Edgar Filing: NOVAMED INC

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

___________________

FORM 10-Q

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

COMMISSION FILE NUMBER: 0-26625

NOVAMED, INC.

(Exact name of registrant as specified in its charter)

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

980 North Michigan Avenue, Suite 1620, Chicago, Illinois 60611

(Address of principal executive offices)

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

___________________

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 and 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 o

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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

As of August 02, 2006, there were outstanding 23,589,714 shares of the registrant's common stock, par value $.01 per share.

NOVAMED, INC.

FORM 10-Q FOR QUARTERLY PERIOD ENDED JUNE 30, 2006

INDEX

	PART OR ITEM	PAGE
Part I.	FINANCIAL STATEMENTS	3
Item 1.	Interim Condensed Consolidated Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets -June 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Operations - Three and six months ended June 30, 2006 and 2005	4
	Condensed Consolidated Statement of Stockholders’ Equity - Six months ended June 30, 2006	5
	Condensed Consolidated Statements of Cash Flows - Six months ended June 30, 2006 and 2005	6
	Notes to the Interim Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23

Item 4.	Controls and Procedures	23

Part II.	OTHER INFORMATION	24
Item 4.	Submission of Matters to a Vote of Security Holders	24

Item 6.	Exhibits	24
	Signatures	25

Part I. FINANCIAL INFORMATION

Item 1. Interim Condensed Consolidated Financial Statements (unaudited)

NOVAMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data)

		June 30,			December 31,
ASSETS		2006			2005
Current assets:		(unaudited)
Cash and cash equivalents	$	1,714		$	1,690
Accounts receivable, net of allowances of $17,521 and $13,941, respectively		15,197			11,933
Notes and amounts due from related parties		505			541
Inventory		2,221			2,012
Other current assets		1,826			1,310
Total current assets		21,463			17,486
Property and equipment, net		12,234			9,940
Intangible assets, net		86,633			68,299
Noncurrent deferred tax assets, net		1,320			470
Other assets, net		1,050			967
Total assets	$	122,700		$	97,162

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,916		$	5,529
Accrued expenses and income taxes payable		4,758			4,897
Current maturities of long-term debt		672			302
Current liabilities of discontinued operations		77			89
Total current liabilities		12,423			10,817
Long-term debt, net of current maturities		32,857			17,404
Minority interests		11,664			10,266
Commitments and contingencies
Stockholders’ equity:
Series E Junior Participating Preferred Stock, $0.01 par value, 1,912,000 shares authorized, none outstanding at June 30, 2006 and December 31, 2005, respectively		—			—
Common stock, $0.01 par value, 81,761,465 shares authorized, 28,258,256 and 26,783,396 shares issued at June 30, 2006 and December 31, 2005, respectively		282			268
Additional paid-in-capital		89,677			84,830
Deferred compensation		—			(1,572	)
Accumulated deficit		(14,373	)		(17,393	)
Treasury stock, at cost, 4,702,632 and 4,386,641 shares at June 30, 2006 and December 31, 2005, respectively		(9,830	)		(7,458	)
Total stockholders’ equity		65,756			58,675
Total liabilities and stockholders’ equity	$	122,700		$	97,162

The notes to the interim condensed consolidated financial statements

are an integral part of these statements.

NOVAMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data; unaudited)

	Three months ended June 30,				Six months ended June 30,
	2006		2005		2006		2005
Net revenue:
Surgical facilities	$	21,105	$	15,061	$	38,970	$	28,484
Product sales and other		5,937		5,350		11,988		10,213
Total net revenue		27,042		20,411		50,958		38,697

Operating expenses:
Salaries, wages and benefits		8,572		6,099		16,617		12,111
Cost of sales and medical supplies		6,661		4,963		12,553		9,408
Selling, general and administrative		4,983		4,653		9,486		8,451
Depreciation and amortization		749		551		1,468		1,127
Total operating expenses		20,965		16,266		40,124		31,097

Operating income		6,077		4,145		10,834		7,600

Minority interests in earnings of consolidated entities		2,825		1,891		5,042		3,413
Other (income) expense, net		497		20		758		(56	)
Income before income taxes		2,755		2,234		5,034		4,243
Income tax provision		1,102		893		2,014		1,697
Net income from continuing operations		1,653		1,341		3,020		2,546
Net income from discontinued operations		—		38		—		187
Net income	$	1,653	$	1,379	$	3,020	$	2,733

Basic earnings per common share:
Income from continuing operations	$	0.07	$	0.06	$	0.13	$	0.12
Income from discontinued operations		—		—		—		0.01
Net income	$	0.07	$	0.06	$	0.13	$	0.13

Diluted earnings per common share:
Income from continuing operations	$	0.07	$	0.06	$	0.12	$	0.11
Income from discontinued operations		—		—		—		0.01
Net income	$	0.07	$	0.06	$	0.12	$	0.12

Weighted average common shares outstanding		23,241		21,545		23,035		21,514
Dilutive effect of employee stock options and restricted stock		1,534		1,991		1,659		2,136
Diluted weighted average common shares outstanding		24,775		23,536		24,694		23,650

The notes to the interim condensed consolidated financial statements are an integral part of these statements.

NOVAMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(Dollars and shares in thousands, unaudited)

	Common Stock												Treasury Stock
	Shares		Par Value		Additional Paid-In Capital			Deferred Compensation Restricted Stock			Retained Earnings (Accumulated) (Deficit)		Shares			At Cost			Total Stockholders’ Equity
Balance, December 31, 2005	26,783	$	268	$	84,830		$	(1,572	)	$	(17,393	)	(4,387	)	$	(7,458	)	$	58,675

Stock options exercised	1,411		14		5,530			—			—		(305	)		(2,296	)		3,248
Shares issued - employee stock purchase plan	9		—		55			—			—		—			—			55
Restricted stock grants	55		—		—			—			—		—			—			—
Stock compensation expense	—				834			—			—		(11	)		(76	)		758
Reclass deferred compensation	—		—		(1,572	)		1,572			—		—			—			—
Net income	—		—		—			—			3,020		—			—			3,020
Balance, June 30, 2006	28,258	$	282	$	89,677		$	—		$	(14,373	)	(4,703	)	$	(9,830	)	$	65,756

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

NOVAMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands; unaudited)

		Six months ended June 30,
		2006			2005
Cash flows from operating activities:
Net income	$	3,020		$	2,733
Adjustments to reconcile net income to net cash provided by continuing operations, net of effects of purchase transactions—
Net earnings of discontinued operations		—			(187	)
Depreciation and amortization		1,468			1,127
Current and deferred taxes		2,014			1,697
Stock-based compensation		822			—
Earnings of non-consolidated affiliate		(31	)		(100	)
Gain on sale of minority interests		(9	)		(36	)
Minority interests		5,042			3,413
Distributions to minority partners		(4,194	)		(3,423	)
Changes in operating assets and liabilities—
Accounts receivable		(2,490	)		(1,573	)
Inventory		(17	)		(143	)
Other current assets		(233	)		(87	)
Accounts payable and accrued expenses		898			920
Other noncurrent assets		39			52
Net cash provided by operating activities		6,329			4,393

Cash flows from investing activities:
Payments for acquisitions, net		(19,891	)		(6,339	)
Purchase of written option		—			(3,600	)
Proceeds from sale of minority interests		60			749
Purchases of property and equipment		(1,379	)		(1,446	)
Other		33			62
Net cash used in investing activities		(21,177	)		(10,574	)

Cash flows from financing activities:
Borrowings under revolving line of credit		34,900			21,000
Payments under revolving line of credit		(19,600	)		(13,000	)
Proceeds from the issuance of common stock		232			343
Payments of other debt, debt issuance fees and capital lease obligations		(648	)		(240	)
Net cash provided by financing activities		14,884			8,103

Cash flows from discontinued operations:
Operating activities		(12	)		16
Investing activities		—			67
Net cash (used in) provided by discontinued operations		(12	)		83

Net increase in cash and cash equivalents		24			2,005
Cash and cash equivalents, beginning of period		1,690			500
Cash and cash equivalents, end of period	$	1,714		$	2,505

The notes to the interim condensed consolidated financial statements

are an integral part of these statements.

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

1.	BASIS OF PRESENTATION

The information contained in the interim consolidated financial statements and notes is condensed from that which would appear in the annual consolidated financial statements. Accordingly, the interim condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2005, filed by NovaMed, Inc. with the Securities and Exchange Commission on Form 10-K. The unaudited interim condensed consolidated financial statements as of June 30, 2006 and for the three and six months ended June 30, 2006 and 2005, include all normal recurring adjustments which management considers necessary for a fair presentation. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the entire fiscal year.

2.	STATEMENT OF CASH FLOWS - SUPPLEMENTAL

Supplemental cash information:

		Six months ended June 30,
		2006			2005
Interest paid	$	820		$	227
Income taxes paid		115			270
Income tax refunds received		(38	)		(21	)

Non cash investing and financing activities:

On February 1, 2006, the estate of Stephen J. Winjum exercised all remaining stock options held by the estate to acquire 1,330,730 shares of common stock. Per the terms of the stock option agreements and the Company’s stock incentive plans, the estate tendered to the Company 305,254 shares of the Company’s common stock that the estate owned to fund the $2,295 aggregate exercise price. The Company added these tendered shares into treasury. As a result of this transaction, the Company recorded additional paid-in-capital of $5,213, which includes a deferred tax asset of $2,930.

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

During the first six months of 2006 and 2005, the Company obtained medical equipment by entering into capital leases for $263 and $302, respectively.

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

INVENTORY

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

		June 30,		December 31,
Balances as of:		2006		2005
Optical products	$	895	$	824
Surgical supplies		1,135		967
Other		191		221
Total inventory	$	2,221	$	2,012

4.	INTANGIBLE ASSETS

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

	Unamortized Goodwill
			Surgical Facilities		Product Sales		Other		Total		Other Intangibles
Balance December 31, 2005		$	61,805	$	5,475	$	941	$	68,221	$	78
Acquisitions			18,349		—		—		18,349		—
Amortization			—		—		—		—		(15	)
Balance June 30, 2006		$	80,154	$	5,475	$	941	$	86,570	$	63

5.	ACQUISITIONS

The Company generally acquires majority equity interests in ASCs through the purchase method of accounting. The results of operations are included in the consolidated financial statements of the Company from the date of acquisition. During the first half of 2006 the Company made the following acquisitions, none of which was significant enough to require pro forma disclosure.

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

Effective January 31, 2006, the Company’s ASC located in Berkley, Michigan redeemed its retiring partner’s entire interest in this ASC, issuing a promissory note payable in eight quarterly installments through November 1, 2007. This physician’s 24% interest was allocated proportionately among the remaining partners. This increased the Company’s interest in this ASC to 67% from its previous 51% ownership interest.

On February 21, 2006, the Company acquired a 65% interest in the Preston Plaza Surgery Center, a multi-specialty ASC located in Dallas, Texas, for $12,450, of which the Company allocated $10,859 to goodwill. The acquisition was funded from the Company’s credit facility.

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

On April 13, 2006, the Company acquired a 55% interest in the American Surgery Centers of South Texas, an ophthalmology ASC located in San Antonio, Texas for $2,070, of which the Company allocated $1,948 to goodwill. The acquisition was funded from the Company’s credit facility.

On May 2, 2006, the Company acquired a 51% interest in the Eye Surgery Center of Arkansas, an ophthalmology ASC located in Jonesboro, Arkansas for $5,200, of which the Company allocated $5,119 to goodwill. The acquisition was funded from the Company’s credit facility.

6.	DISCONTINUED OPERATIONS

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

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

The discontinued operations reserve balance was $77 and $89 at June 30, 2006 and December 31, 2005, respectively. The reserve is for remaining costs from exiting the physician practice management business completed in 2003. The operating results of discontinued operations are summarized below.

	Six months ended June 30,
	2006		2005
Net revenue	$	—	$	453
Operating expenses		—		320
Litigation settlement		—		(197	)
Minority interests		—		25
Income before income taxes		—		305
Income tax provision		—		118
Net income per statement of operations	$	—	$	187

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

7.	OTHER (INCOME) EXPENSE

		Three months ended June 30,						Six months ended June 30,
		2006			2005			2006			2005
Interest expense	$	595		$	197		$	988		$	312
Interest income		(21	)		(4	)		(38	)		(16	)
Earnings of non-consolidated affiliate		(11	)		(39	)		(31	)		(100	)
(Gain) loss on sale of minority interests		—			(36	)		(9	)		(36	)
Other, net		(66	)		(98	)		(152	)		(216	)
Other (income) expense, net	$	497		$	20		$	758		$	(56	)

During the first quarter of 2006 the Company sold a 3% minority interest in its Maryville, Illinois ASC to a physician thereby increasing minority ownership in this ASC to 23%. This transaction resulted in a net gain on the sale of minority interest of $9 in the first quarter of 2006.

During the second quarter of 2005 the Company sold a 26% minority interest in its Columbus, Georgia ASC to eleven physicians and sold a 29% minority interest in its Richmond, Virginia ASC to two physicians, increasing the minority ownership in this ASC to 49%.

8.	REVOLVING CREDIT FACILITY

Effective June 29, 2006 the Company entered into a Fifth Amended and Restated Credit Agreement with its lenders, increasing the maximum commitment available under the facility to $80,000 and extending the expiration date to June 29, 2009. The amended facility includes an option to increase the maximum commitment available to $100,000 under certain conditions. The maximum commitment available under the facility is the lesser of $80,000 or the maximum allowed under the calculated ratio limitations. Maximum borrowing availability and applicable interest rates under the facility are calculated based on a ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. Interest on borrowings under the facility is payable at an annual rate equal to the Company’s lender’s published base rate plus the applicable borrowing margin ranging from 0% to .5% or LIBOR plus a range from 1.25% to 2.25%, varying depending upon the Company’s ratios and ability to meet other financial covenants. The credit agreement contains covenants that include limitations on indebtedness, liens, capital expenditures, acquisitions, investments and share repurchases, as well as restrictions on the payment of dividends. At June 30, 2006, the Company had $32,300 of borrowings outstanding under its revolving credit facility and was in compliance with all of its credit agreement covenants. The weighted average interest rate on credit line borrowings during the three and six months ended June 30, 2006 was 6.66% and 6.44%, respectively. In addition, the Company paid a fee ranging from .175% to .2% on the unused portion of the commitment. The weighted average interest rate on credit line borrowings at June 30, 2006 was 6.96%.

During the second quarter of 2006, the Company entered into two interest rate swap agreements. The interest rate swaps protect the Company against certain interest rate fluctuations of the LIBOR rate on $24,000 of the Company’s variable rate debt under the credit facility. The date of the first interest rate swap was April 12, 2006, and it expires on April 19, 2009. This interest rate swap effectively fixes the Company’s LIBOR interest rate on $12,000 of variable rate debt at a rate of 5.34%. The date of the second interest rate swap was June 28, 2006 and it expires on September 30, 2008. This interest rate swap effectively fixes the Company’s LIBOR interest rate on $12,000 of variable rate debt at a rate of 5.75%. The Company has determined that the fair value of the interest rate swaps was insignificant at June 30, 2006.

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

The Company has two outstanding letters of credit issued to two of its optical products buying group vendors in the amounts of $220 and $110 that expire on March 31, 2007 and December 31, 2006, respectively. The outstanding letters of credit reduce the amount available under the credit facility.

9.	STOCK BASED COMPENSATION

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (SFAS 123(R)), applying the modified prospective method. Prior to the adoption of SFAS 123(R), the Company applied the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for its stock-based awards, and accordingly, recognized no compensation cost for its stock plans other than for its restricted stock awards. Under the modified prospective method, SFAS 123(R) applies to new awards and to awards that were outstanding as of December 31, 2005 that are subsequently vested, modified, repurchased or cancelled. Compensation expense recognized during the first half of 2006 includes the portion vesting during the period for (1) all share-based payments granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and (2) all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated using the Black-Scholes option-pricing model. During the second quarter of 2006, the Company granted its directors and employees options to purchase 295,600 shares with an exercise price of $6.87 per share and options to purchase 100,000 shares with an exercise price of $7.10 per share. Stock compensation expense of $313 and $617 was recognized on existing stock options during the three and six months ended June 30, 2006, respectively. As a result of the Company’s decision to adopt the modified prospective method, prior period results have not been restated.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 for the three and six months ended June 30, 2005:

		Three months ended			Six months ended
		June 30, 2005
Net income - as reported	$	1,379		$	2,733
Deduct: Total stock based compensation expense, net of related tax effects		(100	)		(281	)
Pro forma net income	$	1,279		$	2,452

Earnings per share:
Basic — as reported	$	0.06		$	0.13
Basic — pro forma	$	0.06		$	0.11
Diluted — as reported	$	0.06		$	0.12
Diluted — pro forma	$	0.05		$	0.10

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for stock options granted during the three and six months ended June 30, 2006 and 2005:

	2006						2005
	Three months			Six months			Three months			Six months
Expected option life in years		6			6			4			4
Risk-free interest rate		4.73	%		4.73	%		3.90	%		3.87	%
Dividend yield		—			—			—			—
Expected volatility		51.3	%		51.3	%		70.8	%		70.8	%
Per share fair value	$	3.77		$	3.77		$	3.25		$	3.28

The expected option life used for 2006 grants is the average of the vesting term assuming options are exercised as vested and the original contractual term of the option. The prior years’ expected life was the vesting term of the option. The risk free interest rate is based on the yield curve for U.S. Treasury zero-coupon issues with an equivalent remaining term. The dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected life of the options. The expected volatility in 2006 is based on the historical volatility of the Company’s stock price for the period beginning January 1, 2003 through the option grant date. The prior years’ expected volatility was based on the historical volatility of the Company’s stock price.

A summary of stock based compensation activity within the Company’s stock-based compensation plans for the six months ended June 30, 2006 is as follows:

	Number of Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value

Outstanding at December 31, 2005		5,932,796		$	3.40
Granted		395,600		$	6.93
Exercised		(1,410,408	)	$	1.75
Canceled		(146,167	)	$	11.50

Outstanding at June 30, 2006		4,771,821		$	3.95		6.1	$	13,359

Exercisable at June 30, 2006		3,387,648		$	3.19		4.9	$	12,063

The aggregate intrinsic value for stock options outstanding and exercisable is defined as the difference between the market value of the Company’s stock as of the end of the period and the exercise price of the stock options. The total intrinsic value of stock options exercised during the first half of 2006 was $7,052. As a result of the stock options exercised, the Company recorded additional paid-in-capital of $5,530, which includes $3,083 of tax benefits recognized. During the first half of 2006, cash received from stock options exercised was $166.

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

On February 1, 2006, the estate of Stephen J. Winjum exercised all remaining stock options held by the estate to acquire 1,330,730 shares of common stock. Per the terms of the stock option agreements and the Company’s stock incentive plans, the estate tendered to the Company 305,254 shares of the Company’s common stock that the estate owned to fund the $2,295 aggregate exercise price. The Company added these tendered shares into treasury resulting in an increase in treasury stock of $2,295.

The following is a summary of nonvested stock option activity:

	Number of Shares			Weighted Average Grant-Date Fair Value

Nonvested at December 31, 2005		1,284,805		$	2.64
Granted		395,600		$	3.77
Vested		(286,543	)	$	2.00
Canceled		(9,689	)	$	2.92

Nonvested at June 30, 2006		1,384,173		$	3.08

At June 30, 2006, there was $4,262 of total unrecognized compensation cost related to nonvested stock options. This cost will be recognized over 4 years.

The Company also grants restricted stock awards to certain employees. Restricted stock awards are valued at the closing market value of the Company’s common stock on the day prior to the grant, and the total value of the award is recognized as expense ratably over the vesting period of the employees receiving the grants. The Company granted 55,000 restricted stock awards during the second quarter of 2006. As of June 30, 2006, the total amount of unrecognized compensation expense related to nonvested restricted stock awards was approximately $1,744, which is expected to be recognized over a weighted-average period of approximately 3.5 years. The Company recognized compensation expense of $101 and $205 on existing restricted stock awards during the three and six months ended June 30, 2006, respectively.

The Company has an employee stock purchase plan (“ESPP”) 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. Approximately 9,000 and 10,000 shares were purchased under this plan during the six months ended June 30, 2006 and 2005, respectively. Under the provisions of SFAS 123(R), the Company recognized compensation expense of $12 during the first half of 2006. At June 30, 2006, 101,500 shares were reserved for future issuance under the ESPP.

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

10.	OPERATING SEGMENTS

The table below presents information about operating data and segment assets as of and for the three and six months ended June 30, 2006 and 2005:

	Surgical Facilities		Product Sales		Other		Corporate			Total
Three months ended June 30, 2006
Net revenue	$	21,105	$	4,152	$	1,771	$	14		$	27,042
Earnings (loss) before taxes		3,732		1,180		69		(2,226	)		2,755
Depreciation and amortization		627		56		18		48			749
Interest income		13		—		—		8			21
Interest expense		22		—		—		573			595
Capital expenditures		825		41		1		38			905
Accounts receivable		8,851		5,769		492		85			15,197
Identifiable assets		102,979		12,938		1,660		5,123			122,700

Three months ended June 30, 2005
Net revenue	$	15,061	$	3,500	$	1,848	$	2		$	20,411
Earnings (loss) before taxes		2,756		758		168		(1,448	)		2,234
Depreciation and amortization		408		47		28		68			551
Interest income		2		—		—		2			4
Interest expense		8		—		—		189			197
Capital expenditures		578		113		1		6			698
Accounts receivable		6,340		5,217		589		146			12,292
Identifiable assets		67,497		12,197		1,775		5,315			86,784

Six months ended June 30, 2006
Net revenue	$	38,970	$	8,136	$	3,816	$	36		$	50,958
Earnings (loss) before taxes		6,607		2,164		353		(4,090	)		5,034
Depreciation and amortization		1,209		110		39		110			1,468
Interest income		25		—		—		13			38
Interest expense		35		—		—		953			988
Capital expenditures		1,119		132		19		109			1,379
Accounts receivable		8,851		5,769		492		85			15,197
Identifiable assets		102,979		12,938		1,660		5,123			122,700

Six months ended June 30, 2005
Net revenue	$	28,484	$	6,521	$	3,690	$	2		$	38,697
Earnings (loss) before taxes		5,289		1,350		329		(2,725	)		4,243
Depreciation and amortization		848		89		53		137			1,127
Interest income		9		—		—		7			16
Interest expense		13		—		—		299			312
Capital expenditures		1,169		178		59		40			1,446
Accounts receivable		6,340		5,217		589		146			12,292
Identifiable assets		67,497		12,197		1,775		5,315			86,784

NOVAMED, INC. AND SUBSIDIARIES

NOTES TO THE INTERIM

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

June 30, 2006

(Dollars in thousands, except per share data; unaudited)

11.	SUBSEQUENT EVENTS

On July 19, 2006, the Company acquired a 61% interest in the Clearview Surgical Institute, a multi-specialty ambulatory surgery center located in Laredo, Texas.

On August 2, 2006, NovaMed Eye Surgery Center of New Albany, LLC, of which the Company owns a 67.5% interest, acquired substantially all of the assets of the John Kenyon Center for Eye Surgery, an ophthalmic ambulatory surgery center located in Jeffersonville, Indiana.

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis presents our consolidated financial condition at June 30, 2006 and the results of operations for the three and six months ended June 30, 2006 and 2005. You should read the following discussion together with our consolidated financial statements and the related notes contained elsewhere in this quarterly report. In addition to the historical information provided below, we have made certain estimates and forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated or implied by these estimates and forward-looking statements as a result of certain factors, including those discussed in the CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS on page 23 of this quarterly report.

Overview

We consider our core business to be the ownership and operation of ambulatory surgery centers (ASCs). As of June 30, 2006, we owned and operated 31 ASCs, of which 28 were jointly owned with physician-partners. We also own other businesses including an optical laboratory, an optical products purchasing organization, and a marketing products and services company. In addition, we provide management services to two eye care practices.

Year-to-Date Financial Highlights:

Consolidated net revenue increased 31.7% to $51.0 million. Surgical facilities net revenue increased 36.8% to $39.0 million (same-facility surgical net revenue increased 7.3% to $28.9 million).

Operating income increased 42.6% to $10.8 million.

Acquired majority interests in three ASCs for $19.7 million

Increased the available commitment under our credit facility to $80,000.

Results of Operations

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

	Three months ended June 30,						Six months ended June 30,
	2006			2005			2006			2005
Net Revenue:
Surgical facilities		78.0	%		73.8	%		76.5	%		73.6	%
Product sales and other		22.0			26.2			23.5			26.4
Total net revenue		100.0			100.0			100.0			100.0

Operating expenses:
Salaries, wages and benefits		31.7			29.9			32.6			31.3
Cost of sales and medical supplies		24.6			24.3			24.6			24.3
Selling, general and administrative		18.4			22.8			18.6			21.8
Depreciation and amortization		2.8			2.7			2.9			2.9
Total operating expenses		77.5			79.7			78.7			80.3

Operating income		22.5			20.3			21.3			19.7

Minority interests in earnings of consolidated entities		10.5			9.3			9.9			8.8
Other (income) expense		1.8			0.1			1.5			(0.1	)
Income before income taxes		10.2			10.9			9.9			11.0
Income tax provision		4.1			4.3			4.0			4.4
Net income from continuing operations		6.1			6.6			5.9			6.6
Net income from discontinued operations		—			0.2			—			0.5
Net income		6.1	%		6.8	%		5.9	%		7.1	%

Three Months Ended June 30, 2006 Compared to the Three Months Ended June 30, 2005

Net Revenue

Consolidated. Total net revenue increased 32.5% from $20.4 million to $27.0 million. Net revenue by segment is discussed below.

Surgical Facilities. The table below summarizes surgical facilities net revenue and procedures performed for the second quarter of 2006 and 2005. Revenues generated from surgical facilities are derived from the fees charged for the procedures performed in our ASCs and through our laser services agreements. Our procedure volume is directly impacted by the number of ASCs we operate, the number of excimer lasers in service, and their respective utilization rates. Net surgical facilities revenue increased 40.1% from $15.1 million to $21.1 million. This increase was primarily the result of $4.6 million of net revenue from ASCs acquired or developed after April 1, 2005 (“new ASCs”) and a $1.6 million increase from ASCs that we owned for the entire comparable reporting periods (“same-facility”). The increase in same-facility revenue was primarily the result of a 7.6% increase in the number of same-facility procedures performed and a 3.2% increase in the net revenue per procedure due to a change in procedure mix and the higher fees charged for refractive intraocular lenses.

		Three Months Ended June 30,				Increase
*Dollars in thousands*		2006		2005		(Decrease)

Surgical Facilities:
Same-facility:
Net revenue	$	16,219	$	14,643	$	1,576
# of procedures		19,387		18,019		1,368

New ASCs:
Net revenue	$	4,865	$	241	$	4,624
# of procedures		6,138		277		5,861

Expired laser services agreement
Net revenue	$	21	$	177	$	(156	)
# of procedures		56		426		(370	)

Product Sales and Other. The table below summarizes net product sales and other revenue by significant business component. Product sales and other revenue increased 11.0% from $5.4 million to $5.9 million. Net revenue at our marketing products and services business increased $0.4 million. This is due to increased services provided to medical device manufacturers. Other net revenue decreased $0.1 million due to the expiration of a management consulting contract at the end of the first quarter of 2006.

	Three Months Ended June 30,				Increase
*Dollars in thousands*	2006		2005		(Decrease)

Product Sales:
Optical laboratories	$	1,537	$	1,371	$	166
Optical products purchasing organization		681		579		102
Marketing products and services		1,427		1,067		360
Optometric practice/retail store		507		483		24
		4,152		3,500		652
Other:
Ophthalmology practice		1,771		1,740		31
Other		14		110		(96	)
		1,785		1,850		(65	)

Total Net Product Sales and Other Revenue	$	5,937	$	5,350	$	587

Salaries, Wages and Benefits

Consolidated. Salaries, wages and benefits expense increased 40.5% from $6.1 million to $8.6 million. As a percentage of net revenue, salaries, wages and benefits expense increased from 29.9% to 31.7% primarily due $0.4 million of stock-based compensation expense recorded in the second quarter of 2006. Salaries, wages and benefits expense by segment is discussed below.

Surgical Facilities. Salaries, wages and benefits expense in our surgical facilities segment increased 43.3% from $3.1 million to $4.5 million. The increase was the result of staff costs associated with new ASCs and staffing required at same-facility ASCs due to increased procedure volume.

Product Sales and Other. Salaries, wages and benefits expense in our product sales and other segments increased 7.5% from $1.9 million to $2.1 million. The increase is primarily due to the addition of new marketing consulting services within our marketing products and services business.

Corporate. Salaries, wages and benefits expense increased 95.2% from $1.0 million to $2.0 million. The increase was primarily due to $0.4 million of stock-based compensation expense recorded in the second quarter of 2006, additional employees required to service the new ASCs and annual salary increases. Salaries, wages and benefits expense during the second quarter of 2005 was unusually low due to the vacancy of the CEO position and related incentive accrual reductions.

Cost of Sales and Medical Supplies

Consolidated. Cost of sales and medical supplies expense increased 34.2% from $5.0 million to $6.7 million. As a percentage of net revenue, cost of sales and medical supplies expense increased from 24.3% to 24.6%. Cost of sales and medical supplies expense by segment is discussed below.

Surgical Facilities. Cost of sales and medical supplies expense in our surgical facilities segment increased 46.8% from $3.4 million to $5.0 million. The expense increase was primarily the result of costs associated with our new ASCs, increased procedure volumes at some of our same-facility ASCs and the higher cost of refractive intraocular lenses.

Product Sales and Other. Cost of sales and medical supplies expense in our product sales and other segments increased 6.0% from $1.5 million to $1.6 million primarily due to costs associated with increased orders for products within our optical laboratories business.

Selling, General and Administrative

Consolidated. Selling, general and administrative expense increased 7.1% from $4.7 million to $5.0 million. As a percentage of net revenue, selling, general and administrative expense decreased from 22.8% to 18.4%. The percentage decrease is primarily due to minimal increases in corporate overhead expenses necessary to service the new ASCs. Selling, general and administrative expense by segment is discussed below.

Surgical Facilities. Selling, general and administrative expense in our surgical facilities segment increased 19.9% from $3.4 million to $4.1 million. The increase is due to costs associated with our new ASCs and an increase of $0.2 million of management and billing/collections fees charged to the ASCs for services rendered by our corporate personnel.

Product Sales and Other. Selling, general and administrative expense in our product sales and other segments remained flat at $0.9 million.

Corporate. Corporate selling, general and administrative expense decreased 91.9% from $390,000 to $32,000. This decrease was primarily due to an increase in management and billing/collections fees charged to the operating segments for services rendered by certain corporate personnel of $0.2 million. The second quarter of 2005 also included incremental costs associated with the CEO search including additional board and presiding director expenses and increased costs to comply with section 404 of the Sarbanes-Oxley Act. We expect to continue to incur costs associated with being a public company throughout 2006 and in future years.

Depreciation and Amortization. Depreciation and amortization expense increased 35.9% from $0.5 million to $0.7 million due to increases in depreciation associated with our new ASCs and capital expenditures in our surgical facilities segment.

Minority Interests and Other (Income) Expense. Minority interests in the earnings of our ASCs were $2.8 million in 2006 as compared to $1.9 million in 2005. Of this increase, 88.3% is attributable to new ASCs.

Provision for Income Taxes. Our effective tax rate was unchanged at 40.0%. Our effective tax rate is affected by expenses that are deducted from operations in arriving at pre-tax income that are not allowed as a deduction on our federal income tax return.

Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005

Net Revenue

Consolidated. Total net revenue increased 31.7% from $38.7 million to $51.0 million. Net revenue by segment is discussed below.

Surgical Facilities. The table below summarizes surgical facilities net revenue and procedures performed for the first six months of 2006 and 2005. Revenues generated from surgical facilities are derived from the fees charged for the procedures performed in our ASCs and through our laser services agreements. Our procedure volume is directly impacted by the number of ASCs we operate, the number of excimer lasers in service, and their respective utilization rates. Net surgical facilities revenue increased 36.8% from $28.5 million to $39.0 million. This increase was primarily the result of $8.7 million of net revenue from ASCs acquired or developed after January 1, 2005 (“new ASCs”) and a $1.9 million increase from ASCs that we owned for the entire comparable reporting periods (“same-facility”). The increase in same-facility revenue was primarily the result of a 3.1% increase in the number of same-facility procedures performed and a 4.2% increase in the net revenue per procedure due to a change in procedure mix and the higher fees charged for refractive intraocular lenses.

		Six Months Ended June 30,				Increase
*Dollars in thousands*		2006		2005		(Decrease)

Surgical Facilities:
Same-facility:
Net revenue	$	28,891	$	26,927	$	1,964
# of procedures		34,846		33,784		1,062

New ASCs:
Net revenue	$	9,861	$	1,186	$	8,675
# of procedures		12,524		1,301		11,223

Expired laser services agreement
Net revenue	$	218	$	371	$	(153	)
# of procedures		586		950		(364	)

Product Sales and Other. The table below summarizes net product sales and other revenue by significant business component. Product sales and other revenue increased 17.4% from $10.2 million to $12.0 million. Net revenue at our marketing products and services business increased $1.0 million. This is due to increased services provided to medical device manufacturers.

		Six Months Ended June 30,				Increase
*Dollars in thousands*		2006		2005		(Decrease)

Product Sales:
Optical laboratories	$	3,130	$	2,657	$	473
Optical products purchasing organization		1,367		1,173		194
Marketing products and services		2,687		1,716		971
Optometric practice/retail store		952		975		(23	)
		8,136		6,521		1,615
Other:
Ophthalmology practice		3,744		3,475		269
Other		108		217		(109	)
		3,852		3,692		160

Total Net Product Sales and Other Revenue	$	11,988	$	10,213	$	1,775

Salaries, Wages and Benefits

Consolidated. Salaries, wages and benefits expense increased 37.2% from $12.1 million to $16.6 million. As a percentage of net revenue, salaries, wages and benefits expense increased from 31.3% to 32.6% primarily due to $0.8 million of stock-based compensation expense recorded during the first half of 2006. Salaries, wages and benefits expense by segment is discussed below.

Surgical Facilities. Salaries, wages and benefits expense in our surgical facilities segment increased 44.0% from $6.0 million to $8.6 million. The increase was the result of staff costs associated with new ASCs and staffing required at same-facility ASCs that experienced increased procedure volume.

Product Sales and Other. Salaries, wages and benefits expense in our product sales and other segments increased 9.5% from $3.9 million to $4.2 million. The increase is primarily due to additional staff required to service increased volume within our marketing products and services business, optical laboratory business and ophthalmology practice.

Corporate. Salaries, wages and benefits expense increased 65.9% from $2.3 million to $3.9 million. The increase was primarily due to $0.8 million of stock based compensation expense recorded in the first half of 2006, additional employees required to service the new ASCs and annual salary increases. Salaries, wages and benefits expense during the first half of 2005 was unusually low due to the vacancy of the CEO position and related incentive accrual reductions.

Cost of Sales and Medical Supplies

Consolidated. Cost of sales and medical supplies expense increased 33.4% from $9.4 million to $12.6 million. As a percentage of net revenue, cost of sales and medical supplies expense increased from 24.3% to 24.6%. Cost of sales and medical supplies expense by segment is discussed below.

Surgical Facilities. Cost of sales and medical supplies expense in our surgical facilities segment increased 40.5% from $6.6 million to $9.3 million. The expense increase was primarily the result of costs associated with our new ASCs, increased procedure volumes at some of our same-facility ASCs and the higher cost of refractive intraocular lenses.

Product Sales and Other. Cost of sales and medical supplies expense in our product sales and other segments increased 16.6% from $2.8 million to $3.3 million primarily due to costs associated with increased orders for products within our marketing products and services business and optical laboratory business.

Selling, General and Administrative

Consolidated. Selling, general and administrative expense increased 12.2% from $8.5 million to $9.5 million. As a percentage of net revenue, selling, general and administrative expense decreased from 21.8% to 18.6%. The percentage decrease is primarily due to minimal increases in corporate overhead expenses necessary to service the new ASCs. Selling, general and administrative expense by segment is discussed below.

Surgical Facilities. Selling, general and administrative expense in our surgical facilities segment increased 22.3% from $6.3 million to $7.7 million. The increase is due to costs associated with our new ASCs and an increase of $0.4 million in management and billing/collections fees charged to the ASCs for services rendered by corporate personnel.

Product Sales and Other. Selling, general and administrative expense in our product sales and other segments increased 2.6% from $1.7 million to $1.8 million.

Corporate. Corporate selling, general and administrative expense decreased 91.9% from $441,000 to $36,000. This decrease was primarily due to an increase in management and billing/collections fees charged to the operating segments for services rendered by certain corporate personnel of $0.4 million. The 2005 period also included incremental costs associated with the CEO search including additional board and presiding director expenses and increased costs to comply with section 404 of the Sarbanes-Oxley Act. The decrease was partially offset by costs associated with the restatement of our previously filed financial statements (See Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005).

Depreciation and Amortization. Depreciation and amortization expense increased 30.3% from $1.1 million to $1.5 million due to increases in depreciation associated with our new ASCs and capital expenditures in our surgical facilities segment.

Minority Interests and Other (Income) Expense. Minority interests in the earnings of our ASCs were $5.0 million in 2006 as compared to $3.4 million in 2005. Of this increase, 90.5% is attributable to new ASCs.

Liquidity and Capital Resources

Operating activities during the first six months of 2006 generated $6.3 million in cash flow from continuing operations compared to $4.4 million in the comparable 2005 period. The increase in operating cash flow from continuing operations resulted primarily from an increase in operating income after adding back $0.8 million non-cash impact of stock compensation expense recorded during the first six months of 2006. This increase was partially offset by an increase in minority interest expense and accounts receivable due to the acquisition of new ASCs.

Investing activities during the first six months of 2006 resulted in negative cash flow of $21.2 million. Investing activities during the first six months of 2006 included the acquisition of three ASCs for $19.7 million, and the purchase of property and equipment for $1.4 million. Investing activities during the first six months of 2005 resulted in negative cash flow of $10.6 million which included the acquisition of two ASCs for $6.2 million, the buy-out of the Overland Park call option for $3.6 million and the purchase of property and equipment for $1.4 million.

Cash flows from financing activities during the first six months of 2006 included $15.3 million of net borrowings under our credit facility and $0.2 million from the exercise of stock options and issuance of stock to employees as part of our employee stock purchase plan, offset by $0.6 million of capital lease obligation payments. Cash flows from financing activities during the first six months of 2005 included $8.0 million of net borrowings under our credit facility and $0.3 million from the exercise of stock options and issuance of stock to employees as part of our employee stock purchase plan, offset by $0.2 million of capital lease obligation payments. Effective June 29, 2006 we entered into an amended credit agreement with our lenders, increasing the maximum commitment available under the facility to $80,000 and extending the expiration date to June 29, 2009. The amended facility includes an option to increase the maximum commitment available to $100,000 under certain conditions. The maximum commitment available under the facility is the lesser of $80,000 or the maximum allowed under the calculated ratio limitations. Maximum borrowing availability and applicable interest rates under the facility are calculated based on a ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization. Interest on borrowings under the facility is payable at an annual rate equal to our lender’s published base rate plus the applicable borrowing margin ranging from 0% to .5% or LIBOR plus a range from 1.25% to 2.25%, varying depending upon our ratios and ability to meet other financial covenants. The credit agreement contains covenants that include limitations on indebtedness, liens, capital expenditures, acquisitions, investments and share repurchases, as well as restrictions on the payment of dividends. At June 30, 2006, we had $32,300 of borrowings outstanding under our revolving credit facility and were in compliance with all of our credit agreement covenants. As disclosed in Note 8 to the Interim Condensed Consolidated Financial Statements, during the second quarter of 2006, the Company entered into two interest rate swap agreements. The interest rate swaps protect the Company against certain interest rate fluctuations of the LIBOR rate on $24,000 of the Company’s variable rate debt under the credit facility.

As of June 30, 2006, we had cash and cash equivalents of $1.7 million and working capital of $9.0 million.

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

We are a party to option agreements with three physicians pursuant to which the physicians have the right to purchase or sell equity interests in two of our ASCs. These are summarized as follows:

Two of our existing physician-partners who each own a 14.5% interest in our Richmond, Virginia ASC have the right to sell us back their equity interests for the initial price paid at any time; and

We have an option to purchase an additional 26% equity interest from our physician-partner in our Ft. Lauderdale, Florida ASC to enable us to increase our interest in the ASC to a majority equity interest. The purchase price of this 26% interest is based on a multiple of the ASC’s twelve-month trailing EBITDA. If we elect not to exercise this option by July 2007, we have the option to sell our minority interest to our physician-partner for the original purchase price paid. If we elect not to exercise that option by September 2007, our physician-partner has the option to purchase our minority interest at the original purchase price paid.

We have a nonexclusive supply agreement with Alcon Laboratories, Inc. pursuant to which we can procure and utilize excimer lasers and other equipment manufactured by Alcon. Through the termination date of December 31, 2006, we will pay Alcon monthly based on the number of procedures performed on each of our LADARVision Systems. We are required to pay for a minimum number of annual procedures on each LADARVision System during the remaining term, whether or not these procedures are performed. Assuming we do not procure additional LADARVision Systems under the agreement, the annual minimum commitment for 2006 would be approximately $0.8 million.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS. This Form 10-Q contains certain "forward-looking statements" that reflect our current expectations regarding our future results of operations, performance and achievements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. We have tried, wherever possible, to identify these forward-looking statements by using words such as "anticipates," "believes," "estimates," "expects," "plans," "intends" and similar expressions. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to certain risks, uncertainties and contingencies that could cause our actual results, performance or achievements in 2006 and beyond to differ materially from those expressed in, or implied by, such statements. These risks and uncertainties include: : our ability to acquire, develop or manage a sufficient number of profitable surgical facilities, including facilities that are not exclusively dedicated to eye-related procedures; reduced prices and reimbursement rates for surgical procedures; our ability to maintain successful relationships with the physicians who use our surgical facilities; the application of existing or proposed government regulations, or the adoption of new laws and regulations, that could limit our business operations, require us to incur significant expenditures or limit our ability to relocate our facilities if necessary; and demand for elective surgical procedures. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005 for further discussion. You should not place undue reliance on any forward-looking statements. We undertake no obligation to update or revise any such forward-looking statements that may be made to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to interest rate risk relates primarily to our debt obligations and temporary cash investments. Historically, we have not held or issued derivative financial instruments other than the use of a variable-to-fixed interest rate swap for a portion of our credit facility. We do not use derivative financial instruments for speculative purposes. Interest rate risk is managed through variable rate and term borrowings under our credit facility. On June 30, 2006, we had $32.3 million outstanding under our credit facility. Our revolving line of credit bears interest at an annual rate equal to our lender’s published base rate plus applicable borrowing margin ranging from 0% to 0.50% or LIBOR plus a range from 1.25% to 2.25%, varying upon our ability to meet financial covenants.

At June 30, 2006, $32.3 million of our long-term debt was subject to variable rates of interest. Excluding the impact of our previously disclosed swap agreements, a hypothetical 100 basis point increase in market interest rates would result in additional annual interest expense of $0.3 million. The fair value of our long-term debt approximated its carrying value at June 30, 2006.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

We have carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer (its principal executive officer and principal financial officer), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on their evaluation, the President and Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that such disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply their judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe our disclosure controls and procedures provide such reasonable assurance.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarterly period ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

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

We held our 2006 Annual Meeting of Stockholders on June 20, 2006 at which the stockholders voted to elect two Class I Directors for a term of three years expiring at our 2009 Annual Meeting of Stockholders and to approve the Company’s executive incentive compensation plan. Results of the voting were as follows:

Directors	For	Authority Withheld

Thomas S. Hall	16,528,848	3,841,877
R. Judd Jessup	17,974,937	2,395,788

The remaining directors, Robert J. Kelly, Scott H. Kirk, MD, Steven V. Napolitano and C.A. Lance Piccolo all continued their terms of office as directors of the Company after the 2006 Annual Meeting of Stockholders.

Executive Incentive Compensation Plan	For	Against	Abstain	Broker Non-Votes

	11,338,602	975,951	30,883	8,024,280

Item 6. Exhibits

10.47

Employment Agreement dated as of April 3, 2006 with Jack M. Clark

Subsidiaries of the Registrant

31.1

Certification by the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification by the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of Principal Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NOVAMED, INC.

/s/ Scott T. Macomber

Scott T. Macomber

Executive Vice President and

Chief Financial Officer

(on behalf of Registrant and as principal financial officer)

August 9, 2006

Date

/s/ John P. Hart

John P. Hart

Vice President, Corporate Controller

(as principal accounting officer)

August 9, 2006

Date