**U.S.
        SECURITIES AND EXCHANGE COMMISSION**
 **Washington,
        DC 20549**
 **Form
        10-Q**
 (Mark
        One)
 x
              **QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF****THE
                  SECURITIES EXCHANGE ACT OF
                  1934**
 
 For
        the
        quarterly period ended September 30, 2008.
 
 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 0-27610
 LCA-Vision
        Inc.
 (Exact
        name of registrant as specified in its charter)
 
 Delaware
              
              11-2882328(State
                  or other jurisdiction of
              
              (IRS
                  Employerincorporation
                  or organization)
              
              Identification
                  No.)
 
 7840
        Montgomery Road, Cincinnati, Ohio 45236
 (Address
        of principal executive offices)
 
 (513)
        792-9292
 (Registrant's
        telephone number, including area code)
 
 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
o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, a non-accelerated filer, or a smaller reporting company.
        See
        the definitions of “large accelerated filer,” “accelerated filer” and “smaller
        reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
 
 Large
                  accelerated filer o
              Accelerated
                  filer xNon-accelerated
                  filer o (Do
                  not check if a smaller reporting
                  company)
              Smaller
                  reporting company o
  Indicate
        by checkmark whether the registrant is a shell company (as defined in Rule
        12b-2
        of the Exchange Act).
 Yes o No
x
  Indicate
        the number of shares outstanding of each of the issuer’s classes of common
        stock, as of the latest practicable date: 18,547,417 shares as of October
        22,
        2008.
  
  LCA-Vision
        Inc.
 INDEX
  Part I.
              Financial
                  InformationItem
                  1.
              Financial
                  StatementsCondensed
                  Consolidated Balance Sheets as of September 30, 2008 (unaudited)
                  and
                  December 31, 2007
              3Condensed
                  Consolidated Statements of Operations for the Three and Nine Months
                  Ended
                  September 30, 2008 and 2007 (unaudited)
              4Condensed
                  Consolidated Statements of Cash Flow for the Nine Months Ended
                  September
                  30, 2008 and 2007 (unaudited)
              5Notes
                  to Condensed Consolidated Financial Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              15Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              23Item
                  4.
              Controls
                  and Procedures
              23Part
                  II.Other
                  InformationItem
                  1.
              Legal
                  Proceedings
              24Item
                  6.
              Exhibits
              25Signatures
              26
  2
  **PART
        I. FINANCIAL INFORMATION**
 
 **Item
        1. Financial Statements**
 
 **LCA-Vision
        Inc.**
 **Condensed
        Consolidated Balance Sheets (Unaudited)**
 (Dollars
        in thousands)
 
 September 30, 2008
              
              December 31, 2007AssetsCurrent
                  assetsCash
                  and cash equivalents
              
              $
              24,669
              
              $
              17,614Short-term
                  investments
              
              
              37,993
              
              
              42,534Patient
                  receivables, net of allowance for doubtful accounts of $1,945 and
                  $2,987
              
              
              10,957
              
              
              12,712Other
                  accounts receivable
              
              
              2,260
              
              
              5,941Prepaid
                  professional fees
              
              
              1,105
              
              
              1,872Prepaid
                  income taxes
              
              
              2,880
              
              
              6,391Deferred
                  tax assets
              
              
              3,385
              
              
              3,450Prepaid
                  expenses and other
              
              
              5,238
              
              
              5,076Total
                  current assets
              
              
              88,487
              
              
              95,590Property
                  and equipment
              
              
              122,080
              
              
              106,788Accumulated
                  depreciation and amortization
              
              
              (66,139
              )
              
              (52,872
              )Property
                  and equipment, net
              
              
              55,941
              
              
              53,916Long-term
                  investments
              
              
              4,406
              
              
              2,250Patient
                  receivables, net of allowance for doubtful accounts of $1,931 and
                  $2,130
              
              
              3,499
              
              
              4,556Deferred
                  compensation plan assets
              
              
              3,106
              
              
              5,540Investment
                  in unconsolidated businesses
              
              
              398
              
              
              590Deferred
                  tax assets
              
              
              14,044
              
              
              13,561Other
                  assets
              
              
              2,398
              
              
              3,644Total
                  assets
              
              $
              172,279
              
              $
              179,647Liabilities
                  and Stockholders' InvestmentCurrent
                  liabilitiesAccounts
                  payable
              
              $
              8,077
              
              $
              10,396Accrued
                  liabilities and other
              
              
              9,961
              
              
              13,219Deferred
                  revenue
              
              
              11,050
              
              
              18,719Income
                  taxes payable
              
              
              1,308
              
              
              642Debt
                  obligations maturing in one year
              
              
              7,281
              
              
              3,941Total
                  current liabilities
              
              
              37,677
              
              
              46,917Long-term
                  debt obligations (less current portion)
              
              
              15,331
              
              
              2,012Deferred
                  compensation liability
              
              
              3,067
              
              
              5,516Insurance
                  reserve
              
              
              9,689
              
              
              8,493Deferred
                  revenue
              
              
              15,830
              
              
              23,110Stockholders'
                  InvestmentCommon
                  stock ($0.001 par value; 25,193,866 and 25,114,244 shares issued
                  and
                  18,547,417 and 18,482,658 shares outstanding as of September 30,
                  2008 and
                  December 31, 2007, respectively)
              
              
              25
              
              
              25Contributed
                  capital
              
              
              173,540
              
              
              172,965Common
                  stock in treasury, at cost (6,646,449 and 6,631,586 shares at September
                  30, 2008 and December 31, 2007)
              
              
              (114,632
              )
              
              (114,427
              )Retained
                  earnings
              
              
              31,735
              
              
              34,597Accumulated
                  other comprehensive income
              
              
              17
              
              
              439Total
                  stockholders' investment
              
              
              90,685
              
              
              93,599Total
                  liabilities and stockholders' investment
              
              $
              172,279
              
              $
              179,647
 
 The
        notes
        to the Condensed Consolidated Financial Statements are an integral part of
        this
        statement.
  3
 
 **LCA-Vision
                  Inc.****Condensed
                  Consolidated Statements of Operations
                  (Unaudited)**(Dollars
                  in thousands except per share data)
  Three Months Ended September 30,
              
              Nine Months Ended September 30,2008
              
              2007
              
              2008
              
              2007Revenue —
                  Laser refractive surgery
              
              $
              37,397
              
              $
              74,584
              
              $
              171,147
              
              $
              222,933Operating
                  costs and expensesMedical
                  professional and license fees
              
              
              8,201
              
              
              12,344
              
              
              34,222
              
              
              37,738Direct
                  costs of services
              
              
              17,686
              
              
              23,304
              
              
              62,532
              
              
              72,399General
                  and administrative expenses
              
              
              4,869
              
              
              4,637
              
              
              15,914
              
              
              15,225Marketing
                  and advertising
              
              
              8,294
              
              
              17,208
              
              
              43,744
              
              
              50,100Depreciation
              
              
              4,508
              
              
              2,961
              
              
              13,375
              
              
              7,758Operating
                  (loss) income
              
              
              (6,161
              )
              
              14,130
              
              
              1,360
              
              
              39,713Equity
                  in earnings from unconsolidated businesses
              
              
              132
              
              
              244
              
              
              453
              
              
              598Net
                  investment (loss) income
              
              
              (724
              )
              
              1,474
              
              
              842
              
              
              4,900Other
                  income (expense), net
              
              
              -
              
              
              -
              
              
              18
              
              
              (31
              )(Loss)
                  income before taxes
              
              
              (6,753
              )
              
              15,848
              
              
              2,673
              
              
              45,180Income
                  tax (benefit) expense
              
              
              (2,036
              )
              
              5,830
              
              
              1,088
              
              
              16,822Net
                  (loss) income
              
              $
              (4,717
              )
              $
              10,018
              
              $
              1,585
              
              $
              28,358(Loss)
                  income per common shareBasic
              
              $
              (0.25
              )
              $
              0.51
              
              $
              0.09
              
              $
              1.43Diluted
              
              $
              (0.25
              )
              $
              0.51
              
              $
              0.09
              
              $
              1.41Dividends
                  declared per share
              
              $
              -
              
              $
              0.18
              
              $
              0.24
              
              $
              0.54Weighted
                  average shares outstandingBasic
              
              
              18,537
              
              
              19,521
              
              
              18,519
              
              
              19,834Diluted
              
              
              18,537
              
              
              19,754
              
              
              18,572
              
              
              20,147
 
 The
        notes
        to the Condensed Consolidated Financial Statements are an integral part of
        this
        statement.
  4
  **LCA-Vision
        Inc.**
 **Condensed
        Consolidated Statements of Cash Flow (Unaudited)**
 (Dollars
        in thousands)
 
 Nine Months Ended September 30,2008
              
              2007Cash
                  flow from operating activities:Net
                  income
              
              $
              1,585
              
              $
              28,358Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              13,375
              
              
              7,758Provision
                  for loss on doubtful accounts
              
              
              4,303
              
              
              4,383Loss
                  on investment
              
              
              1,074
              
              
              -Deferred
                  income taxes
              
              
              (50
              )
              
              9,927Stock
                  based compensation
              
              
              966
              
              
              3,623Insurance
                  reserve
              
              
              1,196
              
              
              1,684Equity
                  in earnings of unconsolidated affiliates
              
              
              (453
              )
              
              (598
              )Changes
                  in operating assets and liabilitiesPatient
                  receivables
              
              
              (1,491
              )
              
              (9,617
              )Other
                  accounts receivable
              
              
              3,681
              
              
              (2,934
              )Prepaid
                  income taxes
              
              
              3,511
              
              
              (5,365
              )Prepaid
                  expenses and other
              
              
              (162
              )
              
              1,400Accounts
                  payable
              
              
              (2,319
              )
              
              (1,313
              )Deferred
                  revenue, net of professional fees
              
              
              (13,454
              )
              
              (1,059
              )Income
                  taxes payable
              
              
              666
              
              
              -Accrued
                  liabilities and other
              
              
              (2,499
              )
              
              2,505Net
                  cash provided by operations
              
              $
              9,929
              
              $
              38,752Cash
                  flow from investing activities:Purchase
                  of property and equipment
              
              
              (13,597
              )
              
              (13,012
              )Purchases
                  of investment securities
              
              
              (297,128
              )
              
              (258,415
              )Proceeds
                  from sale of investment securities
              
              
              297,433
              
              
              260,328Other,
                  net
              
              
              645
              
              
              (77
              )Net
                  cash used in investing activities
              
              $
              (12,647
              )
              $
              (11,176
              )Cash
                  flow from financing activities:Principal
                  payments of capital lease obligations and debt
              
              
              (4,328
              )
              
              (3,873
              )Proceeds
                  from loan
              
              
              19,184
              
              
              -Shares
                  repurchased for treasury stock
              
              
              (205
              )
              
              (34,943
              )Tax
                  benefits related to stock-based compensation
              
              
              (624
              )
              
              1,107Exercise
                  of stock options
              
              
              193
              
              
              3,402Dividends
                  paid to stockholders
              
              
              (4,447
              )
              
              (10,658
              )Net
                  cash provided by (used in) financing activities
              
              
              9,773
              
              
              (44,965
              )Increase
                  (decrease) in cash and cash equivalents
              
              
              7,055
              
              
              (17,389
              )Cash
                  and cash equivalents at beginning of period
              
              
              17,614
              
              
              24,431Cash
                  and cash equivalents at end of period
              
              $
              24,669
              
              $
              7,042
  The
        notes
        to the Consolidated Condensed Financial Statements are an integral part of
        this
        statement.
  5
  LCA-Vision
        Inc.
 Notes
        to
        Condensed Consolidated Financial Statements
  **About
        Our Company**
 
 We
        are a
        leading provider of fixed-site laser vision **** correction
        services at our Lasik *Plus* vision
        centers. Our vision centers provide the staff, facilities, equipment and
        support
        services for performing laser vision correction that employ advanced laser
        technologies to help correct nearsightedness, farsightedness and astigmatism.
        We
        currently use three suppliers for fixed-site excimer lasers: Bausch & Lomb,
        Advanced Medical Optics and Alcon. Our vision centers are supported mainly
        by
        independent, board-certified ophthalmologists and credentialed optometrists,
        as
        well as other healthcare professionals. The ophthalmologists perform the
        laser
        vision correction procedures in our vision centers, and either ophthalmologists
        or optometrists conduct pre-procedure evaluations and post-operative follow-ups
        in-center. Most of our patients currently receive a procedure called LASIK,
        which we began performing in the United States in 1997.
 
 As
        of
        September 30, 2008, we had 78 Lasik *Plus* fixed-site laser vision correction centers in the United States and a joint
        venture in Canada.
 
 **Summary
        of Significant Accounting Policies**
 
 This
        filing includes condensed consolidated Balance Sheets as of September 30,
        2008
        and December 31, 2007; condensed consolidated Statements of Operations for
        the
        three and nine months ended September 30, 2008 and 2007; and condensed
        consolidated Statements of Cash Flow for the nine months ended September
        30,
        2008 and 2007. In the opinion of management, these condensed consolidated
        financial statements contain all adjustments (which include only normal
        recurring adjustments) necessary to present fairly the financial position,
        results of operations and cash flows for the interim periods reported. These
        financial statements and notes should be read together with the financial
        statements and notes in our annual report on Form 10-K for the fiscal year
        ended
        December 31, 2007. Results of operations for the period ending September
        30,
        2008 are not necessarily indicative of results to be expected for the year
        ended
        December 31, 2008.
 
 **Consolidation
        and Basis of Presentation**
 
 We
        use
        the consolidation method to report our investment in majority-owned subsidiaries
        and other companies that are not considered variable interest entities (VIEs)
        and in all VIEs for which we are considered the primary beneficiary. In
        addition, we consolidate the results of operations of professional corporations
        with which we contract to provide the services of ophthalmologists or
        optometrists at our vision centers in accordance with Emerging Issue Task
        Force
        (EITF) Issue No. 97-2, *Application
        of FASB Statement 94 and APB Opinion No. 16 to Physician Management Entities
        and
        Certain Other Entities with Contractual Management Agreements* .
        Investments in joint ventures and 20% to 50% owned affiliates where we have
        the
        ability to exert significant influence are accounted for by the equity method.
        Intercompany transactions and balances have been eliminated upon
        consolidation.
 
 **Use
        of Estimates**
 
 The
        preparation of our condensed consolidated financial statements in conformity
        with U.S. generally accepted accounting principles requires management to
        make
        estimates and assumptions that affect the reported amounts of assets,
        liabilities, revenues and expenses, and the disclosure of contingent assets
        and
        liabilities. Significant items that are subject to such estimates and
        assumptions include investments, patient financing receivables and reserves,
        insurance reserves, income taxes and enhancement accruals. Although management
        bases its estimates on historical experience and various other assumptions
        that
        are believed to be reasonable under the circumstances, actual results could
        differ significantly from the estimates under different assumptions or
        conditions.
  6
 
 LCA-Vision
        Inc.
 Notes
        to
        Condensed Consolidated Financial Statements
 
 **Reclassification**
 
 Certain
        prior-period amounts have been reclassified in the Condensed Consolidated
        Balance Sheets and Condensed Consolidated Statements of Cash Flow to conform
        to
        current period presentation. The reclassifications were not material to the
        consolidated financial statements.
 
 **Investments**
 
 Management
        determines the appropriate classification of securities at the time of purchase
        and reevaluates such designation as of each balance sheet date. Currently
        all
        securities are classified as available-for-sale. Available-for-sale securities
        are carried at fair value, with unrealized gains and losses, net of tax,
        reported in other comprehensive income, a component of stockholders’ investment.
        The amortized cost of debt securities in this category reflects amortization
        of
        premiums and accretion of discounts to maturity computed under the effective
        interest method. Such amortization is included in the caption “net investment
        (loss) income” within the condensed consolidated statements of operations.
        Realized gains and losses and declines in value judged to be other than
        temporary are also included in net investment (loss) income. The cost of
        securities sold is based upon the specific identification method. Interest
        and
        dividends on securities classified as available-for-sale are included in
        net
        investment (loss) income.
 
 As
        of
        September 30, 2008 and December 31, 2007, there were available-for-sale
        securities, both current and long-term, of $42,399,000 and $44,784,000,
        respectively. The following table is a summary of available-for-sale securities
        at September 30, 2008 (dollars in thousands):
 
 **Amortized Cost**
              
              **Gross**
                **Unrealized**
                **Gains**
              
              **Gross**
                **Unrealized**
                **Losses**
              
              **Estimated Fair**
                **Value (Net**
                **Carrying Value)**Corporate
                  bonds and creditdefault
                  swaps
              
              $
              21,992
              
              $
              -
              
              $
              -
              
              $
              21,992U.S.
                  Government securities
              
              
              2,638
              
              
              -
              
              
              -
              
              
              2,638Municipal
                  bonds
              
              
              15,593
              
              
              32
              
              
              (244
              )
              
              15,381Equities
              
              
              2,944
              
              
              -
              
              
              (556
              )
              
              2,388Total
                  investments
              
              $
              43,167
              
              $
              32
              
              $
              (800
              )
              $
              42,399
 
 At
        September 30, 2008, corporate bonds and credit default swaps and municipal
        bonds
        included $6,200,000 in par value of auction rate instruments for which there
        was
        not an active market. These securities have historically traded at par and
        are
        callable at par at the option of the issuer. Interest is typically paid at
        the
        end of each auction period. Until January 2008, the auction rate securities
        market was highly liquid. Beginning in January 2008, certain of our auction
        rate
        instruments “failed,” meaning that there was insufficient demand to sell all of
        the securities that holders desired to sell at auction. The immediate effect
        of
        a failed auction is that holders cannot sell the securities at auction and
        the
        interest rate on the security generally resets to a maximum auction rate.
  7
  LCA-Vision
        Inc.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 
 At
        September 30, 2008, there was insufficient observable auction rate market
        information available to determine the fair value of most of our auction
        rate
        security investments. Therefore, we estimated fair value using a trinominal
        discount model employing assumptions that market participants would use in
        their
        estimates of fair value. Certain of these assumptions included financial
        standing of the issuer, final stated maturities, estimates of the probability
        of
        the issue being called prior to final maturity, estimates of the probability
        of
        defaults and recoveries, expected changes in interest rates paid on the
        securities, interest rates paid on similar instruments, and an estimated
        illiquidity discount due to extended redemption periods.
 
 Two
        of
        the eight auction rate securities held within our investment portfolio at
        September 30, 2008, with a combined par value of $2,250,000, were designed
        to
        serve as vehicles for credit default swaps. The recent disruptions in the
        credit
        and financial markets are having a significant adverse impact on the credit
        default swap markets, with spreads increasing sharply on investment grade
        entities due to the demand to protect against counterparty risk. Some defaults
        have occurred in the financial sector. Due to increased risk of default,
        it is
        probable that all amounts due (principal and interest) will not be collected
        according to these instruments’ contractual terms. Accordingly, an
        other-than-temporary impairment of $1,074,000 for these two auction rate
        security investments was recognized within the consolidated statement of
        operations in the September 30, 2008 quarter to record the investments at
        fair
        value and establish a new cost basis. Five of the eight auction rate securities,
        consisting primarily of municipal bonds with a combined par value of $3,450,000,
        were reported at fair value with total unrealized losses of $220,000, or
        $132,000 on an after-tax basis, included in accumulated other comprehensive
        income, a component of stockholders’ investment, as of September 30, 2008. The
        remaining auction rate security was redeemed by the issuer in October 2008
        at
        its $500,000 par value.
 
 As
        a
        result of the failed auctions and excluding those securities redeemed subsequent
        to September 30, 2008, our auction rate instruments are not currently liquid.
        Due to the continuation of the unstable credit environment, we believe the
        recovery period for our auction rate instruments will exceed 12 months.
        Accordingly, we have classified the fair value of the auction rate instruments
        that have not been redeemed subsequent to September 30, 2008, as long-term.
        The
        fair value and par value of our long-term auction rate instruments were
        $4,406,000 and $5,700,000 at September 30, 2008, respectively.
 
 The
        net
        carrying value and estimated fair value of debt securities available for
        sale
        and equity investments at September 30, 2008, by contractual maturity, is
        shown
        below. Expected maturities may differ from contractual maturities because
        the
        issuers of the securities may have the right or obligation to prepay obligations
        without prepayment penalties.
  (dollars
                  in thousands)
              
              **Amortized Cost**
              
              **Estimated Fair**
                **Value**Due
                  in one year or less
              
              $
              28,214
              
              $
              28,222Due
                  after one year through three years
              
              
              6,883
              
              
              6,883Due
                  after three years
              
              
              5,126
              
              
              4,906Equities
              
              
              2,944
              
              
              2,388Total
                  investments
              
              $
              43,167
              
              $
              42,399
  8
 
 LCA-Vision
        Inc.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
 
 **F** **air
        Values of Financial Instruments**
 
 Effective
        January 1, 2008, we adopted Financial Accounting Standards Board (FASB)
        Statement No. 157 (SFAS 157), *Fair
        Value Measurements.* SFAS
        No. 157 clarifies the definition of fair value, prescribes methods for
        measuring fair value, establishes a fair value hierarchy based on the inputs
        used to measure fair value and expands disclosures about the use of fair
        value
        measurements. In accordance with Financial Accounting Standards Board Staff
        Position No. FAS 157-2 (FSP 157-2), *Effective
        Date of FASB Statement No. 157* ,
        we will
        defer the adoption of SFAS No. 157 for our nonfinancial assets and
        nonfinancial liabilities, except those items recognized or disclosed at fair
        value on an annual or more frequently recurring basis, until January 1,
        2009. The adoption of SFAS No. 157 did not have a material impact on our
        fair value measurements. Additionally, in October 2008, the FASB issued Staff
        Position No. 157-3, *Determining
        the Fair Value of a Financial Asset when the Market for that Asset is not
        Active* .
        FSB
        157-3 clarifies the application of FAS 157 in a market that is not
        active.
 
 Level
        inputs, as defined by SFAS 157, are as follows:
 
 **Level
                  Input:**
              
              **Input
                  Definition:**Level
                  1
              
              Inputs
                  are unadjusted, quoted prices for identical assets or liabilities
                  in
                  active markets at the measurement date.Level
                  2
              
              Inputs
                  other than quoted prices included in Level 1 that are observable
                  for the
                  asset or liability through corroboration with market data at the
                  measurement date.Level
                  3
              
              Unobservable
                  inputs that reflect management’s best estimate of what market participants
                  would use in pricing the asset or liability at the measurement
                  date.
  The
        following table summarizes fair value measurements by level at
        September 30, 2008 for assets and liabilities measured at fair value on a
        recurring basis (dollars in thousands):
  **Fair Value Measurements as of September 30, 2008 Using****Quoted Prices in**
              
              
              
              **Significant****Active Markets for**
              
              **Significant Other**
              
              **Unobservable****Identical Assets**
              
              **Observable Inputs**
              
              **Inputs****Description**
              
              **(Level 1)**
              
              **(Level 2)**
              
              **(Level 3)**
              
              **Total**Assets:Cash
                  and cash equivalents
              
              $
              24,669
              
              $
              -
              
              $
              -
              
              $
              24,669Investments
              
              
              2,388
              
              
              35,605
              
              
              4,406
              
              
              42,399Deferred
                  compensation assets
              
              
              3,106
              
              
              -
              
              
              -
              
              
              3,106Total
              
              $
              30,163
              
              $
              35,605
              
              $
              4,406
              
              $
              70,174Liabilities:Deferred
                  compensation liabilities
              
              $
              3,067
              
              $
              -
              
              $
              -
              
              $
              3,067
 
 Cash
        and
        cash equivalents are comprised of either bank deposits or amounts invested
        in
        money market funds, the fair value of which is based on quoted market prices.
        The fair values of some investment securities included within our investment
        portfolio are based on quoted market prices from various stock and bond
        exchanges. Certain of our debt securities are classified at fair value utilizing
        Level 2 inputs. For these securities, fair value is measured using observable
        market data that includes dealer quotes, live trading levels, trade execution
        data, credit information and the bond’s terms and conditions. The fair values of
        our auction rate investment instruments are classified in Level 3 as previously
        described. We maintain a self-directed deferred compensation plan structured
        as
        a rabbi trust for certain highly compensated individuals. The investment
        assets
        of the rabbi trust are valued using quoted market prices. The related deferred
        compensation liability represents the fair value of the participants’ investment
        elections, determined using quoted market prices. We consider our credit
        risk,
        taking into consideration the legal rights of participants to receive deferred
        amounts, in the fair value determination of the deferred compensation
        liability.
  9
  LCA-Vision
        Inc.
 Notes
        to
        Condensed Consolidated Financial Statements (Unaudited)
  For
        assets measured at fair value using significant unobservable inputs (Level
        3)
        during the period, a reconciliation of beginning and ending balances for
        each
        major category is set forth in the table below (dollars in
        thousands):
 
 For
        the
        three months ended September 30, 2008
 **Fair Value Measurements Using Significant****Unobservable Inputs (Level 3)****Taxable**
              
              **Tax
                  Exempt****Auction**
              
              **Auction****Rate**
              
              **Rate****Description**
              
              **Securities**
              
              **Securities**
              
              **Total**Balance
                  as of July 1, 2008
              
              $
              1,834
              
              $
              3,893
              
              $
              5,727Assets
                  acquired
              
              
              -
              
              
              -
              
              
              -Assets
                  sold
              
              
              -
              
              
              -
              
              
              -Transfers
                  in (out) of Level 3
              
              
              -
              
              
              (500
              )
              
              (500
              )Gains
                  (losses) included in earnings
              
              
              (1,074
              )
              
              -
              
              
              (1,074
              )Gains
                  (losses) included in other comprehensive income
              
              
              416
              
              
              (163
              )
              
              253Balance
                  as of September 30, 2008
              
              $
              1,176
              
              $
              3,230
              
              $
              4,406
 
 For
        the
        nine months ended September 30, 2008
 **Fair Value Measurements Using Significant****Unobservable Inputs (Level 3)****Taxable**
              
              **Tax
                  Exempt****Auction**
              
              **Auction****Rate**
              
              **Rate****Description**
              
              **Securities**
              
              **Securities**
              
              **Total**Balance
                  as of Janurary 1, 2008
              
              $
              2,600
              
              $
              15,125
              
              $
              17,725Assets
                  acquired
              
              
              -
              
              
              2,150
              
              
              2,150Assets
                  sold
              
              
              (350
              )
              
              (11,925
              )
              
              (12,275
              )Transfers
                  in (out) of Level 3
              
              
              -
              
              
              (1,900
              )
              
              (1,900
              )Gains
                  (losses) included in earnings
              
              
              (1,074
              )
              
              -
              
              
              (1,074
              )Gains
                  (losses) included in other comprehensive income
              
              
              -
              
              
              (220
              )
              
              (220
              )Balance
                  as of September 30, 2008
              
              $
              1,176
              
              $
              3,230
              
              $
              4,406
 
 **Allowance
        for Doubtful Accounts**
 
 We
        provide patient financing to some of our customers, including those who could
        not otherwise obtain third-party financing. The terms of the financing require
        the patient to pay an up-front fee which is intended to cover some or all
        of our
        variable costs, and the remainder is generally deducted automatically from
        the
        patient’s checking account over a period of 12 to 36 months. We have recorded an
        allowance for doubtful accounts as a best estimate of the amount of probable
        credit losses from our patient financing program. Each month, we review the
        allowance and adjust it based upon our experience with patient financing.
        Receivables are charged off against the allowance for doubtful accounts when
        it
        is probable a receivable will not be recovered. Our policy is to reserve
        for all
        receivables that remain open past the financial maturity date and to provide
        reserves for receivables prior to the maturity date so as to bring receivables
        net of reserves down to the estimated net realizable value based on historical
        collectability rates, recent default activity and the current credit
        environment.
 
 **Accrued
        Enhancement Expense**
 
 Effective
        June 15, 2007, participation in our Lifetime Satisfaction Program (“acuity
        program”) is included in the base surgical price for substantially all of our
        patients. Under the acuity program, we provide post-surgical enhancements
        free
        of charge should the patient not achieve the desired visual correction during
        the initial procedure. Under this pricing structure, we account for the acuity
        program as a warranty obligation under the provisions of FASB Statement No.
        5
        (SFAS 5), *Accounting
        for Contingencies* .
        Accordingly, the costs expected to be incurred to satisfy the obligation
        are
        accrued as a liability and direct cost of service at the point of sale given
        our
        ability to reasonably estimate such costs based on historical trends and
        the
        satisfaction of all other revenue recognition criteria.
  10
 LCA-Vision
          Inc.
 Notes
          to
          Condensed Consolidated Financial Statements (Unaudited)


We
        record
        the post-surgical enhancement accrual based on our best estimate of the number
        and associated cost of the procedures to be performed. Each month, we review
        the
        enhancement accrual and consider factors such as procedure cost and historical
        procedure volume when determining the appropriateness of the recorded
        balance.
 
 **Deferred
        Revenues**
 
 Prior
        to
        June 15, 2007, our acuity programs were separately priced and included a
        no-acuity plan, a one-year acuity plan, and a lifetime acuity plan. Under
        FASB
        Technical Bulletin No. 90-1 (FTB 90-1), *Accounting
        for Separately Priced Extended Warranty and Product Maintenance
        Contract* s,
        100%
        of revenues from the sale of an extended acuity program are to be deferred
        and
        recognized over the life of the contract on a straight-line basis unless
        sufficient experience exists to indicate that the costs to provide the service
        will be incurred other than on a straight-line basis. We believe we have
        sufficient experience to support recognition on other than a straight-line
        basis. Accordingly, we have deferred these revenues and are recognizing them
        over the period in which the future costs of performing the enhancement
        procedures are expected to be incurred. For programs that included one-year
        and
        lifetime options but did not include a no-acuity option, costs associated
        with
        the sale of the lifetime acuity plan begin after the expiration of the one-year
        acuity plan included in the base price. Accordingly, we deferred 100% of
        all
        revenues associated with the sale of the lifetime acuity plan and are
        recognizing them beginning one year after the initial surgery date. For the
        programs that included a no-acuity option in addition to the one-year and
        lifetime options, all revenues from the sale of the one-year and lifetime
        acuity
        plans were deferred and are being recognized in proportion to the total costs
        expected to be incurred, beginning immediately following the initial surgical
        procedure.
 
 Effective
        June 15, 2007, we changed our pricing model and no longer offer separately
        priced acuity options. For substantially all patients, participation in the
        acuity program now is included in the base surgical price. No warranty-related
        revenue deferrals have occurred for procedures performed since that date
        and
        there will be no additions to the deferral account in the future. Revenues
        previously deferred from the sale of the separately priced acuity programs
        are
        being recognized over a seven-year period, our current estimate of the period
        over which costs to provide the enhancement service will be
        incurred.
 
 In
        addition to the deferral of revenues for those procedures performed prior
        to the
        elimination of separately priced acuity programs on June 15, 2007, we also
        have
        deferred a portion of our costs of service related to professional fees paid
        to
        the attending surgeon when a procedure is performed. The physician receives
        no
        incremental fee for an enhancement procedure. Accordingly, a portion of the
        professional fee paid to the physician relates to the future enhancement
        procedures to be performed and qualifies for deferral as a direct and
        incremental cost of the warranty contract. We use the same historical experience
        to amortize deferred professional fees that we use to amortize deferred
        revenue.
 
 As
        of
        September 30, 2008 and December 31, 2007, the deferred revenue balance totaled
        $26,880,000 and $41,829,000, respectively.
 
 **Captive
        Insurance Company Reserves**
 
 We
        have a
        captive insurance company to provide professional liability insurance coverage
        for claims brought against us after December 17, 2002. In addition, our captive
        insurance company’s charter allows it to provide professional liability
        insurance for our doctors, although none are currently insured by the captive.
        We use the captive insurance company for both primary insurance and excess
        liability coverage. A number of claims are now pending with our captive
        insurance company. The financial statements of the captive insurance company
        are
        consolidated with our financial statements since it is a wholly-owned
        enterprise. As of September 30, 2008 and December 31, 2007, we maintained
        insurance reserves of $9,689,000
        and $8,493,000, respectively, which represents an actuarially determined
        estimate of future costs associated with claims filed as well as claims incurred
        but not yet reported. The loss reserve developed by our actuaries is determined
        by comparing historical claim experience to comparable insurance industry
        experience.
 11
 LCA-Vision
            Inc.
 Notes
            to
            Condensed Consolidated Financial Statements
 **Debt**
 
 Long-term
        debt obligations consist of (dollars in thousands):
 
 **Amount Outstanding****September 30, 2008**
              
              **December 31, 2007**Capitalized lease obligations
              
              $
              4,851
              
              $
              5,953Bank
                  loan
              
              
              17,761
              
              
              -Total
                  long-term debt obligations
              
              $
              22,612
              
              $
              5,953Debt
                  obligations maturing in one year
              
              
              (7,281
              )
              
              (3,941
              )Long-term
                  obligations (less current portion)
              
              $
              15,331
              
              $
              2,012
 
 Capitalized
        lease obligations are used to finance purchases of some of our medical
        equipment. The leases cover a period of 24 months to 36 months from the date
        the
        medical equipment is installed.
  On
        April
        24, 2008, we entered into a bank loan agreement for $19,184,000 to finance
        medical equipment. The loan will be paid in equal monthly installments over
        a
        five-year period at a fixed interest rate of 4.96%. The loan agreement contains
        no financial covenants.
 
 Both
        the
        capital lease obligations and the bank loan are secured by certain medical
        equipment.
 
 **Income
        Taxes**
 
 The
        following table summarizes the components of the income tax provision for
        the
        three- and nine-month periods ended September 30, 2008 and 2007 (dollars
        in
        thousands):
 
 **Three months ended**
              
              **Nine months ended****September 30,**
              
              **September 30,**
              
              **September 30,**
              
              **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Federal
                  income tax (benefit) expense
              
              $
              (1,559
              )
              $
              5,455
              
              $
              874
              
              $
              14,681State
                  income tax (benefit) expense, net of federal benefit
              
              
              (477
              )
              
              375
              
              
              214
              
              
              2,141Income
                  tax (benefit) expense
              
              $
              (2,036
              )
              $
              5,830
              
              $
              1,088
              
              $
              16,822Effective
                  income tax rate
              
              
              30.2
              %
              
              36.8
              %
              
              40.7
              %
              
              37.2
              %
 
 Our
        effective income tax rate fluctuated for the three- and nine-month periods
        ended
        September 30, 2008 when compared to the same periods last year primarily
        because
        of lower pre-tax income for 2008 compared with 2007 and the corresponding
        effect
        of favorable permanent differences constituting a larger percentage of our
        overall taxable income, partially offset by the non-tax-deductibility of
        the
        $1.1 million loss on investments recorded in the September 2008
        quarter.
 
 In
        June
        2006, the FASB issued Interpretation No. 48 (FIN 48), *Accounting
        for Uncertainty in Income Taxes* ,
        which
        is effective for fiscal years beginning after December 15, 2006. This
        interpretation prescribes a framework for recognizing and measuring income
        tax
        benefits for inclusion in the financial statements and also provides guidance
        on
        derecognition, classification, interest and penalties. FIN 48 provides that
        an
        income tax benefit is recognized in the financial statements when it is more
        likely than not that the benefit claimed or to be claimed on an income tax
        return will be sustained upon examination. The amount of income tax benefit
        recognized is measured as the largest amount of benefit that is greater than
        50
        percent likely of being realized upon ultimate settlement.
  12
  LCA-Vision
        Inc.
 Notes
        to
        Condensed Consolidated Financial Statements
 
 During
        the three and nine months ended September 30, 2008, there were no significant
        changes to the liability for unrecognized tax benefits or potential interest
        and
        penalties recorded as a component of income tax expense. The total amount
        of
        unrecognized tax benefits was approximately $398,000 and $584,000 at September
        30, 2008 and December 31, 2007, respectively. During the June 2008 quarter,
        the
        Internal Revenue Service completed its examination of our 2006 tax returns
        with
        no significant affect to the financial statements. It is reasonably possible
        that, within the next 12 months, there could be a change in the amount of
        unrecognized tax benefits resulting from IRS reviews for tax years after
        2006 or
        other taxing authorities, including possible settlement of audit issues,
        or the
        expiration of applicable statutes of limitations. It is not possible to
        reasonably estimate the amount of any such change in unrecognized tax benefits
        at this time.
 
 **Per
        Share Data**
 
 Basic
        per
        share data is income applicable to common shares divided by the weighted
        average
        common shares outstanding. Diluted per share data is calculated by dividing
        income applicable to common shares by the weighted average common shares
        outstanding plus shares issuable upon the vesting of outstanding restricted
        stock units and the exercise of in-the-money stock options.
 
 Following
        is a reconciliation of basic and diluted earnings per share for the three
        and
        nine months ended September 30, 2008 and 2007 (dollars in thousands, except
        per
        share amounts):
 
 **Three Months Ended**
              
              **Nine Months Ended****September
                  30,**
              
              **September
                  30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Basic EarningsNet
                  (loss) income
              
              $
              (4,717
              )
              $
              10,018
              
              $
              1,585
              
              $
              28,358Weighted
                  average shares outstanding
              
              
              18,537
              
              
              19,521
              
              
              18,519
              
              
              19,834Basic
                  (loss) earnings per share
              
              $
              (0.25
              )
              $
              0.51
              
              $
              0.09
              
              $
              1.43Diluted
                  EarningsNet
                  (loss) income
              
              $
              (4,717
              )
              $
              10,018
              
              $
              1,585
              
              $
              28,358Weighted
                  average shares outstanding
              
              
              18,537
              
              
              19,521
              
              
              18,519
              
              
              19,834Effect
                  of dilutive securitiesStock
                  options
              
              
              -
              
              
              211
              
              
              28
              
              
              277Restricted
                  stock
              
              
              -
              
              
              22
              
              
              25
              
              
              36Weighted
                  average common shares and potential dilutive shares
              
              
              18,537
              
              
              19,754
              
              
              18,572
              
              
              20,147Diluted
                  (loss) earnings per share
              
              $
              (0.25
              )
              $
              0.51
              
              $
              0.09
              
              $
              1.41
 
 For
        the
        three and nine months ended September 30, 2008, 701,477 and 678,898 weighted
        shares, respectively, that were issuable upon the exercise of stock options
        and
        non-vested restricted stock were excluded from the computation of diluted
        earnings per share as their effect was antidilutive.
 
 **Revenue
        Recognition**
 
 We
        recognize revenues as services are performed and pervasive evidence of an
        arrangement for payment exists. Additionally, revenue is recognized when
        the
        price is fixed and determinable and collectability is reasonably assured.
        Revenues associated with our former separately priced acuity programs have
        been
        deferred and are being recognized over the period in which future costs of
        performing the post-surgical enhancement procedures are expected to be incurred,
        as we have sufficient experience to support that cost associated with future
        enhancements will be incurred on other than a straight-line basis.
 
 **Stock-Based
        Compensation**
 
 We
        have
        four stock incentive plans through which employees and directors have been
        or
        are granted stock-based compensation. We recognize compensation expense for
        the
        grant date fair value of stock-based awards over the applicable vesting period.
        The components of our pre-tax stock-based compensation expense, net of
        forfeitures, and associated income tax benefits were as follows for the three
        and nine months ended September 30, 2008 (dollars in thousands):
  13
  LCA-Vision
        Inc.
 Notes
        to
        Condensed Consolidated Financial Statements
 
 **Three months ended**
              
              **Nine months ended****September 30,**
              
              **September 30,****2008**
              
              **2007**
              
              **2008**
              
              **2007**Stock
                  options
              
              $
              (83
              )
              $
              223
              
              $
              80
              
              $
              1,610Restricted
                  stock
              
              
              437
              
              
              621
              
              
              886
              
              
              2,013$
              354
              
              $
              844
              
              $
              966
              
              $
              3,623Income
                  tax benefit
              
              
              181
              
              
              513
              
              
              425
              
              
              916$
              173
              
              $
              331
              
              $
              541
              
              $
              2,707
 
 The
        stock
        option expense for the three-month period ended September 30, 2008 was negative
        due to a revision to the forfeiture estimates resulting from layoffs and
        other
        personnel reductions that occurred during the quarter.
 
 **Commitments
        and Contingencies**
 On
        September 13, 2007, and October 1, 2007, two complaints were filed against
        the
        Company and certain of our current and former directors and officers by Beaver
        County Retirement Board and Spencer and Jean Lin, respectively, in the United
        States District Court for the Southern District of Ohio (Western Division)
        purportedly on behalf of a class of shareholders who purchased our common
        stock
        between February 12, 2007 and July 30, 2007.  On November 8, 2007, an
        additional complaint was filed by named plaintiff Diane B. Callahan against
        the
        Company and certain of our current and former directors and officers in the
        United States District Court for the Southern District of Ohio (Western
        Division).  This third action was filed purportedly on behalf of a class of
        shareholders who purchased our common stock between February 12, 2007 and
        November 2, 2007.  These actions have been consolidated into one action. A
        consolidated complaint was filed on April 19, 2008. The plaintiffs in the
        consolidated complaint are seeking damages on behalf of a class of shareholders
        who purchased our common stock between October 24, 2006 and November 2, 2007,
        asserting claims under Sections 10(b) and 20(a) of the Securities Exchange
        Act
        of 1934. They allege that certain of the Company’s public disclosures regarding
        its financial prospects and historical accounting for bad-debt reserves and
        expenses were false or misleading. On July 10, 2008, the Company, together
        with
        the other defendants, filed a motion to dismiss the consolidated complaint.
        On
        September 5, 2008, plaintiffs filed their memorandum in opposition to the
        motion
        to dismiss. We strongly believe that these claims lack merit, and we intend
        to
        defend against the claims vigorously. Due to the inherent uncertainties of
        litigation, we cannot predict the outcome of the action at this time, and
        can
        give no assurance that these claims will not have a material adverse effect
        on
        our financial position or results of operations.  No amount has been
        accrued for these claims at September 30, 2008.
 
 On
        October 5, 2007, a complaint was filed in the Court of Common Pleas, Hamilton
        County, Ohio, against certain of our current and former officers and directors,
        derivatively on behalf of the Company.  The plaintiff, Nicholas Weil,
        asserts that three of the defendants breached their fiduciary duties when
        they
        allegedly sold LCA-Vision's securities on the basis of material non-public
        information in 2007.  The plaintiff also asserts claims for breach of
        fiduciary duty, abuse of control, corporate waste, and unjust enrichment
        in
        connection with the disclosures that also are the subject of the securities
        actions described above. The Company is named as a nominal defendant in the
        complaint, although the action is derivative in nature. 
        The plaintiff demands damages and attorneys fees, and seeks other equitable
        relief.  On December 20, 2007, the court stayed this action, pursuant to a
        stipulation of the parties, pending the resolution of the motion to dismiss
        filed in the consolidated class action, discussed above. We are in the process
        of evaluating these claims.  However, due to the inherent uncertainty of
        litigation, we cannot predict the outcome of the action at this time, and
        can
        give no assurance that these claims will not have a material adverse effect
        on
        our financial position or results of operations due to our indemnification
        obligations to these persons if liability were found. No amount has been
        accrued
        for these claims at September 30, 2008.
 
 14
 
 LCA-Vision
        Inc.
 Notes
        to
        Condensed Consolidated Financial Statements
 
 Our
        business results in a number of medical malpractice lawsuits. Claims reported
        to
        us prior to December 18, 2002 were generally covered by external insurance
        policies and to date have not had a material financial impact on our business
        other than the cost of insurance and our deductibles under those policies.
        Effective in
        December 2002, we established a captive insurance company to provide coverage
        for claims brought against us after December 17, 2002. We use the captive
        insurance company for both primary insurance and excess liability coverage.
        A
        number of claims are now pending with our captive insurance company. Since
        the
        inception of the captive insurance company in 2002, total claims and expense
        payments of $1,171,000 have been disbursed.
 
 In
        addition to the above, we are periodically subject to various other claims
        and
        lawsuits. We believe that none of these other claims or lawsuits to which
        we are
        currently subject, individually or in the aggregate, will have a material
        adverse effect on our business, financial position, results of operations
        or
        cash flows.
 
 **Item
        2.****Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations.**
 
 This
        quarterly report on Form 10-Q contains forward-looking statements within
        the
        meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
        Securities Exchange Act of 1934. These forward-looking statements are based
        on
        information available to us as of the date hereof. Actual results could differ
        materially from those stated or implied in such forward-looking statements
        due
        to risks and uncertainties associated with our business, including, without
        limitation, those concerning economic, political and sociological conditions;
        the acceptance rate of new technology, and our ability to successfully implement
        new technology on a national basis; market acceptance of our services; the
        successful execution of marketing strategies to cost effectively drive patients
        to our vision centers; competition in the laser vision correction industry;
        an
        inability to attract new patients; the possibility of long-term side effects
        and
        adverse publicity regarding laser vision correction; operational and management
        instability; legal or regulatory action against us or others in the laser
        vision
        correction industry; our ability to profitably operate vision centers and
        retain
        qualified personnel during periods of lower procedure volumes; the relatively
        high fixed cost structure of our business; the continued availability of
        non-recourse third-party financing for our patients on terms similar to what
        we
        have paid historically; and the future value of revenues financed by us and
        our
        ability to collect on such financings which will depend on a number of factors,
        including the worsening consumer credit environment and our ability to manage
        credit risk related to consumer debt, bankruptcies and other credit trends.
        In
        addition, an ongoing FDA study about post-Lasik quality of life matters could
        potentially impact negatively the acceptance of Lasik. Except to the extent
        required under the federal securities laws and the rules and regulations
        promulgated by the Securities and Exchange Commission, we assume no obligation
        to update the information included herein, whether as a result of new
        information, future events or circumstances, or otherwise. In addition to
        the
        information given herein, please refer to “Item 1A. Risk Factors” in this report
        and our annual report on Form 10-K for the fiscal year ended December 31,
        2007
        for a discussion of important factors that could affect our
        results.
 
 The
        following discussion and analysis of the Company's financial condition and
        results of operations should be read together with our Condensed Consolidated
        Financial Statements and the accompanying Notes included in this Quarterly
        Report.
 
 **Overview**
 
 We
        are a
        leading provider of fixed-site laser vision correction centers at our
        Lasik *Plus* vision
        centers. Our vision centers provide the staff, facilities, equipment and
        support
        services for performing vision correction procedures that employ advanced
        laser
        technologies to help correct nearsightedness, farsightedness and astigmatism.
 
 We
        derive
        all of our revenues from the delivery of laser vision correction services
        performed in our U.S. vision centers. Our revenues therefore depend on our
        volume of procedures, which is impacted by a number of factors, including
        the
        following:
  15
  ·
              General
                  economic conditions and consumer confidence
                  levels
  ·
              Our
                  ability to generate customers through our arrangements with managed
                  care
                  companies, direct-to-consumer advertising and word-of-mouth
                  referrals
  ·
              The
                  availability of patient financing
  ·
              The
                  level of consumer acceptance of laser vision
                  correction
  ·
              The
                  effect of competition and discounting practices in our
                  industry
 
 Other
        factors that may impact our revenues include:
  ·
              Deferred
                  revenue from the sale, prior to June 15, 2007, of separately priced
                  extended warranties
 ·
              Our
                  mix of procedures among the different types of laser
                  technology
 
 Our
        operating costs and expenses include:
 
 ·
              Medical
                  professional and license fees, including per procedure fees for
                  the
                  ophthalmologists performing laser vision correction and license
                  fees per
                  procedure paid to certain equipment suppliers of our excimer
                  lasers
  ·
              Direct
                  costs of services, including center rent and utilities, equipment
                  lease
                  and maintenance costs, surgical supplies, center staff expense,
                  finance
                  charges for third-party patient financing and costs related to
                  other
                  revenues
  ·
              General
                  and administrative costs, including headquarters staff expense
                  and other
                  overhead costs
  ·
              Marketing
                  and advertising costs
  ·
              Depreciation
                  of equipment
 
 Our
        revenues are primarily a function of the number of laser vision correction
        procedures performed and the pricing for these services. Our vision centers
        have
        a relatively high degree of operating leverage due to the fact that many
        of our
        costs are fixed in nature. As a result, our level of procedure volume can
        have a
        significant impact on our level of profitability. As indicated below, we
        have
        experienced significant declines in levels of procedure volume during the
        first
        nine months of 2008, primarily during the three months ended September 30,
        2008.
        We believe this is due to the occurrence of a number of factors cited in
        the
        first paragraph of this Item 2 as risks and uncertainties associated with
        our
        business. These factors include the effect of deteriorating U.S. economic
        conditions on consumer spending habits, the inability of our marketing
        strategies to drive procedure volume in the current economic environment
        and,
        perhaps, an increase in consumer concern about laser vision correction resulting
        from the ongoing FDA study. We expect these conditions will continue to
        adversely affect our procedure volume and our revenues for at least the balance
        of 2008.
 
 The
        following table details the number of laser vision correction procedures
        performed at our consolidated vision centers.
  **2008**
              
              **2007**First
                  Quarter
              
              
              44,159
              
              
              59,101Second
                  Quarter
              
              
              30,086
              
              
              48,668Third
                  Quarter
              
              
              21,484
              
              
              44,547Fourth
                  Quarter
              
              
              
              
              
              39,888Year
              
              
              95,729
              
              
              192,204
 
 Our
        strongest quarter in terms of procedures performed historically has been
        the
        first quarter of the year. We believe this is related to a number of factors,
        including the availability of funds under typical employer medical flexible
        spending programs and the general effect of the New Year season.
  16
  Prior
        to
        June 15, 2007, we offered our patients separately priced acuity programs.
        These
        programs included a no-acuity plan, a one-year acuity plan, and a lifetime
        acuity plan. Under applicable accounting rules, 100% of revenues from the
        sale
        of an extended acuity program are to be deferred and recognized over the
        life of
        the contract on a straight-line basis unless sufficient experience exists
        to
        indicate that the costs to provide the service will be incurred other than
        on a
        straight-line basis. We believe we have sufficient experience to support
        recognition on other than a straight-line basis. Accordingly, we have deferred
        these revenues and are recognizing them over the period in which the future
        costs of performing the enhancement procedures are expected to be incurred.
        For
        programs that included one-year and lifetime options but did not include
        a
        no-acuity option, costs associated with the sale of the lifetime acuity plan
        begin after the expiration of the one-year acuity plan included in the base
        price. Accordingly, we deferred 100% of all revenues associated with the
        sale of
        the lifetime acuity plan and are recognizing them beginning one year after
        the
        initial surgery date. For programs that included a no-acuity option in addition
        to the one-year and lifetime options, all revenues from the sale of the one-year
        and lifetime acuity plans were deferred and are being recognized in proportion
        to the total costs expected to be incurred, beginning immediately following
        the
        initial surgical procedure.
 
 Effective
        June 15, 2007, we eliminated the use of separately priced extended acuity
        warranties. No warranty-related revenue deferrals have occurred for procedures
        performed since that date and there will be no additions to the deferral
        account
        in the future. The following table provides an estimate of the run-off of
        the
        balance in future periods based upon historical enhancement rates. All amounts
        related to the one-year acuity program have been fully amortized. These rates
        are reviewed quarterly and the amortization will be modified as needed (dollars
        in thousands).
  **Lifetime if Base**
              
              **Lifetime if Base****Price Includes**
              
              **Price Does Not****the One-Year**
              
              **Include an****Acuity Plan**
              
              **Acuity Plan**
              
              **Total**Balance as of September 30, 2008
              
              $
              22,947
              
              $
              3,933
              
              $
              26,880Estimated
                  amortization:2008
                  Q4
              
              
              3,225
              
              
              544
              
              
              3,7692009
                  Q1
              
              
              2,618
              
              
              442
              
              
              3,0602009
                  Q2
              
              
              1,972
              
              
              322
              
              
              2,2942009
                  Q3
              
              
              1,659
              
              
              268
              
              
              1,9272009
                  Q4
              
              
              1,572
              
              
              255
              
              
              1,8272010
              
              
              5,266
              
              
              885
              
              
              6,1512011
              
              
              3,713
              
              
              663
              
              
              4,3762012
              
              
              2,119
              
              
              397
              
              
              2,5162013
              
              
              727
              
              
              144
              
              
              8712014
              
              
              76
              
              
              13
              
              
              89
 
 In
        addition to the deferral of revenues under FTB 90-1, we also have deferred
        a
        portion of our costs of service related to professional fees paid to the
        attending surgeon when a procedure is performed. These costs total 10% of
        the
        revenue. The physician receives no incremental fee for an enhancement procedure.
        Accordingly, a portion of the professional fee paid to the physician relates
        to
        the future enhancement procedures to be performed and qualifies for deferral
        under FTB 90-1 as a direct and incremental cost of the warranty contract.
        We use
        the same historical experience to amortize deferred revenue and deferred
        professional fees.
 
 **Results
        of Operations for the Three Months Ended September 30, 2008 and
        2007**
 
 We
        have
        seen a decline in appointments and in the show rates for both appointments
        and
        treatments. We believe this is primarily due to the current economic uncertainty
        and other macroeconomic factors. Particularly, we believe that tightening
        consumer discretionary spending has negatively impacted our volume.
 
 In
        the
        third quarter of 2008, revenues decreased by $37,187,000, or 49.9%, to
        $37,397,000 from $74,584,000 in the third quarter of 2007. Procedure volume
        of
        21,484 was a decrease of 51.8% from 44,547 in the third quarter of 2007.
        For
        vision centers open at least 12 months, procedure volume decreased by
        approximately 54.6% in the third quarter of 2008 to 20,231 compared to 44,547
        in
        the third quarter of 2007. The components of the revenue change include (dollars
        in thousands):
  17
  Decrease
                  in revenues from lower procedure volume
              
              $
              (34,624
              )Impact
                  from increase in average selling price, before revenue
                  deferral
              
              
              739Change
                  in deferred revenues
              
              
              (3,302
              )Decrease
                  in revenues
              
              $
              (37,187
              )
 
 The
        average reported revenue per procedure, which includes the impact of taking
        into
        income deferred revenue from separately priced extended warranties as well
        as
        some price increases related to the adoption of IntraLase technology, increased
        4.0% to $1,741 in the third quarter of 2008 from $1,674 in the third quarter
        of
        2007. IntraLase is now operational in most of our vision centers.
 
 Effective
        July 1, 2008, we implemented a simplified market-specific pricing structure
        based on the results of four months of earlier testing in multiple markets.
        The
        revised structure, which was intended to drive procedure volume while
        maintaining acceptable margins, establishes local price points that take
        into
        account market competition and other factors. When excluding the impact of
        deferred revenue, the revised pricing structure has resulted in a $100 decline
        in average price per procedure when compared with the second quarter of 2008.
        The price reduction benefited conversion in some markets but not all markets
        where price was reduced. We will continue to monitor the relationship between
        price and conversion and make adjustments to price where we believe revenue
        can
        be maximized.
  *Change
        in deferred revenue*
 The
        following table summarizes the effect on period-over-period revenues of the
        change in deferred revenues for the third quarters of 2008 and 2007 (dollars
        in
        thousands):
  **2008**
              
              **2007**
              
              **Decrease in**
                **Revenues**Revenues deferred
              
              $
              -
              
              $
              -
              
              $
              -Amortization
                  of prior deferred revenues
              
              
              4,404
              
              
              7,706
              
              
              (3,302
              )Net
                  decrease in revenues
              
              
              
              
              
              
              
              $
              (3,302
              )
 
 *Medical
        professional and license fees*
 Medical
        professional and license fees decreased by $4,143,000, or 33.6%, in the third
        quarter of 2008 from the third quarter of 2007. This decrease was primarily
        due
        to lower costs and physician fees associated with lower revenues, partially
        offset by higher costs associated with IntraLase license fees. The amortization
        of the deferred medical professional fees attributable to prior years was
        $440,000 in the third quarter of 2008 and $771,000 in the third quarter of
        2007.
        IntraLase accounted for approximately 74% of the procedures in the third
        quarter
        of 2008 but only 5% in the third quarter of 2007.
 
 *Direct
        costs of services*
 Direct
        costs of services include the salary component of physician compensation
        for
        certain physicians employed by us, staffing, equipment, financing charges,
        medical supplies, facility costs of operating laser vision correction centers
        and bad debt expense. Direct costs of services decreased in the third quarter
        of
        2008 by $5,618,000, or 24.1%, over the third quarter of 2007. This decrease
        was
        principally the result of procedure volume declines driving decreases in
        surgical supplies, bad debt expense, finance fees and employee incentives
        and,
        secondarily, was attributable to workforce reductions, which reduced salary,
        fringe benefits and stock-based compensation expense. These decreases were
        partially offset by increases in rent/utilities and equipment expense for
        new
        centers. New center costs in the third quarter 2008 were
        $1,514,000.
 
 In
        response to lower procedure volume, we reduced our workforce by approximately
        16% in the first quarter and by an additional 25% in the third quarter of
        2008.
        We recorded a severance charge of $812,000 during the third quarter in
        connection with this recent workforce reduction.
 
 In
        October 2008 we closed our Boise, Idaho vision center due to poor financial
        performance. We will take a charge of approximately $600,000 in the fourth
        quarter of 2008 related to this closure. We will continue to monitor the
        financial performance of all vision centers on a monthly basis.
 
 18
  *General
        and administrative*
 General
        and administrative expenses increased by $232,000, or 5.0%, in the third
        quarter
        of 2008 from the third quarter of 2007. This was primarily due to an increase
        in
        professional services and rent/utilities. The professional services included
        costs for our customer service and sales training program, legal fees and
        consulting costs for strategic planning and human resource support. The rent
        increase resulted from the addition of our national call center and data
        center
        in December of 2007.
 *Marketing
          and advertising expenses*
 Marketing
          and advertising expenses decreased by $8,914,000, or 51.8%, in the third
          quarter
          of 2008 from the third quarter of 2007. This decrease was made to better
          align
          our spending with anticipated consumer demand. We are continuing to work
          to
          develop more efficient marketing techniques and recently consolidated our
          media programs under a single, proven lead agency that will manage our
          marketing programs and vendors. Our future operating profitability will
          depend
          in large part on the success of our efforts in this regard.
 
 *Depreciation
          expense*
 Depreciation
          expense increased by $1,547,000 in the third quarter of 2008 from the third
          quarter of 2007 as a result of capital investments in new vision centers
          over
          the past year, expenditures at our national call center and data center,
          the
          purchase of IntraLase lasers and capital improvements made to our Bausch
&
Lomb laser platforms.
 
 *Non-operating
          income and expenses*
 We
          recorded a net investment loss of $724,000 in the third quarter of 2008
          as
          compared to net investment income of $1,474,000 in the third quarter of
          2007.
          The $2,198,000 decline is due to an other-than-temporary impairment on
          investments of $1,074,000, a decrease in investment income of $1,300,000
          as a
          result of a decline in investment holdings that were used for our share
          buyback
          program in 2007, declining deferred compensation asset values resulting
          from
          changing market conditions and reduced investment balances, and a shift
          of some
          investments from taxable and tax exempt bonds to U.S. Treasury money market
          accounts that earn a lower rate of interest. These decreases were partially
          offset by a $176,000 increase in income from patient financing
          charges.
 
 *Income
          taxes*
 The
          following table summarizes the components of the income tax provision for
          the
          third quarter of 2008 and 2007 (dollars in thousands):
 
 **Three
                    months ended****September
                    30,****2008**
                
                **2007**Federal
                    income tax (benefit) expense
                
                $
                (1,559
                )
                $
                5,455State
                    income tax (benefit), net of federal benefit
                
                
                (477
                )
                
                375Income
                    tax (benefit) expense
                
                $
                (2,036
                )
                $
                5,830Effective
                    income tax rate
                
                
                30.2
                %
                
                36.8
                %
 
 
 Income
          tax expense decreased from 36.8% of pre-tax income during the third quarter
          of
          2007 to 30.2% of pre-tax loss during the third quarter of 2008. The decrease
          resulted primarily from the lower pre-tax earnings for 2008 compared to
          2007,
          the corresponding effect of favorable permanent differences constituting
          a
          larger percentage of our overall tax provision and the non-deductibility
          of the
          loss on investments recorded this quarter.
  19
  **Results
          of Operations for the Nine Months Ended September 30, 2008 and
          2007**
 
 In
          the
          first nine months of 2008, revenues decreased by $51,786,000, or 23.2%,
          to
          $171,147,000 from $222,933,000 in the first nine months of 2007. Procedure
          volume of 95,729 was a decrease of 37.2% from 152,316 in the first nine
          months
          of 2007. The components of the revenue change include (dollars in
          thousands):
 
 
 Decrease
                    in revenues from lower procedure volume
                
                $
                (82,385
                )Impact
                    from increase in average selling price, before revenue
                    deferral
                
                
                16,826Change
                    in deferred revenues
                
                
                13,773Decrease
                    in revenues
                
                $
                (51,786
                )
 
 The
          average reported revenue per procedure, which includes the impact of taking
          into
          income deferred revenue from separately priced extended warranties, increased
          22.2% to $1,788 in the first nine months of 2008 from $1,464 in the first
          nine
          months of 2007.
 
 We
          have
          seen a decline in pre-operative appointment bookings and in the show rates
          for
          both appointments and treatments. We believe this is primarily due to the
          current economic uncertainty and other macroeconomic factors.
 
 *Change
          in deferred revenues*
 The
          following table summarizes the effect on revenues of the change in deferred
          revenues for the first nine months of 2008 and 2007 (dollars in
          thousands):
 **Nine Months Ended**
                    **September 30, 2008****2008**
                  
                  **2007**
                  
                  **Increase in Revenues**Revenues
                      deferred
                  
                  $
                  -
                  
                  $
                  (20,054
                  )
                  $
                  20,054Amortization
                      of prior deferred revenues
                  
                  
                  14,950
                  
                  
                  21,231
                  
                  
                  (6,281
                  )Net
                      increase in revenues
                  
                  
                  
                  
                  
                  
                  
                  $
                  13,773
 
 *Medical
          professional and license fees*
 Medical
          professional and license fees decreased by $3,516,000 or 9.3%, in the first
          nine
          months of 2008 from the first nine months of 2007. This decrease was primarily
          due to lower costs and physician fees associated with lower revenues, partially
          offset by higher costs associated with IntraLase license fees. As a result
          of
          deferring revenue associated with separately priced extended warranties,
          $2,006,000 of medical professional fees were deferred in the first half
          of 2007.
          The amortization of the deferred medical professional fees attributable
          to prior
          years was $1,495,000 in the first nine months of 2008 and $2,123,000 in
          the
          first nine months of 2007.
 
 *Direct
          costs of services*
 Direct
          costs of services decreased in the first nine months of 2008 by $9,867,000,
          or
          13.6%, over the first nine months of 2007. This decrease was primarily
          the
          result of lower expense for surgical supplies, employee incentives, laser
          rent
          and financing fees due to lower procedure volumes and, secondarily, to
          workforce
          reductions which reduced salary and stock-based compensation expense. This
          decrease was partially offset by increased rent and utilities costs for
          new
          centers.
 
 *General
          and administrative*
 General
          and administrative expenses increased by $689,000 or 4.5%, in the first
          nine
          months of 2008 from the first nine months of 2007. This amount was primarily
          due
          to increases in professional services, salaries, fringe benefits, and
          telecommunications costs for the new call center, partially offset by decreases
          in stock-based and employee incentive compensation due to lower performance
          expectations for 2008.




20




*Marketing
      and advertising expenses*


Marketing
      and advertising expenses decreased by $6,356,000, or 12.7%, in the first nine
      months of 2008 from the first nine months of 2007. These expenses were 25.6%
      of
      revenue during the first nine months of 2008, compared with 22.5% during the
      first nine months of 2007. Due to deteriorating returns on some marketing
      initiatives, marketing spending levels were reduced significantly in the third
      quarter of 2008 as discussed above. We are continuing to work to develop more
      efficient marketing techniques. Our future operating profitability will depend
      in large part on the success of our efforts in this regard.





*Depreciation
      expense*


Depreciation
      expense increased by $5,617,000, or 72.4%, in the first nine months of 2008
      from
      the first nine months of 2007 as a result of capital investments in new centers
      over the past year, expenditures at our national call center and data center,
      the purchase of IntraLase lasers and capital improvements made to our Bausch
      & Lomb laser platforms.





*Non-operating
      income and expenses*


Net
      investment income in the first nine months of 2007 decreased $4,058,000, or
      82.8%, due to the recognition of an other-than-temporary impairment on
      investments of $1,074,000, a decrease in investment income of $3,745,000 as
      a
      result of a decline in investment holdings that were used for our share buyback
      program in 2007, declines in deferred compensation assets and the returns on
      those assets resulting from changing market conditions and a shift of some
      investments from taxable and tax exempt bonds to U.S. Treasury money market
      accounts that earn a lower rate of interest. This decrease was partially offset
      by a $761,000 increase in income from patient financing charges.





*Income
      taxes*


The
      following table summarizes the components of income tax provision for the first
      nine months of 2008 and 2007 (dollars in thousands):





**Nine months ended****September 30,****2008**
            
            **2007**Federal income tax
                expense
            
            $
            874
            
            $
            14,681State
                income tax, net of federal benefit
            
            
            214
            
            
            2,141Income
                tax expense
            
            $
            1,088
            
            $
            16,822Effective
                income tax rate
            
            
            40.7
            %
            
            37.2
            %





Income
      tax expense increased from 37.2% of pre-tax income during the first nine months
      of 2007 to 40.7% of pre-tax income during the first nine months of 2008. The
      increase resulted primarily from lower pre-tax earnings for 2008 compared with
      2007, the non-deductible charge for unrealized loss on investments, and the
      corresponding effect of favorable permanent differences constituting a larger
      percentage of our overall tax provision.





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents and short-term investments totaled $62,662,000 as of September
      30, 2008, up from $60,148,000 at December 31, 2007. Net cash provided by
      operating activities in the first nine months of 2008 was $9,929,000 as compared
      to $38,752,000 for the corresponding period in the prior year. The decrease
      in
      cash provided by operating activities from 2007 to 2008 resulted from lower
      earnings and the $12,395,000 reduction in deferred revenue between 2007 and
      2008.





Long-term
      investments totaled $4,406,000 as of September 30, 2008, up from $2,250,000
      at
      December 31, 2007. These assets are comprised of auction rate securities that
      were failing auction at those dates. The auction rate securities have maturity
      dates ranging from 2016 to 2036. As of December 31, 2007, the Company had
      $18,300,000 of auction rate securities at par value, $12,100,000 of which had
      been redeemed by September 30, 2008 and another $500,000 in October 2008. These
      investments are being reported at a fair value. See the notes to the condensed
      consolidated financial statements for additional information.





As
      of
      September 30, 2008, we had approximately $14,456,000 in patient receivables,
      net
      of allowance for doubtful accounts. Gross patient receivables decreased
      $4,053,000 since December 31, 2007, primarily as a result of a decrease in
      procedure volume. At the same time, the allowance for doubtful accounts
      decreased by $1,241,000 from $5,117,000 to $3,876,000. This decrease in the
      allowance for doubtful accounts was a result of sending uncollected balances
      to
      collections earlier in the process.





21





Collection
      patterns have shown deterioration over the past year. In response, we have
      implemented new policies and strengthened our underwriting standards. Although
      it will take approximately 18 to 36 months to fully assess the impact of these
      changes, bad debt expense is approximately 2.5% of revenues which is consistent
      with past quarters. We are carefully monitoring our collection rates and related
      underwriting standards in order to ensure the adequacy of our allowance for
      doubtful accounts and that collectability of our revenue is reasonably assured
      at the time service is rendered.





Other
      accounts receivable decreased from $5,941,000 at December 31, 2007 to $2,260,000
      at September 30, 2008. This was primarily due to the reduction in vendor rebates
      as a result of converting some purchases to every-day discounted pricing rather
      than gross pricing subject to future rebates.





Prepaid
      taxes decreased from $6,391,000 at December 31, 2007 to $2,880,000 at September
      30, 2008. This decrease occurred primarily as a result of receiving the refund
      of previously paid taxes due to a change in tax accounting methods for deferred
      revenue that was accepted by the IRS.





Deferred
      compensation plan assets and liabilities both declined from December 31, 2007
      to
      September 30, 2008. This decline was primarily attributed to participant
      withdrawals and the current stock market valuation reductions.





As
      of
      September 30, 2008, accounts payable decreased to $8,077,000 from $10,396,000
      at
      December 31, 2007. This decrease was the result of decreased activity and a
      high
      level of invoiced-but-not-paid capital expenditures at year end that
      subsequently were paid.





On
      April
      24, 2008, we entered into a loan agreement with PNC Equipment Finance, LLC
      to
      finance the majority of the IntraLase units purchased by us. At closing, we
      drew
      $19,184,000 on the loan facility, which requires monthly payments over a
      five-year period at a fixed interest rate of 4.96%. We have typically financed
      our laser purchases with capital lease obligations provided by the vendors.
      The
      IntraLase purchases were made with cash at the time of purchase. The loan
      transaction frees-up that capital to be used in the business for other corporate
      purposes. The remaining unpaid balance on the bank loan was $17,761,000 at
      September 30, 2008.





On
      August
      21, 2007, our board of directors authorized a share repurchase plan under which
      we are authorized to purchase up to $50,000,000 of our common stock. During
      2007, we repurchased 588,408 shares of our common stock under this program
      at an
      average price of $16.99 per share, for a total cost of approximately
      $10,000,000. No shares were repurchased during the first nine months of
      2008.





In
      the
      third quarter of 2008, the board of directors decided to suspend payment of
      a
      dividend and to revisit this decision in the future.





Our
      costs
      associated with the opening of a new vision center primarily consist of capital
      expenditures, including the purchase or lease of lasers, diagnostic equipment
      and office equipment, rent and leasehold improvements. In addition, we typically
      incur other startup expenses and pre-opening advertising expenses. Generally,
      we
      estimate the costs associated with opening a new vision center to be between
      $1,000,000 and $1,500,000. Actual costs vary from vision center to vision center
      based upon the market, the number of lasers purchased or leased for the vision
      center, the site of the vision center and the level of leasehold improvements
      required, among other variables. Our capital expenditures consist primarily
      of
      investments incurred in connection with the opening of new vision centers and
      equipment purchases or upgrades at existing facilities.





Year-to-date,
      we have opened six new vision centers: Savannah, Georgia; Des Moines, Iowa;
      Tulsa, Oklahoma; Woodbridge, New Jersey; Nashville, Tennessee; and Arlington,
      Texas. Capital expenditures through September 30, 2008 were $13,597,000 which
      were comprised primarily of the costs to open new vision centers and the
      purchases of IntraLase lasers.





During
      the second half of 2008, we have continued our efforts to reduce capital
      expenditures by halting new 2008 center openings, reducing the number of center
      relocations planned for the year from five to three, and limiting new laser
      purchases by moving under-utilized lasers to new centers. In the third quarter
      of 2008, our capital expenditures were $1,007,000. No new centers or relocations
      are planned for the fourth quarter.




22




The
      ability to fund our marketing and advertising program, planned capital
      expenditures and new vision center rollouts depends on our future performance,
      which, to a certain extent, is subject to general economic, competitive,
      legislative, regulatory and other factors, some of which are beyond our control.
      Based upon our current anticipated level of operations, we believe that cash
      flow from operations and available cash and short-term investments should
      provide sufficient cash reserves and liquidity to fund our working capital
      and
      capital expenditure needs.





**Critical
      Accounting Estimates**





There
      have been no material changes in the critical accounting policies described
      in
      Management’s Discussion and Analysis in our Annual Report on Form 10-K for the
      fiscal year ended December 31, 2007.





**Item
      3. Quantitative and Qualitative Disclosure About Market
      Risk**





The
      carrying values of cash and cash equivalents, accounts receivable and accounts
      payable approximate fair value because of the short maturity of these
      instruments.





Short-term
      investments are recorded at market value. Due to the short-term nature of the
      investments in corporate bonds and the significant portion of the investments
      in
      Treasury money market funds, municipal and U.S. Government bonds, we believe
      there is little risk to the valuation of debt securities. The investments in
      equity securities carry more market risk.





Long-term
      investments include auction rate securities that are currently failing auction.
      These investments are recorded at fair value using a discounted cash flow
      approach. We are divesting all auction rate securities as the market allows.
      Many of the issuers of the auction rate securities are redeeming their issues
      so
      as to reduce the overall interest costs for the issuer. There can be no
      assurance, however, that the issuers of the action rate securities we hold
      will
      do so in advance of their maturity or the restoration of a regularized auction
      market.





We
      have a
      low exposure to changes in foreign currency exchange rates and, as such, have
      not used derivative financial instruments to manage foreign currency fluctuation
      risk.





**Item
      4. Controls and Procedures**





(a)
            Evaluation
                Of Disclosure Controls And
                Procedures





Under
      the
      supervision of and with the participation of the Company's management, including
      the Company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO),
      an evaluation of the effectiveness of the Company's disclosure controls and
      procedures was performed as of September 30, 2008. Based on this evaluation,
      the
      CEO and CFO concluded that the Company's disclosure controls and procedures
      are
      effective to ensure that material information is (1) accumulated and
      communicated to our management as appropriate to allow timely decisions
      regarding disclosure and (2) recorded, processed, summarized and reported within
      the time periods specified in the rules and forms of the Securities and Exchange
      Commission.





(b)
            Changes
                in Internal Control over Financial
                Reporting




Under
      the
      supervision of, and with the participation of our management, including the
      CEO
      and CFO, an evaluation of the Company’s internal control over financial
      reporting was performed as of September 30, 2008. Based on this evaluation,
      management concluded that there were no changes in the Company’s internal
      control over financial reporting that occurred during the quarter ended
      September 30, 2008 that have materially affected, or are reasonably likely
      to
      materially affect, the Company’s internal control over financial
      reporting.





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**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





On
      September 13, 2007, and October 1, 2007, two complaints were filed against
      the
      Company and certain of our current and former directors and officers by Beaver
      County Retirement Board and Spencer and Jean Lin, respectively, in the United
      States District Court for the Southern District of Ohio (Western Division)
      purportedly on behalf of a class of shareholders who purchased our common stock
      between February 12, 2007 and July 30, 2007.  On November 8, 2007, an
      additional complaint was filed by named plaintiff Diane B. Callahan against
      the
      Company and certain of our current and former directors and officers in the
      United States District Court for the Southern District of Ohio (Western
      Division).  This third action was filed purportedly on behalf of a class of
      shareholders who purchased our common stock between February 12, 2007 and
      November 2, 2007.  These actions have been consolidated into one action. A
      consolidated complaint was filed on April 19, 2008. The plaintiffs in the
      consolidated complaint are seeking damages on behalf of a class of shareholders
      who purchased our common stock between October 24, 2006 and November 2, 2007,
      asserting claims under Sections 10(b) and 20(a) of the Securities Exchange
      Act
      of 1934. They allege that certain of the Company’s public disclosures regarding
      its financial prospects and historical accounting for bad-debt reserves and
      expenses were false or misleading. On July 10, 2008, the Company, together
      with
      the other defendants, filed a motion to dismiss the consolidated complaint.
      On
      September 5, 2008, plaintiffs filed their memorandum in opposition to the motion
      to dismiss. We strongly believe that these claims lack merit, and we intend
      to
      defend against the claims vigorously. Due to the inherent uncertainties of
      litigation, we cannot predict the outcome of the action at this time, and can
      give no assurance that these claims will not have a material adverse effect
      on
      our financial position or results of operations.  No amount has been
      accrued for these claims at September 30, 2008.





On
      October 5, 2007, a complaint was filed in the Court of Common Pleas, Hamilton
      County, Ohio, against certain of our current and former officers and directors,
      derivatively on behalf of the Company.  The plaintiff, Nicholas Weil,
      asserts that three of the defendants breached their fiduciary duties when they
      allegedly sold LCA-Vision's securities on the basis of material non-public
      information in 2007.  The plaintiff also asserts claims for breach of
      fiduciary duty, abuse of control, corporate waste, and unjust enrichment in
      connection with the disclosures that also are the subject of the securities
      actions described above. The Company is named as a nominal defendant in the
      complaint, although the action is derivative in nature. 
      The plaintiff demands damages and attorneys fees, and seeks other equitable
      relief.  On December 20, 2007, the court stayed this action, pursuant to a
      stipulation of the parties, pending the resolution of the motion to dismiss
      filed in the consolidated class action, discussed above. We are in the process
      of evaluating these claims.  However, due to the inherent uncertainty of
      litigation, we cannot predict the outcome of the action at this time, and can
      give no assurance that these claims will not have a material adverse effect
      on
      our financial position or results of operations due to our indemnification
      obligations to these persons if liability were found. No amount has been accrued
      for these claims at September 30, 2008.





Our
      business results in medical malpractice lawsuits. Claims reported to us prior
      to
      December 18, 2002 were generally covered by external insurance policies and
      to
      date have not had a material financial impact on our business other than the
      cost of insurance and our deductibles under those policies. Due to substantial
      increases in insurance premiums, effective in December 2002, we established
      a
      captive insurance company to provide coverage for claims brought against us
      after December 17, 2002. We use the captive insurance company for both primary
      insurance and excess liability coverage. A number of claims are now pending
      with
      our captive insurance company. Since the inception of the captive insurance
      company in 2002, total claim and expense payments of $1,171,000 have been
      disbursed.





In
      addition to the above, we are periodically subject to various other claims
      and
      lawsuits. We believe that none of these other claims or lawsuits to which we
      are
      currently subject, individually or in the aggregate, will have a material
      adverse effect on our business, financial position, results of operations or
      cash flows.





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**Item
      6.**  **Exhibits**




ExhibitsNumber
            
            Description31.1
            
            CEO Certification under Section 302 of the Sarbanes-Oxley
                Act of 200231.2
            
            CFO
                Certification under Section 302 of the Sarbanes-Oxley Act of
                200232
            
            Certifications
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002


25


**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.





**LCA-VISION INC.**Date: October 28, 2008
            /s/ Steven C. StrausSteven C. StrausChief Executive OfficerDate: October 28, 2008
            /s/ Michael J. CelebrezzeMichael J. CelebrezzeInterim Chief Financial OfficerSenior Vice President of Finance and Treasurer




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