U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
DC  20549


Form  10-Q


(Mark
One)


x
            QUARTERLY REPORT UNDER SECTION
      13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT  OF 1934.


For the
quarterly period ended June 30, 2009.





 ̈
            TRANSITION REPORT UNDER SECTION
      13 OR 15(d) OF


THE
SECURITIES EXCHANGE ACT.


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 Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes  
  x                     No
     ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).





Yes     
 ̈                     No
      ̈





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   ̈
                  Accelerated
      filer   xNon-accelerated
      filer   ̈
                  Smaller
      reporting company   ̈





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 18,603,990 shares as of July 22,
2009









LCA-Vision
Inc.


TABLE
OF CONTENTS





Part
      I.
                                Financial
      Information
                                3Item
      1.
                                Financial
      Statements
                                3Condensed
      Consolidated Balance Sheets (Unaudited)June
      30, 2009 and December 31, 2008
                                3Condensed
      Consolidated Statements of Operations (Unaudited)Three
      Months and Six Months Ended June 30, 2009 and 2008
                                4Condensed
      Consolidated Statements of Cash Flows (Unaudited)Six
      Months Ended June 30, 2009 and 2008
                                5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                                6Item
      2.
                                Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                18Item
      3.
                                Quantitative
      and Qualitative Disclosures About Market Risk
                                25Item
      4.
                                Controls
      and Procedures
                                26Part
      II.
                                Other
      Information
                                26Item
      1.
                                Legal
      Proceedings
                                26Item
      1A.
                                Risk
      Factors
                                26Item
      2.
                                Unregistered
      Sales of Equity Securities and Use of Proceeds
                                26Item
      3.
                                Defaults
      Upon Senior Securities
                                26Item
      4.
                                Submission
      of Matters to a Vote of Security Holders
                                27Item
      5.
                                Other
      Information
                                27Item
      6.
                                Exhibits
                                27Signatures
                                28




2





PART
1.  FINANCIAL INFORMATION





Item 1. Financial
Statements





LCA-Vision
Inc.


Condensed
Consolidated Balance Sheets


(Dollars
in thousands)


(Unaudited)





June 30, 2009
                    
                    
                    December 31, 2008AssetsCurrent
      assetsCash
      and cash equivalents
                    
                    $
                    31,267
                    
                    
                    $
                    23,648Short-term
      investments
                    
                    
                    32,744
                    
                    
                    
                    32,687Patient
      receivables, net of allowance for doubtful accounts of $1,397 and
      $1,465
                    
                    
                    7,295
                    
                    
                    
                    9,678Other
      accounts receivable
                    
                    
                    2,102
                    
                    
                    
                    2,515Prepaid
      professional fees
                    
                    
                    705
                    
                    
                    
                    911Prepaid
      income taxes
                    
                    
                    5,863
                    
                    
                    
                    8,957Deferred
      tax assets
                    
                    
                    3,177
                    
                    
                    
                    4,708Deferred
      compensation plan assets
                    
                    
                    2,427
                    
                    
                    
                    -Prepaid
      expenses and other
                    
                    
                    5,475
                    
                    
                    
                    5,299Total
      current assets
                    
                    
                    91,055
                    
                    
                    
                    88,403Property
      and equipment
                    
                    
                    92,990
                    
                    
                    
                    121,734Accumulated
      depreciation and amortization
                    
                    
                    (55,851
                    )
                    
                    
                    (70,235
                    )Property
      and equipment, net
                    
                    
                    37,139
                    
                    
                    
                    51,499Long-term
      investments
                    
                    
                    3,108
                    
                    
                    
                    3,126Accounts
      receivables, net of allowance for doubtful accounts of $1,107 and
      $1,662
                    
                    
                    1,677
                    
                    
                    
                    2,645Deferred
      compensation plan assets
                    
                    
                    -
                    
                    
                    
                    2,196Deferred
      tax assets
                    
                    
                    8,516
                    
                    
                    
                    7,027Other
      assets
                    
                    
                    5,715
                    
                    
                    
                    2,586Total
      assets
                    
                    $
                    147,210
                    
                    
                    $
                    157,482Liabilities
      and Stockholders' InvestmentCurrent
      liabilitiesAccounts
      payable
                    
                    $
                    8,315
                    
                    
                    $
                    8,169Accrued
      liabilities and other
                    
                    
                    11,872
                    
                    
                    
                    8,608Deferred
      revenue
                    
                    
                    7,049
                    
                    
                    
                    9,107Deferred
      compensation liability
                    
                    
                    2,427
                    
                    
                    
                    -Debt
      and capital lease obligations maturing in one year
                    
                    
                    4,267
                    
                    
                    
                    6,985Total
      current liabilities
                    
                    
                    33,930
                    
                    
                    
                    32,869Long-term
      rent obligations
                    
                    
                    1,972
                    
                    
                    
                    1,820Long-term
      debt and capital lease obligations (less current portion)
                    
                    
                    11,601
                    
                    
                    
                    14,120Deferred
      compensation liability
                    
                    
                    -
                    
                    
                    
                    2,196Insurance
      reserve
                    
                    
                    9,914
                    
                    
                    
                    9,489Deferred
      license fee
                    
                    
                    5,109
                    
                    
                    
                    -Deferred
      revenue
                    
                    
                    10,708
                    
                    
                    
                    14,003Stockholders'
      investmentCommon
      stock ($0.001 par value; 25,229,336 and 25,199,734 shares and 18,603,824
      and 18,552,985 shares issued and outstanding,
respectively)
                    
                    
                    25
                    
                    
                    
                    25Contributed
      capital
                    
                    
                    174,281
                    
                    
                    
                    174,206Common
      stock in treasury, at cost (6,625,512 shares and 6,646,749
      shares)
                    
                    
                    (114,668
                    )
                    
                    
                    (114,632
                    )Retained
      earnings
                    
                    
                    13,784
                    
                    
                    
                    23,515Accumulated
      other comprehensive income (loss)
                    
                    
                    554
                    
                    
                    
                    (129
                    )Total
      stockholders' investment
                    
                    
                    73,976
                    
                    
                    
                    82,985Total
      liabilities and stockholders' investment
                    
                    $
                    147,210
                    
                    
                    $
                    157,482





The
accompanying notes to the condensed consolidated financial statements are an
integral part of this statement.





3




LCA-Vision
Inc.


Condensed
Consolidated Statements of Operations


(Dollars
in thousands except per share data)


(Unaudited)





Three
      Months Ended June 30,
                
                
                Six
      Months Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues
      - Laser refractive surgery
                
                $
                31,681
                
                
                $
                54,181
                
                
                $
                79,602
                
                
                $
                133,750Operating
      costs and expensesMedical
      professional and license fees
                
                
                6,987
                
                
                
                11,260
                
                
                
                17,762
                
                
                
                26,022Direct
      costs of services
                
                
                17,269
                
                
                
                20,045
                
                
                
                35,085
                
                
                
                44,496General
      and administrative
                
                
                4,452
                
                
                
                5,671
                
                
                
                8,869
                
                
                
                10,862Marketing
      and advertising
                
                
                9,485
                
                
                
                15,466
                
                
                
                22,511
                
                
                
                35,449Depreciation
                
                
                3,768
                
                
                
                4,612
                
                
                
                8,127
                
                
                
                8,867Consent
      revocation charges
                
                
                -
                
                
                
                -
                
                
                
                804
                
                
                
                -Restructuring
      and impairment charges
                
                
                1,554
                
                
                
                77
                
                
                
                2,455
                
                
                
                533Operating
      (loss) income
                
                
                (11,834
                )
                
                
                (2,950
                )
                
                
                (16,011
                )
                
                
                7,521Equity
      in earnings from unconsolidated businesses
                
                
                48
                
                
                
                265
                
                
                
                75
                
                
                
                321Net
      investment income
                
                
                633
                
                
                
                831
                
                
                
                455
                
                
                
                1,566Other
      income, net
                
                
                20
                
                
                
                -
                
                
                
                22
                
                
                
                18(Loss)
      income before income taxes
                
                
                (11,133
                )
                
                
                (1,854
                )
                
                
                (15,459
                )
                
                
                9,426Income
      tax (benefit) expense
                
                
                (4,246
                )
                
                
                (1,281
                )
                
                
                (5,728
                )
                
                
                3,123Net
      (loss) income
                
                $
                (6,887
                )
                
                $
                (573
                )
                
                $
                (9,731
                )
                
                $
                6,303(Loss)
      earnings per common shareBasic
                
                $
                (0.37
                )
                
                $
                (0.03
                )
                
                $
                (0.52
                )
                
                $
                0.34Diluted
                
                $
                (0.37
                )
                
                $
                (0.03
                )
                
                $
                (0.52
                )
                
                $
                0.34Dividends
      declared per share
                
                $
                -
                
                
                $
                0.06
                
                
                $
                -
                
                
                $
                0.24Weighted
      average shares outstandingBasic
                
                
                18,590
                
                
                
                18,525
                
                
                
                18,576
                
                
                
                18,510Diluted
                
                
                18,590
                
                
                
                18,525
                
                
                
                18,576
                
                
                
                18,570





The
accompanying notes to the condensed consolidated financial statements are an
integral part of this statement.


4





LCA-Vision
Inc.


Condensed
Consolidated Statements of Cash Flows


(Dollars
in thousands)


(Unaudited)





Six Months Ended June 30,2009
                    
                    
                    2008Cash
      flow from operating activitiesNet
      (loss) income
                    
                    $
                    (9,731
                    )
                    
                    $
                    6,303Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                    
                    
                    8,127
                    
                    
                    
                    8,867Provision
      for loss on doubtful accounts
                    
                    
                    1,957
                    
                    
                    
                    3,325Loss
      on investments
                    
                    
                    365
                    
                    
                    
                    -Non
      cash restructuring charges
                    
                    
                    1,877
                    
                    
                    
                    -Deferred
      income taxes
                    
                    
                    (265
                    )
                    
                    
                    1,686Stock
      based compensation
                    
                    
                    568
                    
                    
                    
                    612Insurance
      reserve
                    
                    
                    425
                    
                    
                    
                    1,070Equity
      in earnings of unconsolidated affiliates
                    
                    
                    (75
                    )
                    
                    
                    (321
                    )Changes
      in operating assets and liabilitiesPatient
      receivables
                    
                    
                    1,394
                    
                    
                    
                    (3,492
                    )Other
      accounts receivable
                    
                    
                    413
                    
                    
                    
                    999Prepaid
      income taxes
                    
                    
                    3,094
                    
                    
                    
                    4,736Prepaid
      expenses and other
                    
                    
                    880
                    
                    
                    
                    80Accounts
      payable
                    
                    
                    146
                    
                    
                    
                    (6,821
                    )Deferred
      revenue, net of professional fees
                    
                    
                    (4,818
                    )
                    
                    
                    (9,491
                    )Accrued
      liabilities and other
                    
                    
                    8,165
                    
                    
                    
                    (1,796
                    )Net
      cash provided by operations
                    
                    $
                    12,522
                    
                    
                    $
                    5,757Cash
      flow from investing activitiesPurchases
      of property and equipment
                    
                    
                    (178
                    )
                    
                    
                    (12,590
                    )Purchases
      of investment securities
                    
                    
                    (153,617
                    )
                    
                    
                    (171,849
                    )Proceeds
      from sale of investment securities
                    
                    
                    153,900
                    
                    
                    
                    170,910Other,
      net
                    
                    
                    263
                    
                    
                    
                    787Net
      cash provided by (used in) investing activities
                    
                    $
                    368
                    
                    
                    $
                    (12,742
                    )Cash
      flow from financing activitiesPrincipal
      payments of debt and capital lease obligations and loan
                    
                    
                    (5,237
                    )
                    
                    
                    (2,367
                    )Proceeds
      from debt
                    
                    
                    -
                    
                    
                    
                    19,184Shares
      repurchased for treasury stock
                    
                    
                    (36
                    )
                    
                    
                    (205
                    )Exercise
      of stock options
                    
                    
                    2
                    
                    
                    
                    147Dividends
      paid to stockholders
                    
                    
                    -
                    
                    
                    
                    (4,447
                    )Net
      cash (used in) provided by financing activities
                    
                    
                    (5,271
                    )
                    
                    
                    12,312Increase
      in cash and cash equivalents
                    
                    
                    7,619
                    
                    
                    
                    5,327Cash
      and cash equivalents at beginning of period
                    
                    
                    23,648
                    
                    
                    
                    17,614Cash
      and cash equivalents at end of period
                    
                    $
                    31,267
                    
                    
                    $
                    22,941





The
accompanying notes to the consolidated condensed financial statements are an
integral part of this statement.




5




LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





1.  Description
of Business and Accounting Policies





Description
of Business


The
following represents a summary of the business and accounting policies of
LCA-Vision Inc.  A more detailed presentation can be found in our 2008
Annual Report on Form 10-K.





We are a
provider of fixed-site laser visioncorrection services at
our LasikPlus® vision
centers.  Our vision centers provide the staff, facilities, equipment
and support services for performing laser vision correction procedures that
employ advanced laser technologies to help correct nearsightedness,
farsightedness and astigmatism.  We currently use three suppliers for
fixed-site excimer lasers:  Abbott Medical Optics (AMO), Alcon and
Bausch & Lomb.  During the first three quarters of this year, we
are migrating to two suppliers of excimer lasers:  AMO and
Alcon.  Our vision centers are supported 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
June 30, 2009, we had 71 LasikPlus fixed-site laser vision
correction centers in the United States and a joint venture in
Canada.  During the quarter ended June 30, 2009, we closed four vision
centers.  We operate in only one business segment.





Basis
of Presentation


Our
Condensed Consolidated Financial Statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”) and, in
the opinion of management, include all adjustments necessary for a fair
presentation of our financial position, results of operations, and cash flows
for each period presented.





The
adjustments referred to above are of a normal and recurring
nature.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to SEC rules and regulations.





The
Condensed Consolidated Balance Sheet as of December 31, 2008 was derived from
audited financial statements, but does not include all disclosures required by
U. S. generally accepted accounting principles.  These Condensed
Consolidated Financial Statements should be read in conjunction with our 2008
Annual Report on Form 10-K.  Operating results for the three and six
month periods ended June 30, 2009 are not necessarily indicative of the results
expected in the subsequent quarter or for the year ending December 31,
2009.





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 (Unaudited)





Reclassifications


We have
reclassified certain prior-period amounts in the Condensed Consolidated
Financial Statements to conform to current period presentation.  The
reclassifications were not material to the consolidated financial
statements.





Subsequent
Events


Effective
this quarter, we implemented Statement of Financial Accounting Standards (SFAS)
No. 165 (SFAS 165), Subsequent
Events.  This standard establishes general standards of
accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued.  The adoption of SFAS 165
did not impact our financial position or results of operations.  We
evaluated all events or transactions that occurred after June 30, 2009 through
July 28, 2009, the date we issued these financial statements. During this
period, we did not have any material recognizable or nonrecognizable subsequent
events.





2.  Investments





Management
determines the appropriate classification of securities at the time of purchase
and reevaluates such designation as of each balance sheet
date.  Currently, we classify all securities as
available-for-sale.  We carry available-for-sale securities at fair
value, with temporary unrealized gains and losses, net of tax, reported in
accumulated other comprehensive loss, 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.  We include this
amortization in the caption “Net investment income” within the Condensed
Consolidated Statement of Operations.  We also include in net
investment income realized gains and losses and declines in value determined to
be other than temporary.  We base the cost of securities sold upon the
specific identification method.  We include interest and dividends on
securities classified as available-for-sale in net investment
income.





In April
2009, the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) No. FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-then-Temporary Impairments, or FSP FAS 115-2, which amended the
other-than-temporary impairment model for debt securities.  The
impairment model for equity securities was not affected.  Under this
FSP, an other-than-temporary impairment must be recognized through earnings if
an investor has the intent to sell the debt security or if it is more likely
than not that the investor will be required to sell the debt security before
recovery of its amortized cost basis.  However, even if an investor
does not expect to sell a debt security, it must evaluate expected cash flows to
be received and determine if a credit loss has occurred.  In the event
of a credit loss, only the amount associated with the credit loss is recognized
in income.  The amount of loss relating to other factors is recorded
in accumulated other comprehensive income (loss).  The FSP also
requires additional disclosures regarding the calculation of credit losses and
the factors considered in reaching a conclusion that an investment is not
other-than-temporarily impaired.





We
adopted the provisions of FSP FAS 115-2 on April 1, 2009.  The
adoption of the FSP did not have a material impact on our financial position or
results of operations.


7


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





We have
classified certain of our investments in auction rate securities as non-current
assets within the accompanying Condensed Consolidated Balance Sheets at June 30,
2009 and December 31, 2008.  Short-term and long-term investments,
designated as available-for-sale, consist of the following (dollars in
thousands):





June
      30,
                    
                    
                    December
      31,2009
                    
                    
                    2008Short-term
      investments:Corporate
      obligations
                    
                    $
                    22,975
                    
                    
                    $
                    20,971U.S.
      governmental notes and agencies
                    
                    
                    1,127
                    
                    
                    
                    1,400Municipal
      securities
                    
                    
                    6,482
                    
                    
                    
                    7,982Equities
                    
                    
                    1,902
                    
                    
                    
                    1,784Auction
      rate municipal debt
                    
                    
                    258
                    
                    
                    
                    550Total
      short-term investments
                    
                    
                    32,744
                    
                    
                    
                    32,687Long-term
      investments:Auction
      rate municipal debt
                    
                    
                    1,139
                    
                    
                    
                    1,357Auction
      rate preferred securities
                    
                    
                    1,078
                    
                    
                    
                    1,093Auction
      rate securities - credit default swaps
                    
                    
                    891
                    
                    
                    
                    676Total
      long-term investments
                    
                    
                    3,108
                    
                    
                    
                    3,126Total
      investments
                    
                    $
                    35,852
                    
                    
                    $
                    35,813




The
following table shows the net carrying value (amortized cost) and estimated fair
value of debt and equity securities at June 30, 2009 by contractual
maturity (dollars in thousands).  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.





Amortized
                    Cost
                  
                  
                  Estimated
                    Fair ValueDue
      in one year or less
                  
                  $
                  24,102
                  
                  
                  $
                  24,102Due
      after one year through three years
                  
                  
                  6,374
                  
                  
                  
                  6,482Due
      after three years
                  
                  
                  3,052
                  
                  
                  
                  3,366Total
      debt securities
                  
                  
                  33,528
                  
                  
                  
                  33,950Equities
                  
                  
                  1,463
                  
                  
                  
                  1,902Total
      investments
                  
                  $
                  34,991
                  
                  
                  $
                  35,852




8


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





The
following table summarizes unrealized gains and losses related to our
investments designated as available-for-sale (dollars in
thousands):





June 30, 2009Adjusted
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                FairValueCorporate
      obligations
                
                $
                22,975
                
                
                $
                -
                
                
                $
                -
                
                
                $
                22,975U.
      S. government notes and agencies
                
                
                1,127
                
                
                
                -
                
                
                
                -
                
                
                
                1,127Municipal
      securities
                
                
                6,374
                
                
                
                108
                
                
                
                -
                
                
                
                6,482Equities
                
                
                1,463
                
                
                
                439
                
                
                
                -
                
                
                
                1,902Auction
      rate municipal securities
                
                
                1,333
                
                
                
                64
                
                
                
                -
                
                
                
                1,397Auction
      rate preferred securities
                
                
                1,043
                
                
                
                35
                
                
                
                -
                
                
                
                1,078Auction
      rate securities - credit default swaps
                
                
                676
                
                
                
                215
                
                
                
                -
                
                
                
                891Total
      investments
                
                $
                34,991
                
                
                $
                861
                
                
                $
                -
                
                
                $
                35,852





December 31, 2008Adjusted
                  Cost
                
                
                Gross
                  Unrealized
                  Gains
                
                
                Gross
                  Unrealized
                  Losses
                
                
                FairValueCorporate
      obligations
                
                $
                20,971
                
                
                $
                -
                
                
                $
                -
                
                
                $
                20,971U.
      S. government notes and agencies
                
                
                1,400
                
                
                
                -
                
                
                
                -
                
                
                
                1,400Municipal
      securities
                
                
                7,885
                
                
                
                97
                
                
                
                -
                
                
                
                7,982Equities
                
                
                1,784
                
                
                
                -
                
                
                
                -
                
                
                
                1,784Auction
      rate municipal securities
                
                
                1,907
                
                
                
                -
                
                
                
                -
                
                
                
                1,907Auction
      rate preferred securities
                
                
                1,093
                
                
                
                -
                
                
                
                -
                
                
                
                1,093Auction
      rate securities - credit default swaps
                
                
                676
                
                
                
                -
                
                
                
                -
                
                
                
                676Total
      investments
                
                $
                35,716
                
                
                $
                97
                
                
                $
                -
                
                
                $
                35,813





We
realized gains of $6,000 on the sale of marketable securities for the three and
six months ended June 30, 2009.  Prior to our adoption of FSP FAS
115-2 in the current quarter, we recognized impairments under the previously
effective guidance contained within SFAS 115, Accounting for Certain Investments
in Debt and Equity Securities.  We did not recognize any
other-than-temporary impairments during the three months ended June 30, 2009 or
during the three and six months ended June 30, 2008.  We recognized
$29,000 and $336,000, before tax, in other-than-temporary impairments to certain
of our auction rate securities and equities, respectively, during the six months
ended June 30, 2009.  We did not recognize any unrealized losses in
other comprehensive loss during the three and six months ended June 30,
2009.





Equities


Given the
duration and extent of the decline in fair values associated with our equity
securities (comprised primarily of various equity mutual funds), we recognized
an other-than-temporary impairment of $336,000, before tax, during the six
months ended June 30, 2009.  There were no declines in the fair value
of our equity securities during the three months ended June 30,
2009.


9


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





Auction
Rate Securities


At June
30, 2009 and December 31, 2008, we held $5,025,000 and $5,625,000 par value,
respectively, of various auction rate securities.  The assets
underlying the auction rate instruments are primarily municipal bonds, preferred
closed end funds, and credit default swaps.  Historically, these
securities had provided liquidity through a Dutch auction process that reset the
applicable interest rate at pre-determined intervals every 7 to 28 days.
However, these auctions began to fail in the first quarter of 2008. Since these
auctions have failed, we have realized higher interest rates for many of these
auction rate securities than we would have otherwise. Although we have been
receiving interest payments at these rates, the related principal amounts will
not be accessible until a successful auction occurs, a buyer is found outside of
the auction process, the issuer calls the security, or the security matures
according to its contractual terms. Maturity dates for our auction rate
securities range from 2016 to 2036.  We redeemed auction rate
municipal securities at par values of $550,000 in January 2009 and $50,000 in
June 2009.





At June
30, 2009, there was insufficient observable auction rate market information
available to determine the fair value of our auction rate security investments.
Therefore, we estimated fair value using a trinomial 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 six auction rate securities held within our investment portfolio at June 30,
2009, 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 market, 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, we recognized an
other-than-temporary impairment of $1,575,000 for these two auction rate
security investments in 2008 to record the investments at fair value and
establish a new combined cost basis of $676,000 at December 31, 2008. As of June
30, 2009, the fair value of these two instruments was $891,000, resulting in a
net unrealized gain of $129,000, net of tax, recorded in accumulated other
comprehensive income.  The increase in fair value at June 30, 2009, as
compared to December 31, 2008, was attributable primarily to slightly increased
LIBOR forward rates relative to longer-term Treasury yields.





Four of
the six auction rate securities held within our investment portfolio, consisting
of municipal bonds and preferred securities, had a combined par value of
$2,775,000 and a combined fair value of $2,475,000 at June 30,
2009.  As of December 31, 2008, these securities had a combined par
value of $2,825,000 with a combined fair value of $2,450,000.  Based
primarily on the period of time and the extent of the impairment, we recorded an
other-than-temporary impairment of $375,000 and $29,000, before tax, in the
Condensed Consolidated Statement of Operations in the three-month periods ended
December 31, 2008 and March 31, 2009, respectively.  We did not
recognize any other-than-temporary impairments in the three months ended June
30, 2009.  As of June 30, 2009, the fair value of our auction rate
municipal and preferred securities has increased, resulting in a net unrealized
gain of $60,000, net of tax, reported in accumulated other comprehensive income
(loss).  In June 2009, we redeemed at par a tranche of our auction
rate preferred securities for $50,000.  In addition, we redeemed at
par various tranches of an auction rate municipal security for $300,000 in July
2009.  We reclassified the portion of the auction rate municipal
security redeemed in July 2009 from long-term investments to short-term
investments at June 30, 2009.


10


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





As a
result of the failed auctions, 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 July 31, 2009, as long-term. At June
30, 2009, the fair value and par value of our long-term auction rate instruments
were $3,108,000 and $4,725,000, respectively.





3.  Fair
Values of Financial Instruments





SFAS No.
157 (SFAS 157), Fair Value
Measurements, defines fair value as the exchange price that would be
received for an asset or paid to transfer a liability (an exit price) in the
principal or most advantageous market for the asset and liability in an orderly
transaction between market participants at the measurement date.  SFAS
157 establishes a three-tier value hierarchy, which prioritizes the inputs used
in the valuation methodologies in measuring fair value:





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 I 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 fair
value hierarchy requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value.





Effective
this quarter, we implemented FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly, or FSP
FAS 157-4. FSP FAS 157-4 provides additional guidelines for making
fair value measurements more consistent with the principles presented in
SFAS 157 and provides authoritative guidance in determining whether a
market is active or inactive, and whether a transaction is distressed. This FSP
is applicable to all assets and liabilities (i.e. financial and nonfinancial)
and requires enhanced disclosures, including interim and annual disclosure of
the input and valuation techniques (or changes in techniques) used to measure
fair value and the defining of the major security types comprising debt and
equity securities held based upon the nature and risk of the security. The
adoption of this FSP did not impact our financial position or results of
operations.





Effective
this quarter, we have also implemented FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments, or FSP FAS 107-1. FSP FAS 107-1
amended Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of
Financial Instruments, and APB Opinion No. 28, Interim Financial Reporting,
to require disclosures about the fair value of financial instruments in interim
as well as in annual financial statements. The adoption of this standard has
resulted in the disclosure of the fair values attributable to our debt
instruments within our interim financial statements. Because this FSP addresses
disclosure requirements, the adoption of this FSP did not impact our financial
position or results of operations.


11


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





The
following tables summarize fair value measurements by level at June 30,
2009 and December 31, 2008 for assets and liabilities measured at fair value on
a recurring basis (dollars in thousands):





Fair Value Measurements as of June 30, 2009
      UsingQuoted
      Prices in
                
                
                
                
                
                SignificantActive
      Markets for
                
                
                Significant
      Other
                
                
                UnobservableIdentical
      Assets
                
                
                Observable
      Inputs
                
                
                InputsDescription
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)
                
                
                TotalAssets:Available-for-sale
      securities
                
                $
                1,902
                
                
                $
                30,842
                
                
                $
                3,108
                
                
                $
                35,852Deferred
      compensation plan assets
                
                
                2,427
                
                
                
                -
                
                
                
                -
                
                
                
                2,427Total
                
                $
                4,329
                
                
                $
                30,842
                
                
                $
                3,108
                
                
                $
                38,279Liabilities:Deferred
      compensation plan liabilities
                
                $
                2,427
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2,427





Fair Value Measurements as of December 31, 2008
      UsingQuoted
      Prices in
                
                
                
                
                
                SignificantActive
      Markets for
                
                
                Significant
      Other
                
                
                UnobservableIdentical
      Assets
                
                
                Observable
      Inputs
                
                
                InputsDescription
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)
                
                
                TotalAssets:Available-for-sale
      securities
                
                $
                1,784
                
                
                $
                30,903
                
                
                $
                3,126
                
                
                $
                35,813Deferred
      compensation plan assets
                
                
                2,196
                
                
                
                -
                
                
                
                -
                
                
                
                2,196Total
                
                $
                3,980
                
                
                $
                30,903
                
                
                $
                3,126
                
                
                $
                38,009Liabilities:Deferred
      compensation plan liabilities
                
                $
                2,196
                
                
                $
                -
                
                
                $
                -
                
                
                $
                2,196





We base
the fair values of some investment securities included within our investment
portfolio on quoted market prices from various stock and bond
exchanges.  We classify certain of our debt securities at fair value
utilizing Level 2 inputs.  For these securities, we measure fair value
using observable market data that includes dealer quotes, live trading levels,
trade execution data, credit information and the bond’s terms and
conditions.  We classify the fair values of our auction rate
instruments in Level 3 because they are valued using a trinomial discount model
(see Investments, Note 2).  We maintain a self-directed deferred
compensation plan structured as a rabbi trust for certain highly compensated
individuals.  We value the investment assets of the rabbi trust using
quoted market prices.  The related deferred compensation liability
represents the fair value of the participants’ investment elections, determined
using quoted market prices.  In 2009, our Compensation Committee
approved terminating the deferred compensation plan as of December 31,
2009.  Distributions will be made to all participants in January
2010.


12


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):





Fair
Value Measurements Using Significant Unobservable Inputs (Level 3)





For
      the Three Months Ended
                
                
                For
      the Six Months EndedJune
      30, 2009
                
                
                June
      30, 2009Balance
      at beginning of period
                
                $
                3,155
                
                
                $
                3,126Assets
      acquired
                
                
                -
                
                
                
                -Assets
      sold
                
                
                (44
                )
                
                
                (44
                )Transfers
      out of Level 3
                
                
                (258
                )
                
                
                (258
                )Gains
      included in other comprehensive loss
                
                
                255
                
                
                
                313Losses
      included in earnings
                
                
                -
                
                
                
                (29
                )Balance
      as of June 30, 2009
                
                $
                3,108
                
                
                $
                3,108





Fair
Value Measurements Using Significant Unobservable Inputs (Level 3)





For
      the Three Months Ended
                
                
                For
      the Six Months EndedJune
      30, 2008
                
                
                June
      30, 2008Balance
      at beginning of period
                
                $
                10,477
                
                
                $
                17,725Assets
      acquired
                
                
                -
                
                
                
                2,150Assets
      sold
                
                
                (3,350
                )
                
                
                (12,275
                )Transfers
      out of Level 3
                
                
                -
                
                
                
                -Gains
      included in other comprehensive loss
                
                
                -
                
                
                
                -Losses
      included in earnings
                
                
                -
                
                
                
                (473
                )Balance
      as of June 30, 2009
                
                $
                7,127
                
                
                $
                7,127





4.  Income
Taxes





The
following table summarizes the components of the income tax (benefit) provision
for the three and six months ended June 30, 2009 and 2008 (dollars in
thousands):





Three
      Months Ended
                
                
                Six
      Months EndedJune
      30,
                
                
                June
      30,
                
                
                June
      30,
                
                
                June
      30,2009
                
                
                2008
                
                
                2009
                
                
                2008Federal
      income tax (benefit) expense
                
                $
                (3,601
                )
                
                $
                (1,251
                )
                
                $
                (4,859
                )
                
                $
                2,433State
      income tax (benefit) expense, net of federal benefit
                
                
                (645
                )
                
                
                (30
                )
                
                
                (869
                )
                
                
                690Income
      tax (benefit) expense
                
                $
                (4,246
                )
                
                $
                (1,281
                )
                
                $
                (5,728
                )
                
                $
                3,123Effective
      income tax rate
                
                
                38.1
                %
                
                
                69.1
                %
                
                
                37.1
                %
                
                
                33.1
                %





Our
effective tax rate increased for the six-month period ended June 30, 2009 when
compared to the same period in the prior year.  The 2008 rate was
lower due to lowering of 2008 performance expectations and the corresponding
effect of permanent differences constituting a larger percentage of our overall
taxable income.


13


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





Our
effective tax rate for the income tax benefit for the three months ended
June 30, 2008 was higher because the projected annual tax expense was revised
from 39.0% as of the end of the first quarter to 33.1% year-to-date and the
entire change flowed through the second quarter of 2008.  The
reduction in the six months ended June 30, 2008 rate resulted from the decline
in earnings and the impact of permanent tax differences.





During
the three and six months ended June 30, 2009, there were no significant changes
to the liability for unrecognized tax benefits or potential interest and
penalties recorded as a component of income tax.  The total amount of
unrecognized tax benefits was approximately $441,000 at each of June 30, 2009
and December 31, 2008.  It is reasonably possible that the amount of
the total unrecognized tax benefits may change in the next twelve
months.  However, we do not believe that any anticipated change will
be material to the Condensed Consolidated Financial Statements.





5.  Earnings
Per Common Share





We
calculate basic earnings per common share (“EPS”) using the weighted average
number of common shares outstanding during the period.  Diluted EPS
reflects the potential dilution that would occur if common stock equivalents
were exercised or converted to common stock but only to the extent that they are
considered dilutive to our earnings.  The impact from the adoption of
FSP EITF 03-6-1, Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities in 2009 on the calculation of basic and diluted
EPS was not material to the Condensed Consolidated Financial
Statements.  The following table is a reconciliation of basic and
diluted EPS for the following periods (dollars in thousands, except per share
amounts):





Three
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Basic (Loss) EarningsNet
      (loss) income
                    
                    $
                    (6,887
                    )
                    
                    $
                    (573
                    )
                    
                    $
                    (9,731
                    )
                    
                    $
                    6,303Weighted
      average shares outstanding
                    
                    
                    18,590
                    
                    
                    
                    18,525
                    
                    
                    
                    18,576
                    
                    
                    
                    18,510Basic
      (loss) earnings per share
                    
                    $
                    (0.37
                    )
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.52
                    )
                    
                    $
                    0.34Diluted (Loss) EarningsNet
      (loss) income
                    
                    $
                    (6,887
                    )
                    
                    $
                    (573
                    )
                    
                    $
                    (9,731
                    )
                    
                    $
                    6,303Weighted
      average shares outstanding
                    
                    
                    18,590
                    
                    
                    
                    18,525
                    
                    
                    
                    18,576
                    
                    
                    
                    18,510Effect
      of dilutive securitiesStock
      options
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    36Restricted
      stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    24Weighted
      average common shares and potential dilutive shares
                    
                    
                    18,590
                    
                    
                    
                    18,525
                    
                    
                    
                    18,576
                    
                    
                    
                    18,570Diluted
      (loss) earnings per share
                    
                    $
                    (0.37
                    )
                    
                    $
                    (0.03
                    )
                    
                    $
                    (0.52
                    )
                    
                    $
                    0.34





For the
six months ended June 30, 2008, we did not include outstanding stock options and
restricted stock awards having a grant price greater than the average market
price of the common shares for the year in the computation of diluted earnings
per share because the effect of these share-based awards would be
antidilutive.  The total number of these shares was
694,479.  For the three months ended June 30, 2009 and 2008 and for
the six months ended June 30, 2009, we excluded all outstanding stock options
and restricted stock awards from the computation of our diluted earnings per
share because the effect of these share-based awards was antidilutive due to our
net loss.


14


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





6.  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 (income) expense, net of forfeitures, and associated income tax
effect were as follows for the three and six months ended June 30 (dollars in
thousands):





Three
      Months Ended
                    
                    
                    Six
      Months EndedJune
      30,
                    
                    
                    June
      30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Stock
      options
                    
                    $
                    106
                    
                    
                    $
                    257
                    
                    
                    $
                    247
                    
                    
                    $
                    163Restricted
      stock
                    
                    
                    470
                    
                    
                    
                    456
                    
                    
                    
                    321
                    
                    
                    
                    449576
                    
                    
                    
                    713
                    
                    
                    
                    568
                    
                    
                    
                    612Income
      tax benefit
                    
                    
                    242
                    
                    
                    
                    244
                    
                    
                    
                    231
                    
                    
                    
                    254$
                    334
                    
                    
                    $
                    469
                    
                    
                    $
                    337
                    
                    
                    $
                    358





7.  Restructuring
and Impairment Charges





In the
second quarter of 2009, we decided to close four vision centers and
substantially reduced the use of microkeratomes as part of a plan to reduce
costs and increase operational efficiencies.  As a result, we incurred
restructuring charges totaling $1,554,000 for the three months ended June 30,
2009, which included $1,103,000 of asset impairment charges, $498,000 of
employee separation benefits and $350,000 of contract termination
costs.  Partially offsetting these charges was a benefit of $397,000
due to a change in estimate to previously recognized contract termination costs
related to our vision centers closed in 2008 after successful renegotiations
with the lessors. The fair value measurements utilized internal discounted cash
flow analysis in determining fair value, which is a Level 3 input under SFAS
157.





The
restructuring charge for the six months ended June 30, 2009 was $2,455,000,
which included $1,189,000 of asset impairment charges, $541,000 of employee
separation benefits, and $725,000 of lease obligations.  Partially
offsetting the charges were the successful renegotiations mentioned
above.





At June
30, 2009 and December 31, 2008, current restructuring reserves of $424,000 and
$168,000, respectively, were included in “Accrued liabilities and other” in the
Condensed Consolidated Balance Sheets.  Long-term restructuring
reserves were $396,000 and $306,000 at June 30, 2009 and December 31, 2008,
respectively, and were included in “Long-term rent obligations”.





The
remaining lease obligations associated with our contract termination costs are
summarized as follows (dollars in thousands):





Balance
                          December 31,
                          2008
                        
                        Expense
                        
                        Utilization
                        
                        Balance
                          March 31,
                          2009
                        
                        Expense
                        
                        
                        Utilization
                        
                        Balance
                          June 30,
                          2009$
                        474
                        
                        
                        $
                        872
                        
                        
                        $
                        (94
                        )
                        
                        $
                        1,252
                        
                        
                        $
                        (71
                        )
                        
                        $
                        (361
                        )
                        
                        $
                        820





8.  Consent
Revocation Charges





For the
six months ended June 30, 2009, we incurred $804,000 in expenses related to our
successful defense of a consent solicitation initiated by a dissident
stockholder group.  We did not incur any similar charges during the
three months ended June 30, 2009.


15


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





9.  Debt
and Leasing Arrangements





Long-term
debt obligations consist of (dollars in thousands):





June
      30,
                      2009
                    
                    
                    December
      31,
                      2008Capitalized
      lease obligations
                    
                    $
                    745
                    
                    
                    $
                    4,213Bank
      loan
                    
                    
                    15,123
                    
                    
                    
                    16,892Total
      long-term debt obligations
                    
                    $
                    15,868
                    
                    
                    $
                    21,105Debt
      obligations maturing in one year
                    
                    
                    (4,267
                    )
                    
                    
                    (6,985
                    )Long-term
      obligations (less current portion)
                    
                    $
                    11,601
                    
                    
                    $
                    14,120





We use
capitalized lease obligations to finance purchases of some of our medical
equipment. The leases cover  periods of 24 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 agreement provides for repayment 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.





The
estimated fair value of our long-term debt and capital lease obligations is
$16,300,000, based on the present value of the underlying cash flows discounted
at our incremental borrowing rate.  Within the hierarchy of fair value
measurements, these are Level 3 fair value measurements.





Effective
March 1 and April 1, 2009, we entered into five-year lease agreements with Alcon
Inc. and Abbott Medical Optics, respectively, for new excimer lasers which
allowed us to standardize our excimer treatment platforms and reduce the number
of platforms at each of our vision centers from three to two.  The
standardization of our excimer laser platforms will reduce equipment and
maintenance costs, while allowing us to continue to offer the same broad
spectrum of treatment options that include a standard treatment, a custom
wavefront guided treatment, an optimized treatment and IntraLase femtosecond
technology.  As part of the transactions, we disposed of our Bausch
& Lomb lasers and retired $1,900,000 in related capital lease
obligations.  We received cash payments totaling $6,800,000 from the
lessors that may be partially refundable if we do not perform a minimum
number of procedures over the term of the agreements. We have
deferred these amounts and will recognize them ratably over the
lease term.  The unrecognized portion is included in “Deferred license
fee” in our Condensed Consolidated Balance Sheet at June 30, 2009.





The
Abbott Medical Optics laser lease qualifies as a capital lease and the Alcon
Inc. laser lease qualifies as an operating lease.





10.  Comprehensive
Income (Loss)





The
components of accumulated other comprehensive income (loss) consist of the
following (dollars in thousands):





June
      30,
                  
                  
                  December
      31,2009
                  
                  
                  2008Unrealized
      investment gain, net of tax of $345 and $43
                  
                  $
                  517
                  
                  
                  $
                  54Foreign
      currency translation
                  
                  
                  37
                  
                  
                  
                  (183
                  )Accumulated
      other comprehensive income (loss)
                  
                  $
                  554
                  
                  
                  $
                  (129
                  )




16


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




The
components of comprehensive income (loss) consisted of the following for the
three and six months ended June 30 (dollars in thousands):




Three Months Ended
                  
                  
                  Six Months EndedJune 30,
                  
                  
                  June 30,2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008Net
      (loss) income
                  
                  $
                  (6,887
                  )
                  
                  $
                  (573
                  )
                  
                  $
                  (9,731
                  )
                  
                  $
                  6,303Unrealized
      investment gain, net of tax of $288, ($11), $308 and
($294)
                  
                  
                  342
                  
                  
                  
                  (17
                  )
                  
                  
                  463
                  
                  
                  
                  (442
                  )Foreign
      currency translation
                  
                  
                  302
                  
                  
                  
                  298
                  
                  
                  
                  220
                  
                  
                  
                  268Comprehensive
      (loss) income
                  
                  $
                  (6,243
                  )
                  
                  $
                  (292
                  )
                  
                  $
                  (9,048
                  )
                  
                  $
                  6,129




11.  Commitments
and Contingencies





On
September 13, 2007, October 1, 2007, and November 8, 2007, three putative class
action complaints were filed against us and certain of our current and former
directors and officers by Beaver County Retirement Board, Spencer and Jean Lin
and Diane B. Callahan, respectively, in the United States District Court for the
Southern District of Ohio (Western Division).  These actions were
consolidated into one action, and a consolidated complaint was filed on April
19, 2008.  In that complaint, the lead plaintiff asserts claims under
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks
damages on behalf of a class of stockholders who purchased our common stock
between October 24, 2006 and November 2, 2007.  It alleges that
certain of our public disclosures regarding our financial performance and
prospects were false or misleading.  On July 10, 2008, the defendants
filed a motion to dismiss the consolidated complaint.  On March 25,
2009, the Court dismissed all claims asserted in the consolidated complaint,
with prejudice.  On April 18, 2009, the lead plaintiff filed a motion
to reconsider the court’s dismissal of all of its claims, specifically
requesting leave to file an amended complaint.  That motion is fully
briefed, and we await the Court’s decision.  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.





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 our behalf.  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 plaintiff demands damages and attorneys fees, and seeks
other equitable relief.  We are named as a nominal defendant in the
complaint, although the action is derivative in nature. We do, however, have an
obligation to indemnify our officers and the defendants named in this action if
liability were found.  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.





Our
business results in medical malpractice lawsuits.  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, we have disbursed total claim and expense payments of
$1,586,000.


17





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





Information
included in this Quarterly Report on Form 10-Q contains forward-looking
statements that involve potential risks and uncertainties.  Actual
results could differ materially from those discussed herein.  Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed herein and those discussed in our Annual Report on Form 10-K
for the year ended December 31, 2008.  Readers are cautioned not to
place undue reliance on these forward-looking statements that speak only as of
the date thereof.





The
Company files annual, quarterly and current reports, proxy statements and other
information with the SEC under the Exchange Act.  These reports and
other information filed by the Company may be read and copied at the Public
Reference Room of the SEC, 100 F Street N.E., Washington, D.C. 20549.
Information may be obtained about the Public Reference Room by calling the SEC
at 1-800-SEC-0330.  The SEC also maintains an internet site that
contains reports, proxy statements and other information about issuers, like the
Company, which file electronically with the SEC.  The address of that
site is http://www.sec.gov.





The
financial results for the three and six months ended June 30, 2009 and 2008
referred to in this  discussion should be read in conjunction with our
Condensed Consolidated Financial Statements and the accompanying Notes in this
Quarterly Report on Form 10-Q.  Results of interim periods may not be
indicative of the results for subsequent periods or the full year.





Overview




We are a
provider of laser vision correction services at our LasikPlus® vision centers. Our
vision centers provide the staff, facilities, equipment and support services for
performing laser vision correction procedures that employ advanced laser
technologies to help correct nearsightedness, farsightedness and
astigmatism.   In 2007, we adopted IntraLase technology, a
femtosecond laser that can be used in place of a microkeratome.





We derive
all of our revenues from the delivery of laser correction services performed in
our U.S. vision centers.  Our revenues, therefore, depend on our
volume of procedures, and are impacted by a number of factors, including the
following:





·
            General
      economic conditions and consumer confidence and discretionary spending
      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,
    and


·
            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 acuity
      programs, and


·
            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 per procedure
      license fees paid to certain equipment suppliers of our excimer and
      femtosecond lasers,


·
            Direct
      costs of services, including center rent and utilities, equipment lease
      and maintenance costs, surgical supplies, center staff expense, financing
      charges for third-party patient financing, and other costs related to
      revenues,


·
            General
      and administrative costs, including headquarters and call center staff
      expense, and other overhead costs,


·
            Marketing
      and advertising costs, and


·
            Depreciation
      of equipment.




18





Because
our revenues are a function of the number of laser vision correction procedures
performed and the pricing for these services, and many of our costs are fixed,
our vision centers have a relatively high degree of operating
leverage.  As a result, our level of procedure volume can have a
significant impact on our level of profitability.  The following table
details the number of laser vision correction procedures performed at our
consolidated vision centers.





2009
                      
                      
                      2008First
      Quarter
                      
                      
                      27,859
                      
                      
                      
                      44,159Second
      Quarter
                      
                      
                      17,864
                      
                      
                      
                      30,086Third
      Quarter
                      
                      
                      
                      
                      
                      
                      21,484Fourth
      Quarter
                      
                      
                      
                      
                      
                      
                      19,424Year
                      
                      
                      45,723
                      
                      
                      
                      115,153





Our
procedure volume has been severely affected by the deepening credit crisis,
depressed housing prices, and general economic slowdown in the United States,
resulting in a decline in consumer confidence levels and the deferral of
high-end discretionary expenditures by many consumers.  We anticipate
these conditions will continue throughout 2009 and beyond and that industry
procedure volume will continue to decline, which we expect will negatively
affect our revenues.





We offer
our patients acuity programs.  Prior to June 15, 2007, we priced these
programs separately.  We offered a no-acuity plan, a one-year acuity
plan, and a lifetime acuity plan.  We have deferred the revenues from
the sale of these programs 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 began after the expiration of the one-year acuity plan
included in the base price and we are recognizing revenues associated with the
sale of the lifetime acuity plan 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, we deferred all revenues from the sale of the
one-year and lifetime acuity plans and recognized them 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, we now include
participation in our acuity programs in the base surgical
price.  Under this pricing model, we have not deferred any
warranty-related revenue for procedures performed after June 15,
2007.  We are recognizing revenue previously deferred from the sale of
the separately priced acuity programs over a seven-year period, our current
estimate of the period over which costs of performing the enhancement procedures
will be incurred.




19


We will
not make any 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.  These rates are
reviewed quarterly and the amortization will be modified as needed (dollars in
thousands).





Lifetime ifBase
                      PriceIncludes
                      theOne-Year
                      Acuity Plan
                    
                    
                    Lifetime ifBase
                      PriceDoes Not
                      Include an
                      Acuity Plan
                    
                    
                    TotalBalance
      as of June 30, 2009
                    
                    $
                    15,132
                    
                    
                    $
                    2,625
                    
                    
                    $
                    17,757Estimated
      amortization:2009
      Q3
                    
                    
                    1,659
                    
                    
                    
                    268
                    
                    
                    
                    1,9272009
      Q4
                    
                    
                    1,572
                    
                    
                    
                    255
                    
                    
                    
                    1,8272010
                    
                    
                    5,266
                    
                    
                    
                    883
                    
                    
                    
                    6,1492011
                    
                    
                    3,713
                    
                    
                    
                    663
                    
                    
                    
                    4,3762012
                    
                    
                    2,119
                    
                    
                    
                    397
                    
                    
                    
                    2,5162013
                    
                    
                    727
                    
                    
                    
                    144
                    
                    
                    
                    8712014
                    
                    
                    76
                    
                    
                    
                    15
                    
                    
                    
                    91




In
addition to the deferral of revenues, 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 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.





Results
of Operations for the Three Months Ended June 30, 2009 and 2008





Revenues


In the
second quarter of 2009, revenues decreased by $22,500,000, or 41.5%, to
$31,681,000 from $54,181,000 in the second quarter of 2008.  Procedure
volume decreased 40.6% to 17,864 in the second quarter of 2009 from 30,086 in
the second quarter of 2008.  For vision centers open at least 12
months, procedure volume decreased by approximately 40.6% in the second quarter
of 2009 to 17,533, as compared to 29,528 in the second quarter of
2008.  The components of the revenue change include (dollars in
thousands):





Decrease
      in revenue from lower procedure volume
                  
                  $
                  (20,000
                  )Impact
      from average selling price, before revenue deferral
                  
                  
                  153Change
      in deferred revenue
                  
                  
                  (2,653
                  )Decrease
      in revenues
                  
                  $
                  (22,500
                  )




The
average reported revenue per procedure, which includes the impact of deferring
revenue from separately priced extended warranties, decreased 1.6% to $1,773 in
the second quarter of 2009 from $1,801 in the second quarter of
2008.





We have
seen a decline in both appointment show rates and conversion
rates.  Patient activity in regards to inquiries is also down. We
believe this is due to the current period of economic uncertainty and other
macroeconomic factors.  Industry sources indicate that the entire
laser vision correction industry is negatively impacted.





Medical
professional and license fees


Medical
professional and license fees in the second quarter of 2009 decreased by
$4,273,000, or 37.9%, from the second quarter of 2008.  The decrease
was due to decreased physician fees of $2,056,000 and license fees of $1,822,000
associated with decreased revenues.  The amortization of the deferred
medical professional fees attributable to prior years was $2,294,000 in the
second quarter of 2009 and $4,947,000 in the second quarter of
2008.  Comparing the second quarter of 2009 to the second quarter of
2008, we have experienced a significant increase in IntraLase usage, which has
increased our license fee expense.





20





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 in the second quarter
of 2009 decreased by $2,776,000, or 13.8%, from the second quarter of
2008.  This decrease was principally the result of lower procedure
volumes, which drove lower costs for salaries and fringe benefits, travel and
entertainment, bad debt, and financing fees, partially offset by increases in
laser treatment costs and  professional liability
insurance.





General
and administrative


General
and administrative expenses in the second quarter of 2009 decreased by
$1,219,000, or 21.5%, from the second quarter of 2008, primarily due to
workforce reductions.  We have also reduced professional services and
contract services.





Marketing
and advertising


Marketing
and advertising expenses in the second quarter of 2009 decreased by $5,981,000,
or 38.7%, from the second quarter of 2008.  These expenses were 29.9%
of revenues in the second quarter of 2009 compared to 28.5% during the second
quarter of 2008.  In the second quarter of 2009, we reduced our
marketing spend levels due largely to declining consumer confidence levels that
resulted in deteriorating returns on some marketing initiatives.  The
decrease in monetary expenditures aligns our spending better with anticipated
consumer demand. We are continuing to work to develop more efficient marketing
techniques and expanding local initiatives as a means to attract
customers.  Our future operating profitability will depend in large
part on the success of our efforts in this regard.





Restructuring
and impairment charges


The
restructuring charge for the second quarter of 2009 resulted from closing four
of our vision centers and substantially reducing the use of microkeratomes to
reduce costs and increase operational efficiencies.  In June, we
closed our Alpharetta, Georgia; Las Vegas, Nevada; Scarsdale, New York and
Charlotte, North Carolina vision centers.  The restructuring charges
were $1,554,000, which included $1,103,000 of asset impairment charges, $498,000
of employee separation benefits, and $350,000 of contract termination
costs.  Partially offsetting the second quarter charge was a benefit
of $397,000 due to a change in estimate to previously recognized contract
termination costs related to our vision centers closed in 2008 after successful
renegotiations with the lessors.





Non-operating
income and expenses


Net
investment income in the second quarter of 2009 decreased $198,000, or 23.8%,
due to a decrease of $327,000 in patient financing income, partially offset by
an increase in investment income of $129,000.





Income
taxes


The
following table summarizes the components of the income tax provision for the
second quarters of 2009 and 2008 (dollars in thousands):




Three Months EndedJune 30,
                  
                  
                  June 30,2009
                  
                  
                  2008Federal
      income tax benefit
                  
                  $
                  (3,601
                  )
                  
                  $
                  (1,251
                  )State
      income tax benefit, net of federal benefit
                  
                  
                  (645
                  )
                  
                  
                  (30
                  )Income
      tax benefit
                  
                  $
                  (4,246
                  )
                  
                  $
                  (1,281
                  )Effective
      income tax rate
                  
                  
                  38.1
                  %
                  
                  
                  69.1
                  %




Our
effective income tax rate decreased from 69.1% of pre-tax loss during the second
quarter of 2008 to 38.1% of pre-tax loss during the second quarter of
2009.  Our effective tax rate for the three months ended June 30, 2008
was higher because projected annual tax expense was revised from 39.0% as of the
end of the first quarter to 33.1% year-to-date and the entire change flowed
through the second quarter of 2008.  The reduction in the 2008 rate
resulted from the decline in earnings and the impact of permanent tax
differences.


21




Results
of Operations for the Six Months Ended June 30, 2009 and 2008





Revenues


In the
six months ended June 30, 2009, revenues decreased by $54,148,000, or 40.5%, to
$79,602,000 from $133,750,000 in the six months ended June 30,
2008.  Procedure volume decreased 38.4% to 45,723 from 74,245 in the
six months ended June 30, 2008.  For vision centers open at least 12
months, procedure volume decreased by approximately 39% in the six months ended
June 30, 2009 to 44,473, as compared to 72,966 in the six months ended June 30,
2008.  The components of the revenue change include (dollars in
thousands):





Decrease
      in revenues from lower procedure volume
                  
                  $
                  (47,330
                  )Impact
      from average selling price, before revenue deferral
                  
                  
                  (1,625
                  )Amortization
      of deferred revenues
                  
                  
                  (5,193
                  )Decrease
      in revenues
                  
                  $
                  (54,148
                  )




The
average reported revenue per procedure, which includes the impact of deferring
revenue from separately priced extended warranties, decreased 3.3% to $1,741 in
the six months ended June 30, 2009 from $1,801 in the six months ended June 30,
2008.





We have
seen a decline in both appointment show rates and conversion
rates.  Patient activity in regards to inquiries is also down. We
believe this is due to the current period of economic uncertainty and other
macroeconomic factors.





Medical
professional and license fees


Medical
professional and license fees in the six months ended June 30, 2009 decreased by
$8,260,000, or 31.7%, from the six months ended June 30, 2008.  The
decrease was due to lower physician fees of $5,095,000 and license fees of
$2,787,000 associated with decreased revenues.  The amortization of
the deferred medical professional fees attributable to prior years was $535,000
in the six months ended June 30, 2009 and $1,054,000 in the six months ended
June 30, 2008.  Comparing the six months ended June 30, 2009 to the
six months ended June 30, 2008, we have experienced a significant increase in
IntraLase usage, which has increased our license fee expense.





Direct
costs of services


Direct
costs of services in the six months ended June 30, 2009 decreased by $9,411,000,
or 21.2%, from the six months ended June 30, 2008.  This decrease was
primarily due to workforce reductions and lower expenses related to bad debt,
surgical supplies, financing fees, and professional liability insurance as a
result of lower procedure volumes.





General
and administrative


General
and administrative expenses in the six months ended June 30, 2009 decreased
by $1,993,000, or 18.4%, from the six months ended June 30, 2008 primarily due
to a decrease in salaries and fringe benefits, professional services, contract
services, telecommunications, and state and local taxes, partially offset by an
increase in rent and utilities and stock-based compensation
expense.





Marketing
and advertising expenses


Marketing
and advertising expenses in the six months ended June 30, 2009 decreased by
$12,938,000, or 36.5%, from the six months ended June 30, 2008.  These
expenses were 28.3% of revenues in the six months ended June 30, 2009 compared
to 26.5% during the six months ended June 30, 2008.  In 2009, we
reduced our marketing spend levels, due largely to declining consumer confidence
levels that resulted in deteriorating returns on some marketing initiatives. The
decrease in monetary expenditures aligns our spending better with anticipated
consumer demand. We are continuing to work to develop more efficient marketing
techniques and expanding local initiatives as a means to attract
customers.  Our future operating profitability will depend in large
part on the success of our efforts in this regard.





Consent
revocation charges


In the
six months ended June 30, 2009, we incurred $804,000 in charges related to our
successful defense of a consent solicitation initiated by a dissident
stockholder group.




22




Restructuring
and impairment charges


The
restructuring charge for the six months ended June 30, 2009 resulted from
closing four of our vision centers and substantially reducing the use of
microkeratomes to reduce costs and increase operational
efficiencies.  In June, we closed our Alpharetta, Georgia; Las Vegas,
Nevada; Scarsdale, New York and Charlotte, North Carolina vision
centers.  The restructuring charges were $2,455,000, which included
$1,189,000 of asset impairment charges, $541,000 of employee separation
benefits, and $725,000 of lease obligations.  Partially offsetting the
charge was a benefit of $397,000 due to a change in estimate to previously
recognized contract termination costs related to our vision centers closed in
2008 after successful renegotiations with the lessors.





Non-operating
income and expenses


Net
investment income in the six months ended June 30, 2009 decreased $1,111,000, or
71.0%, due to a decrease in investment income of $252,000, other-than-temporary
impairment of $365,000 related to our auction rate securities and equity
investments, and a decrease of $494,000 in patient financing
income.





Income
taxes


The
following table summarizes the components of the income tax provision for the
first six months of 2009 and 2008 (dollars in thousands):





Six Months EndedJune 30,
                  
                  
                  June 30,2009
                  
                  
                  2008Federal
      income tax (benefit) expense
                  
                  $
                  (4,859
                  )
                  
                  $
                  2,433State
      income tax (benefit) expense, net of federal benefit
                  
                  
                  (869
                  )
                  
                  
                  690Income
      tax (benefit) expense
                  
                  $
                  (5,728
                  )
                  
                  $
                  3,123Effective
      income tax rate
                  
                  
                  37.1
                  %
                  
                  
                  33.1
                  %




Our
effective income tax rate increased from 33.1% of pre-tax income during the
first six months of 2008 to 37.1% of pre-tax income during the first six months
of 2009.  The increase resulted primarily from the lowering of
performance expectations for 2008 and the corresponding effect of permanent
differences constituting a larger percentage of our overall tax
provision.





Liquidity
and Capital Resources





Cash and
cash equivalents and short-term investments totaled $64,011,000 as of June 30,
2009, up from $56,335,000 at December 31, 2008.  Our cash flows from
operating, investing, and financing activities, as reflected in the Condensed
Consolidated Statements of Cash Flows, are summarized as follows (dollars in
thousands):





Six Months Ended June 30,2009
                  
                  
                  2008Cash
      provided (used) by:Operating
      activities
                  
                  $
                  12,522
                  
                  
                  $
                  5,757Investing
      activities
                  
                  
                  368
                  
                  
                  
                  (12,742
                  )Financing
      activities
                  
                  
                  (5,271
                  )
                  
                  
                  12,312Net
      increase in cash and cash equivalents
                  
                  $
                  7,619
                  
                  
                  $
                  5,327





Cash
flows generated from operating activities, a major source of our liquidity,
amounted to $12,522,000 and $5,757,000 for the six months ended June 30, 2009
and 2008, respectively.  The $6,765,000 increase was primarily due to
receipt of our 2008 income tax refund and deferred license fees from our revised
laser contracts, partially offset by lower earnings.  Our cost control
and cash conservation measures are having the desired results as we continue to
take actions that we believe are prudent given the current economic environment.
Among these, we reduced headcount in the vision centers, national call center
and corporate offices during 2009 and 2008, reduced marketing spend
significantly, and are reducing costs in all other discretionary
areas.  We also are managing closely working capital with particular
focus on ensuring timely collection of outstanding patient receivables and the
management of our trade payable obligations.  Patient receivables
decreased $1,394,000 in the six months ended June 30, 2009. At June 30, 2009,
working capital (excluding debt due within one year) amounted to $61,392,000
compared to $62,519,000 at December 31, 2008.  Liquid assets (cash and
cash equivalents, short-term investments, and accounts receivable) amounted to
210.2% of current liabilities, compared to 200.8% at December 31,
2008.


23




We
continue to offer our own sponsored patient financing. As of June 30, 2009, we
had $8,972,000 in patient receivables, net of allowance for doubtful accounts,
which was a decrease of $3,351,000, or 27.2%, from December 31,
2008.  During 2009, we continue to take steps to improve collection
results from internally financed patients including the use of credit scores to
qualify patients for appropriate financing options.  We continually
monitor the allowance for doubtful accounts and will adjust our lending criteria
or require greater down payments if our experience indicates that is
necessary.  However, our ability to successfully collect patient
accounts is dependent, in part, on overall economic conditions.





Our cash
conservation measures also impacted cash flows from investing and financing
activities.  Capital expenditures are lower in 2009 as there have been
no new center openings or center relocations.  In addition, during the
third quarter of 2008 our Board of Directors suspended payment of a quarterly
dividend.  The Board of Directors will review the decision to pay a
dividend quarterly.   We  paid a quarterly dividend
from the third quarter of 2004 through the second quarter of 2008.





On April
24, 2008, we entered into a loan agreement with PNC Equipment Finance, LLC to
finance the majority of the IntraLase units which we purchased.  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 typically
have 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 freed up that capital to be used in the business for other
corporate purposes. The remaining unpaid balance on the bank loan was
$15,123,000 at June 30, 2009. The loan agreement contains no financial covenants
and, as with our capital lease obligations, is secured by certain medical
equipment.





Effective
March 1 and April 1, 2009, we entered into five-year lease agreements with Alcon
Inc. and Abbott Medical Optics, respectively, for new excimer lasers which
allowed us to standardize our excimer treatment platforms and reduce the number
of platforms at each of our vision centers from three to two.  The
standardization of our excimer laser platforms will reduce equipment and
maintenance costs, while allowing us to continue to offer the same broad
spectrum of treatment options that includes a standard treatment, a custom
wavefront guided treatment, an optimized treatment and IntraLase femtosecond
technology.  As part of the transactions, we disposed of our Bausch
& Lomb lasers and retired $1,900,000 in related capital lease
obligations.  We received cash payments totaling $6,800,000 from the
lessors that may be partially refundable if we do not perform a minimum number
of procedures over the term of the agreements.  We have deferred these
amounts and will recognize them ratably over the lease
term.  The unrecognized portion is included in “Deferred license fee”
in our Condensed Consolidated Balance Sheet at June 30, 2009.





The
Abbott Medical Optics laser lease qualifies as a capital lease and the
Alcon Inc. laser lease qualifies as an operating lease.





At June
30, 2009 and December 31, 2008, we held $5,025,000 and $5,625,000, respectively,
par value of various auction rate securities.  The assets underlying
the auction rate instruments are primarily municipal bonds, preferred closed end
funds, and credit default swaps.  Historically, these securities had
provided liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined intervals every 7 to 28 days. However, these
auctions began to fail in the first quarter of 2008. Because these auctions have
failed, we have realized higher interest rates for many of these auction rate
securities than we would have otherwise. Although we have been receiving
interest payments at these rates, the related principal amounts will not be
accessible until a successful auction occurs, a buyer is found outside of the
auction process, the issuer calls the security, or the security matures
according to contractual terms. Maturity dates for our auction rate
securities range from 2016 to 2036. As of December 31, 2007, we held $18,300,000
of auction rate securities.  Since that time, $13,575,000 have been
redeemed at par by their issuers.  See Notes to Condensed Consolidated
Financial Statements for further information regarding our auction rate security
investments.




24


We have
not opened any new vision centers in 2009.  During the six months
ended June 30, 2008, we opened five new vision centers.  Capital
expenditures through June 30, 2009 and 2008 were $178,000 and $12,590,000,
respectively.  Our costs associated with the opening of a new vision
center generally consist of capital expenditures such as the purchase or lease
of lasers, diagnostic equipment, office equipment 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 $1,200,000 and $1,500,000. Actual costs vary from vision
center to vision center based upon the location of the market, the number of
lasers purchased or leased for the vision center, the site of the vision center,
the cost of grand opening marketing and the level of leasehold improvements
required.





We
believe that our current cash and investment resources provide us with
significant staying power should the current recession be
prolonged.  We believe that current cash and investment resources are
sufficient to fund operations beyond 2011 even if annual procedure volumes
approximate 80,000 procedures annually.





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, 2008.





Item 3. Quantitative and
Qualitative Disclosure About Market Risk.





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





We record
short-term investments at fair value.  Due to the short-term nature of
the investments in corporate bonds, municipal and U.S. Government bonds, we
believe there is little risk to the valuation of these 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
trinomial discount model.  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 auction 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.




25


Item 4. Controls and
Procedures.





(a)
            Evaluation
      of Disclosure Controls and
Procedures





Under the
supervision of and with the participation of our 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 June 30, 2009. 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 June 30, 2009.  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
June 30, 2009 that have materially affected, or are reasonably likely to
materially affect, the company’s internal control over financial
reporting.





PART
II.   OTHER INFORMATION.





Item 1. Legal
Proceedings





None.





Item 1A.  Risk
Factors





In
addition to the risk factors discussed in our Form 10-K, there are a number of
other risks and uncertainties associated with our business, including, without
limitation, 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; our ability to operate profitable vision centers
and retain qualified personnel during periods of lower procedure volumes; 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.  Further, the FDA’s advisory board on ophthalmic
devises is currently reviewing concerns about post-Lasik quality of life matters
and the advisory board may propose a major new study on Lasik
outcomes.   The FDA or another agency could take legal or
regulatory action against us or others in the laser vision correction
industry.  The outcome of this review or legal or regulatory action
could potentially impact negatively the acceptance of Lasik.  In
addition the acceptance rate of new technologies such as IntraLase or Wavelight
and our ability to implement successfully new technologies on a
national basis, creates additional risk.





Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds





None.





Item 3.  Defaults
Upon Senior Securities





None.




26


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





We held
our Annual Meeting of Stockholders on May 12, 2009.  We submitted
three matters to the vote of the stockholders.  Results were as
outlined below:





Election
of directors:




Shares Voted
      For
                          
                          
                          Authority
      WithheldWilliam F.
    Bahl
                          
                          
                          14,664,623
                          
                          
                          
                          1,429,667John H.
      Gutfreund
                          
                          
                          14,609,359
                          
                          
                          
                          1,484,931John C.
    Hassan
                          
                          
                          14,618,751
                          
                          
                          
                          1,475,539Edgar F. Heizer
      III
                          
                          
                          14,639,667
                          
                          
                          
                          1,454,623Steven C.
      Straus
                          
                          
                          14,640,855
                          
                          
                          
                          1,453,435E. Anthony
      Woods
                          
                          
                          14,632,487
                          
                          
                          
                          1,461,802




Approval
of the Company’s stockholders rights plan:





Shares Voted For
                    
                    Shares Voted
                      Against
                    
                    
                    SharesAbstaining2,546,469
                    
                    
                    7,195,859
                    
                    
                    
                    1,131,330




Ratification
of Ernst & Young LLP as auditors for the fiscal year ending December 31,
2009:





Shares Voted For
                      
                      Shares Voted
                        Against
                      
                      
                      SharesAbstaining15,052,301
                      
                      
                      993,375
                      
                      
                      
                      48,613




In
February 2009, a group led by Stephen N. Joffe, Craig Joffe and Alan Buckey
(collectively, the “Joffe Group”) began to solicit written consents from our
stockholders to:  (i) repeal any amendments to our Bylaws adopted
after December 31, 2008; (ii) remove, without cause, all of our current
directors; and (iii) elect as directors the Joffe Group’s nominees: Stephen N.
Joffe, Jason T. Mogel, Robert B. Probst, Edward J. VonderBrink and Robert H.
Weisman (the “Joffe Group Nominees”).  Our board of directors opposed
the Joffe Group’s consent solicitation and solicited revocations of any consents
granted to the Joffe Group.  In February 2009, Craig Joffe provided a
notice of his intent to nominate the Joffe Group Nominees at our 2009 annual
meeting.





On March
26, 2009, we received a letter from Craig Joffe on behalf of himself and the
Joffe Group (and the Joffe Group filed an amendment to its ownership statement
on Schedule 13D) stating that the Group had terminated its solicitation of
written consents from our stockholders and disbanded. Additionally, in that
letter and amendment Craig Joffe withdrew his intent to nominate the Joffe Group
Nominees for election at the 2009 annual meeting.  We did not
negotiate or enter into any settlement or other agreement with the Joffe Group.
We paid all expenses incurred by our board related to its consent revocation
solicitation, but no expenses of the Joffe Group.





Item 5.  Other
Information





None





Item 6.Exhibits





Exhibits




Number
              
              Description10.1
              
              Letter
      Agreement with Rhonda Sebastian dated June 1, 200931.1
              
              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




27


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:
      July 28, 2009
            /s/ Steven C. StrausSteven
      C. StrausChief
      Executive OfficerDate: July
      28, 2009
            /s/ Michael J.
CelebrezzeMichael
      J. CelebrezzeChief
      Financial Officer


28