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 March 31, 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.





Yesx                                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  x


Non-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: 18,581,953 shares as of April 28,
2009.





LCA-Vision
Inc.


INDEX





Part
      I.        Financial
      InformationItem
      1.          Financial
      StatementsCondensed
      Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008
      (unaudited)
              3Condensed
      Consolidated Statements of Operations for the Three Months Ended March 31,
      2009 and 2008 (unaudited)
              4Condensed
      Consolidated Statements of Cash Flows for the Three Months Ended March 31,
      2009 and 2008 (unaudited)
              5Notes
      to Condensed Consolidated Financial Statements (unaudited)
              6Item
      2.          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              17Item
      3.          Quantitative and
      Qualitative Disclosures about Market Risk
              22Item
      4.          Controls and
      Procedures
              22Part
      II.     Other InformationItem
      1.          Legal
      Proceedings
              23Item
      1A.       Risk Factors
              24Item
      6.         
      Exhibits
              24Signatures
              25


2


PART
1.  FINANCIAL INFORMATION





Item 1. Financial
Statements





LCA-Vision
Inc.


Condensed
Consolidated Balance Sheets (Unaudited)


(Dollars
in thousands)





March 31, 2009
                  
                  
                  December 31, 2008AssetsCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  29,214
                  
                  
                  $
                  23,648Short-term
      investments
                  
                  
                  32,087
                  
                  
                  
                  32,687Patient
      receivables, net of allowance for doubtful accounts of $1,186 and
      $1,465
                  
                  
                  8,625
                  
                  
                  
                  9,678Other
      accounts receivable
                  
                  
                  3,842
                  
                  
                  
                  2,515Prepaid
      professional fees
                  
                  
                  776
                  
                  
                  
                  911Prepaid
      income taxes
                  
                  
                  7,558
                  
                  
                  
                  8,957Deferred
      tax assets
                  
                  
                  4,385
                  
                  
                  
                  4,708Prepaid
      expenses and other
                  
                  
                  5,371
                  
                  
                  
                  5,299Total
      current assets
                  
                  
                  91,858
                  
                  
                  
                  88,403Property
      and equipment
                  
                  
                  120,282
                  
                  
                  
                  121,734Accumulated
      depreciation and amortization
                  
                  
                  (73,039
                  )
                  
                  
                  (70,235
                  )Property
      and equipment, net
                  
                  
                  47,243
                  
                  
                  
                  51,499Long-term
      investments
                  
                  
                  3,155
                  
                  
                  
                  3,126Accounts
      receivable, net of allowance for doubtful accounts of $1,394 and
      $1,662
                  
                  
                  2,237
                  
                  
                  
                  2,645Deferred
      compensation plan assets
                  
                  
                  2,071
                  
                  
                  
                  2,196Investment
      in unconsolidated businesses
                  
                  
                  396
                  
                  
                  
                  377Deferred
      tax assets
                  
                  
                  7,407
                  
                  
                  
                  7,027Other
      assets
                  
                  
                  1,942
                  
                  
                  
                  2,209Total
      assets
                  
                  $
                  156,309
                  
                  
                  $
                  157,482Liabilities
      and Stockholders' InvestmentCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  9,278
                  
                  
                  $
                  8,169Accrued
      liabilities and other
                  
                  
                  11,839
                  
                  
                  
                  8,608Deferred
      revenue
                  
                  
                  7,761
                  
                  
                  
                  9,107Debt
      obligations maturing in one year
                  
                  
                  6,171
                  
                  
                  
                  6,985Total
      current liabilities
                  
                  
                  35,049
                  
                  
                  
                  32,869Long-term
      rent obligations
                  
                  
                  2,557
                  
                  
                  
                  1,820Long-term
      debt obligations (less current portion)
                  
                  
                  13,081
                  
                  
                  
                  14,120Deferred
      compensation liability
                  
                  
                  2,071
                  
                  
                  
                  2,196Insurance
      reserve
                  
                  
                  9,656
                  
                  
                  
                  9,489Deferred
      revenue
                  
                  
                  12,290
                  
                  
                  
                  14,003Other
      liabilities
                  
                  
                  2,000
                  
                  
                  
                  -Stockholders'
      investmentCommon
      stock ($0.001 par value; 25,207,465 and 25,199,734 shares and 18,581,953
      and 18,552,985 shares issued and outstanding,
respectively)
                  
                  
                  25
                  
                  
                  
                  25Contributed
      capital
                  
                  
                  173,668
                  
                  
                  
                  174,206Common
      stock in treasury, at cost (6,625,512 shares and 6,646,749
      shares)
                  
                  
                  (114,668
                  )
                  
                  
                  (114,632
                  )Retained
      earnings
                  
                  
                  20,671
                  
                  
                  
                  23,515Accumulated
      other comprehensive loss
                  
                  
                  (91
                  )
                  
                  
                  (129
                  )Total
      stockholders' investment
                  
                  
                  79,605
                  
                  
                  
                  82,985Total
      liabilities and stockholders' investment
                  
                  $
                  156,309
                  
                  
                  $
                  157,482





The notes
to the Condensed Consolidated Financial Statements are an integral part of this
statement.


3





LCA-Vision
Inc.


Condensed
Consolidated Statements of Operations (Unaudited)


(Amounts
in thousands except per share data)





Three
      months ended March 31,2009
                  
                  
                  2008Revenues
      - Laser refractive surgery
                  
                  $
                  47,921
                  
                  
                  $
                  79,568Operating
      costs and expensesMedical
      professional and license fees
                  
                  
                  10,776
                  
                  
                  
                  14,761Direct
      costs of services
                  
                  
                  17,816
                  
                  
                  
                  24,451General
      and administrative expenses
                  
                  
                  4,418
                  
                  
                  
                  5,191Marketing
      and advertising
                  
                  
                  13,026
                  
                  
                  
                  19,984Depreciation
                  
                  
                  4,358
                  
                  
                  
                  4,254Consent
      revocation expenses
                  
                  
                  804
                  
                  
                  
                  -Restructuring
      expense
                  
                  
                  902
                  
                  
                  
                  456Operating
      (loss) income
                  
                  
                  (4,179
                  )
                  
                  
                  10,471Equity
      in earnings from unconsolidated businesses
                  
                  
                  27
                  
                  
                  
                  56Net
      investment (loss) income
                  
                  
                  (177
                  )
                  
                  
                  736Other
      income, net
                  
                  
                  2
                  
                  
                  
                  18(Loss)
      income before taxes on income
                  
                  
                  (4,327
                  )
                  
                  
                  11,281Income
      tax (benefit) expense
                  
                  
                  (1,483
                  )
                  
                  
                  4,405Net
      (loss) income
                  
                  $
                  (2,844
                  )
                  
                  $
                  6,876(Loss)
      income per common shareBasic
                  
                  $
                  (0.15
                  )
                  
                  $
                  0.37Diluted
                  
                  $
                  (0.15
                  )
                  
                  $
                  0.37Dividends
      declared per share
                  
                  $
                  -
                  
                  
                  $
                  0.18Weighted
      average shares outstandingBasic
                  
                  
                  18,561
                  
                  
                  
                  18,495Diluted
                  
                  
                  18,561
                  
                  
                  
                  18,587





The notes
to the Condensed Consolidated Financial Statements are an integral part of this
statement.


4


LCA-Vision
Inc.


Condensed
Consolidated Statements of Cash Flows (Unaudited)


(Dollars
in thousands)





Three
      months ended March 31,2009
                
                
                2008Cash
      flow from operating activities:Net
      (loss) income
                
                $
                (2,844
                )
                
                $
                6,876Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                
                
                4,358
                
                
                
                4,254Provision
      for loss on doubtful accounts
                
                
                1,175
                
                
                
                2,080Loss
      on investments
                
                
                365
                
                
                
                -Restructuring
      expense
                
                
                872
                
                
                
                -Deferred
      income taxes
                
                
                (136
                )
                
                
                980Stock
      based compensation
                
                
                (8
                )
                
                
                (101
                )Insurance
      reserve
                
                
                167
                
                
                
                1,305Equity
      in earnings of unconsolidated affiliates
                
                
                (27
                )
                
                
                (56
                )Changes
      in operating assets and liabilities:Patient
      accounts receivable
                
                
                286
                
                
                
                (3,796
                )Other
      accounts receivable
                
                
                (1,327
                )
                
                
                (1,039
                )Prepaid
      income taxes
                
                
                1,399
                
                
                
                6,218Prepaid
      expenses and other
                
                
                (72
                )
                
                
                (2,944
                )Accounts
      payable
                
                
                1,109
                
                
                
                (2,003
                )Deferred
      revenue, net of professional fees
                
                
                (2,753
                )
                
                
                (5,038
                )Income
      taxes payable
                
                
                11
                
                
                
                2,827Accrued
      liabilities and other
                
                
                4,756
                
                
                
                (674
                )Net
      cash provided by operations
                
                
                7,331
                
                
                
                8,889Cash
      flow from investing activities:Purchases
      of property and equipment
                
                
                (157
                )
                
                
                (9,330
                )Purchases
      of investment securities
                
                
                (81,478
                )
                
                
                (54,942
                )Proceeds
      from sale of investment securities
                
                
                81,841
                
                
                
                67,287Other,
      net
                
                
                (82
                )
                
                
                480Net
      cash provided by investing activities
                
                
                124
                
                
                
                3,495Cash
      flow from financing activities:Principal
      payments of capital lease obligations and loan
                
                
                (1,853
                )
                
                
                (570
                )Shares
      repurchased for treasury stock
                
                
                (36
                )
                
                
                (205
                )Exercise
      of stock options
                
                
                -
                
                
                
                148Dividends
      paid to stockholders
                
                
                -
                
                
                
                (3,335
                )Net
      cash used in financing activities
                
                
                (1,889
                )
                
                
                (3,962
                )Increase
      in cash and cash equivalents
                
                
                5,566
                
                
                
                8,422Cash
      and cash equivalents at beginning of period
                
                
                23,648
                
                
                
                17,614Cash
      and cash equivalents at end of period
                
                $
                29,214
                
                
                $
                26,036





The notes
to the Condensed Consolidated Financial Statements are an integral part of this
statement.


5


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





About
Our Company





We are a
leading 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
March 31, 2009, we had 75 LasikPlus fixed-site laser vision
correction centers in the United States and a joint venture in Canada. We
operate in only one business segment.





Summary
of Significant Accounting Policies





This
filing includes condensed consolidated Balance Sheets as of March 31, 2009 and
December 31, 2008; condensed consolidated Statements of Operations for the three
months ended March 31, 2009 and 2008; and condensed consolidated Statements of
Cash Flows for the three months ended March 31, 2009 and 2008.  In the
opinion of management, these condensed consolidated financial statements contain
all adjustments (which consist of only normal recurring adjustments) necessary
to present fairly our financial position, results of operations and cash flows
for the interim periods reported.  These financial statements and
notes should be read together with the financial statements and notes in our
annual report on Form 10-K for the fiscal year ended December 31,
2008.  Results of operations for the period ended March 31, 2009 are
not necessarily indicative of results to be expected for the year ending
December 31, 2009.





Consolidation
and Basis of Presentation





We use
the consolidation method to report our investment in majority-owned subsidiaries
and other companies that are not considered variable interest entities (VIEs)
and in all VIEs for which we are considered the primary
beneficiary.  In addition, we consolidate the results of operations of
professional corporations with which we contract to provide the services of
ophthalmologists or optometrists at our vision centers in accordance with
Emerging Issue Task Force (EITF) Issue No. 97-2, Application of FASB Statement 94andAPB Opinion No. 16
to Physician Management Entities and Certain Other Entities with Contractual
Management Agreements.  We account for investments in joint
ventures and 20% to 50% owned affiliates where we have the ability to exert
significant influence by the equity method.  We have eliminated
intercompany transactions and balances upon consolidation.





Use
of Estimates





The
preparation of our condensed consolidated financial statements in conformity
with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities.  Significant items that are subject to such estimates and
assumptions include investments, patient financing receivables and reserves,
insurance reserves, income taxes and enhancement accruals.  Although
management bases its estimates on historical experience and various other
assumptions that are believed to be reasonable under the circumstances, actual
results could differ significantly from the estimates under different
assumptions or conditions.


6


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





Reclassification





We have
reclassified certain prior-period amounts in the condensed consolidated
Statement of Operations  and Condensed Consolidated Statement of Cash
Flows to conform to current period presentation.  The
reclassifications were not material to the consolidated financial
statements.





Investments





Management
determines the appropriate classification of securities at the time of purchase
and reevaluates such designation as of each balance sheet
date.  Currently, 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 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 (loss) income” within the condensed consolidated Statement of
Operations.  We also include in net investment (loss) income realized
gains and losses and declines in value judged 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 (loss)
income.





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





As
      of March 31,
                
                
                As
      of December 31,2009
                
                
                2008Short-term
      investments:Corporate
      obligations
                
                $
                21,266
                
                
                $
                20,971U.S.
      governmental notes and agencies
                
                
                1,299
                
                
                
                1,400Municipal
      securities
                
                
                7,956
                
                
                
                7,982Equities
                
                
                1,566
                
                
                
                1,784Auction
      rate municipal debt
                
                
                -
                
                
                
                550Total
      short-term investments
                
                
                32,087
                
                
                
                32,687Long-term
      investments:Auction
      rate municipal debt
                
                
                1,349
                
                
                
                1,357Auction
      rate preferred securities
                
                
                1,088
                
                
                
                1,093Auction
      rate securities - credit default swaps
                
                
                718
                
                
                
                676Total
      long-term investments
                
                
                3,155
                
                
                
                3,126Total
      investments
                
                $
                35,242
                
                
                $
                35,813


7


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





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





As of March 31, 2009Adjusted
                    Cost
                  
                  
                  Gross
                    Unrealized
                    Gains
                  
                  
                  Gross
                    Unrealized
                    Losses
                  
                  
                  FairValueCorporate
      obligations
                  
                  $
                  21,266
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  21,266U.
      S. government notes and agencies
                  
                  
                  1,299
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,299Municipal
      securities
                  
                  
                  7,842
                  
                  
                  
                  114
                  
                  
                  
                  -
                  
                  
                  
                  7,956Equities
                  
                  
                  1,448
                  
                  
                  
                  118
                  
                  
                  
                  -
                  
                  
                  
                  1,566Auction
      rate municipal securities
                  
                  
                  1,333
                  
                  
                  
                  16
                  
                  
                  
                  -
                  
                  
                  
                  1,349Auction
      rate preferred securities
                  
                  
                  1,088
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,088Auction
      rate securities - credit default swaps
                  
                  
                  676
                  
                  
                  
                  42
                  
                  
                  
                  -
                  
                  
                  
                  718Total
      Investments
                  
                  $
                  34,952
                  
                  
                  $
                  290
                  
                  
                  $
                  -
                  
                  
                  $
                  35,242





As of 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 had no
realized gains or losses on the sale of marketable securities for the three
months ended March 31, 2009.  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 three months ended March 31,
2009.





The net
carrying value and estimated fair value of debt securities and equity
investments at March 31, 2009 by contractual maturity are shown below (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
                  
                  $
                  25,068
                  
                  
                  $
                  25,077Due
      after one year through three years
                  
                  
                  5,339
                  
                  
                  
                  5,444Due
      after three years
                  
                  
                  3,097
                  
                  
                  
                  3,155Total
      debt securities
                  
                  
                  33,504
                  
                  
                  
                  33,676Equities
                  
                  
                  1,448
                  
                  
                  
                  1,566Total
      investments
                  
                  $
                  34,952
                  
                  
                  $
                  35,242


8


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





Auction
Rate Securities


At March
31, 2009 and December 31, 2008, we held $5,075,000 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 have 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. 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 2017 to 2036.  We redeemed an auction rate
municipal security at par value of $550,000 in January 2009.





At March
31, 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 March
31, 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 markets, with spreads increasing sharply on investment grade entities due
to the demand to protect against counterparty risk. Some defaults have occurred
in the financial sector. Due to increased risk of default, it is probable that
all amounts due (principal and interest) will not be collected according to
these instruments’ contractual terms. Accordingly, we recognized an
other-than-temporary impairment of $1,575,000 for these two auction rate
security investments within the Consolidated Statement of Operations 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 March 31, 2009,  the fair value
of these two instruments was $718,000, resulting in a net unrealized gain of
$26,000, net of tax, recorded in other comprehensive loss.  The
increase in fair value at March 31, 2009, as compared to December 31, 2008, was
attributable primarily to slightly increased LIBOR forward rates relative to
longer-term Treasury yields.





We
reported four of the six auction rate securities held within our investment
portfolio at March 31, 2009, consisting of municipal bonds and preferred
securities with a combined par value of $2,825,000, at a combined fair value of
$2,437,000 at March 31, 2009, and $2,450,000 at December 31,
2008.  Based primarily on the period of time and the extent of the
impairment, we recorded an other-than-temporary impairment of $375,000 in the
Consolidated Statement of Operations in the fourth quarter of 2008 related to
these instruments.  For the period ended March 31, 2009, we recorded
an additional other-than-temporary impairment of $29,000, before tax, in the
condensed consolidated Statement of Operations on certain of these securities
with a combined fair value of $2,012,000.   The remaining
instrument with a fair value of $425,000 increased in fair value as compared to
December 31, 2008, with an unrealized gain of $10,000, net of tax, reported in
other comprehensive loss at March 31, 2009.





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 March 31, 2009, as long-term. At March
31, 2009, the fair value and par value of our long-term auction rate instruments
were $3,155,000 and $5,075,000, respectively.


9


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





On April
9, 2009, the Financial Accounting Standards Board (FASB) released FASB Staff
Position (FSP) FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of
Other-Than-Temporary Impairments(FSP FAS 115-2). FSP FAS 115-2 was
issued contemporaneously with FSP FAS 157- 4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability has Significantly
Decreased and Identifying Transactions that are Not Orderly(FSP FAS
157-4) and FSP FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value
of Financial Instruments(FSP FAS 107-1).  FSP FAS 115-2
provides new guidance on the recognition and presentation of an
other-than-temporary impairment of debt securities, such as our auction rate
investment instruments.  FSP 157-4 provides a revised example to
illustrate key considerations when applying the principles in FASB Statement No.
157, Fair Value Measurements(FAS 157), in estimating fair value in non-active markets when there has
been a significant decrease in the volume and level of activity for the
asset.  Finally, FSP 157-4, FSP FAS 107-1 and APB 28-1 require
additional disclosures about fair value measurements in annual and interim
reporting periods.  These standards become effective for us on April
1, 2009, as we have not elected early adoption.  We are currently in
the process of determining the effect, if any, the adoption of these standards
will have on our consolidated financial statements.





Fair
Values of Financial Instruments





Effective
January 1, 2009, we fully adopted FAS 157 as it relates to both
financial and nonfinancial assets and liabilities.  Prior to January
1, 2009, and in accordance with FAS Board Staff Position No. 157-2, FAS 157 only
applied to our financial assets and financial liabilities.





FAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants.  As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or a liability.  As
a basis for considering such assumptions, FAS 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 also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.


10


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





The
following table summarizes fair value measurements by level at March 31,
2009 for assets and liabilities measured at fair value on a recurring basis
(dollars in thousands):





FairValueMeasurementsasofMarch31,2009UsingQuoted Prices in
                  
                  
                  
                  
                  
                  SignificantActive Markets for
                  
                  
                  SignificantOther
                  
                  
                  UnobservableIdentical Assets
                  
                  
                  ObservableInputs
                  
                  
                  InputsDescription
                  
                  (Level 1)
                  
                  
                  (Level 2)
                  
                  
                  (Level 3)
                  
                  
                  TotalAssets:Available-for-sale
      securities
                  
                  $
                  1,566
                  
                  
                  $
                  30,521
                  
                  
                  $
                  3,155
                  
                  
                  $
                  35,242Deferred
      compensation assets
                  
                  
                  2,071
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,071Total
                  
                  $
                  3,637
                  
                  
                  $
                  30,521
                  
                  
                  $
                  3,155
                  
                  
                  $
                  37,313Liabilities:Deferred
      compensation liabilities
                  
                  $
                  2,071
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,071





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).  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.  We consider our credit risk, taking into
consideration the legal rights of participants to receive deferred amounts, in
the fair value determination of the deferred compensation
liability.





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 SignificantUnobservable Inputs (Level 3)Balance
      as of December 31, 2008
                  
                  $
                  3,126Assets
      acquired
                  
                  
                  -Assets
      sold
                  
                  
                  -Transfers
      in (out) of Level 3
                  
                  
                  -Gains
      included in other comprehensive loss
                  
                  
                  58Losses
      included in earnings
                  
                  
                  (29
                  )Balance
      as of March 31, 2009
                  
                  $
                  3,155





Allowance
for Doubtful Accounts





We
provide patient financing to some of our customers, including those who could
not otherwise obtain third-party financing.  The terms of the
financing require the patient to pay an up-front fee which is intended to cover
some or all of our variable costs; the remainder of the fee is generally
deducted automatically from the patient’s checking account over a period of 12
to 36 months.  We have recorded an allowance for doubtful accounts as
a best estimate of the amount of probable credit losses from our patient
financing program.  Each month, we review the allowance and adjust it
based upon our experience with patient financing.  We charge off
receivables against the allowance for doubtful accounts when it is probable a
receivable will not be recovered.  Our policy is to reserve for all
receivables that remain open past the financial maturity date and to provide
reserves for receivables prior to the maturity date so as to bring receivables
net of reserves down to the estimated net realizable value based on historical
collectibility rates, recent default activity and the current credit
environment.


11


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





Accrued
Enhancement Expense





Since
June 15, 2007, we include participation in our Satisfaction Program (acuity
program) in the base surgical price for substantially all of our patients. Under
the acuity program, we provide post-surgical enhancements free of charge should
the patient not achieve the desired visual correction during the initial
procedure.  We account for the acuity program as a warranty obligation
under the provisions of FASB Statement No. 5, Accounting for Contingencies(FAS 5).
Accordingly, we accrue as a liability the costs expected to be incurred to
satisfy the obligation as a direct cost of service at the point of sale given
our ability to reasonably estimate such costs based on historical trends and the
satisfaction of all other revenue recognition criteria.





We record
the post-surgical enhancement accrual based on our best estimate of the number
and associated cost of the procedures to be performed. Each month, we review the
enhancement accrual and consider factors such as procedure cost and historical
procedure volume when determining the appropriateness of the recorded
balance.





Deferred
Revenues





Prior to
June 15, 2007, we separately priced our acuity programs, which included a
no-acuity plan, a one-year acuity plan, and a lifetime acuity plan. Applicable
accounting rules require 100% of revenues from the sale of an extended acuity
program to be deferred and recognized over the life of the contract on a
straight-line basis unless sufficient experience exists to indicate that the
costs to provide the service will be incurred other than on a straight-line
basis. We have sufficient experience to support recognition on other than a
straight-line basis. Accordingly, we have deferred these revenues and are
recognizing them over the period in which the future costs of performing the
enhancement procedures are expected to be incurred. For programs that included
one-year and lifetime options but did not include a no-acuity option, costs
associated with the sale of the lifetime acuity plan began after the expiration
of the one-year acuity plan included in the base price. Accordingly, we deferred
100% of all revenues associated with the sale of the lifetime acuity plan and
are recognizing them beginning one year after the initial surgery date. For
programs that included a no-acuity option in addition to the one-year and
lifetime options, we deferred all revenues from the sale of the one-year and
lifetime acuity plans and are recognizing 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 the acuity program in the base surgical price. We have not
deferred any warranty-related revenue for procedures performed since that date,
and we will not make any additions to the deferral account in the
future.  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 to provide the enhancement services will
be incurred.





In
addition to the deferral of revenues for those procedures performed prior to the
elimination of separately priced acuity programs on June 15, 2007, we also have
deferred a portion of our costs of service related to professional fees paid to
the attending surgeon when a procedure is performed. The physician receives no
incremental fee for an enhancement procedure. Accordingly, a portion of the
professional fee paid to the physician relates to the future enhancement
procedures to be performed and qualifies for deferral as a direct and
incremental cost of the warranty contract. We use the same historical experience
to amortize deferred professional fees that we use to amortize deferred
revenue.


12


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




Insurance
Reserve




We
maintain a captive insurance company to provide professional liability insurance
coverage for claims brought against us after December 17, 2002. In addition, our
captive insurance company’s charter allows it to provide professional liability
insurance for our doctors, none of whom are currently insured by the captive. We
use the captive insurance company for both primary insurance and excess
liability coverage.  A number of claims are now pending with our
captive insurance company.  We consolidate the financial statements of
the captive insurance company with our financial statements because it is a
wholly-owned enterprise. As of March 31, 2009 and December 31, 2008, we
maintained insurance reserves of $9,656,000 and $9,489,000, respectively, which
represent an actuarially determined estimate of future costs associated with
claims filed as well as claims incurred but not yet
reported.   Our actuaries determine loss reserves  by
comparing our historical claim experience to comparable insurance industry
experience.  Since the inception of the captive insurance company in
2002, it has disbursed total claims and expense payments of
$1,487,000.





Income
Taxes





The
following table summarizes the components of the income tax (benefit) provision
for the three-month periods ended March 31, 2009 and 2008 (dollars in
thousands):





March
      31,2009
                  
                  
                  2008Federal
      income tax (benefit) expense
                  
                  $
                  (1,258
                  )
                  
                  $
                  3,685State
      income tax (benefit) expense, net of federal benefit
                  
                  
                  (225
                  )
                  
                  
                  720Income
      tax (benefit) expense
                  
                  $
                  (1,483
                  )
                  
                  $
                  4,405Effective
      income tax rate
                  
                  
                  34.3
                  %
                  
                  
                  39.0
                  %





The
decrease in the effective income tax rate is attributable principally to the
non-deductibility of the loss on investments recorded in the three-month period
ended March 31, 2009.





During
the three months ended March 31, 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 March 31, 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.





Per
Share Data





Basic per
share data is income applicable to common shares divided by the weighted average
number of common shares outstanding. We calculate diluted per share data by
dividing income applicable to common shares by the weighted average number of
common shares outstanding plus shares issuable upon the vesting of outstanding
restricted stock units and the exercise of in-the-money stock
options.


13


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





The
following is a reconciliation of basic and diluted (loss) earnings per share for
the three months ended March 31, 2009 and 2008 (amounts in thousands, except per
share amounts):





Three
      Months EndedMarch
      31,2009
                    
                    
                    2008Basic (Loss) EarningsNet
      (loss)  income
                    
                    $
                    (2,844
                    )
                    
                    $
                    6,876Weighted
      average shares outstanding
                    
                    
                    18,561
                    
                    
                    
                    18,495Basic
      (loss) earnings per share
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.37Diluted (Loss) EarningsNet
      (loss) income
                    
                    $
                    (2,844
                    )
                    
                    $
                    6,876Weighted
      average shares outstanding
                    
                    
                    18,561
                    
                    
                    
                    18,495Effect
      of dilutive securitiesStock
      options
                    
                    
                    -
                    
                    
                    
                    70Restricted
      stock
                    
                    
                    -
                    
                    
                    
                    22Weighted
      average common shares and potential dilutive shares
                    
                    
                    18,561
                    
                    
                    
                    18,587Diluted
      (loss) earnings per share
                    
                    $
                    (0.15
                    )
                    
                    $
                    0.37





For the
three-month periods ended March 31, 2009 and 2008, we excluded 470,227 and
436,748 shares related to stock options, respectively, and 70,526 and 63,968
restricted stock awards, respectively, from the computation of our diluted
earnings per share because the effect of these share-based awards was
anti-dilutive.





Revenue
Recognition





We
recognize revenues as services are performed and pervasive evidence of an
arrangement for payment exists.  Additionally, we recognize revenue
when the price is fixed and determinable and collectibility is reasonably
assured.  We deferred revenues associated with separately priced
acuity programs and  are recognizing it over the period in which
future costs of performing the post-surgical enhancement procedures are expected
to be incurred as we have sufficient experience to support that costs associated
with future enhancements will be incurred on other than a straight-line
basis.  We report all revenues net of tax assessed by applicable
governmental authorities.





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 months ended March 31:





2009
                  
                  
                  2008Stock
      options
                  
                  $
                  141,000
                  
                  
                  $
                  (94,000
                  )Restricted
      stock
                  
                  
                  (150,000
                  )
                  
                  
                  (7,000
                  )(9,000
                  )
                  
                  
                  (101,000
                  )Income
      tax effect
                  
                  
                  (11,000
                  )
                  
                  
                  10,000$
                  2,000
                  
                  
                  $
                  (111,000
                  )


14




LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





Restructuring
Activities





In
December 2008, we closed our Tulsa, Oklahoma and Little Rock, Arkansas vision
centers based on a number of factors that included current financial
performance, an evaluation of the anticipated timing of improvement in procedure
volume and the extent of the expected improvement, as well as the costs
associated with closing the centers.  As a result of changes in the
estimated costs associated with the termination of related contractual
commitments, we recognized an additional $902,000 in restructuring expenses for
the three month period ended March 31, 2009.




Consent Revocation
Expenses









Debt





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


Amount OutstandingMarch 31, 2009
                  
                  
                  December 31,2008Capitalized
      lease obligations
                  
                  $
                  3,239
                  
                  
                  $
                  4,213Bank
      loan
                  
                  
                  16,013
                  
                  
                  
                  16,892Total
      long-term debt obligations
                  
                  $
                  19,252
                  
                  
                  $
                  21,105Debt
      obligations maturing in one year
                  
                  
                  (6,171
                  )
                  
                  
                  (6,985
                  )Long-term
      obligations (less current portion)
                  
                  $
                  13,081
                  
                  
                  $
                  14,120





We use
capitalized lease obligations to finance purchases of some of our medical
equipment. The leases cover a period of 24 months to 36 months from the date the
medical equipment is installed.





On April
24, 2008, we entered into a bank loan agreement for $19,184,000 to finance
medical equipment. The loan 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.





Comprehensive
(Loss) Income





The
components of accumulated other comprehensive loss consisted of the
following:





March 31,
                  
                  
                  December 31,2009
                  
                  
                  2008Unrealized
      investment gain, net of tax of $116 and $43
                  
                  $
                  174
                  
                  
                  $
                  54Foreign
      currency translation adjustment
                  
                  
                  (265
                  )
                  
                  
                  (183
                  )Accumulated
      other comprehensive loss
                  
                  $
                  (91
                  )
                  
                  $
                  (129
                  )





The
components of comprehensive income (loss) consisted of the following for the
three months ended:





March
      31,
                  
                  
                  March
      31,2009
                  
                  
                  2008Net
      (loss) income
                  
                  $
                  (2,844
                  )
                  
                  $
                  6,876Unrealied
      investment gain (loss), net of tax of $80 and ($283)
                  
                  
                  120
                  
                  
                  
                  (425
                  )Foreign
      currency translation
                  
                  
                  (82
                  )
                  
                  
                  (30
                  )Comprehensive
      (loss) income
                  
                  $
                  (2,806
                  )
                  
                  $
                  6,421




15


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





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. 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. We are named as a nominal defendant
in the complaint, although the action is derivative in nature.  The
plaintiff demands damages and attorneys fees, and seeks other equitable
relief.  On December 20, 2007, the court stayed this action, pursuant to a
stipulation of the parties, pending the resolution of the motion to dismiss
filed in the consolidated class action, discussed above.  We are in
the process of evaluating these claims.  However, due to the inherent
uncertainty of litigation, we cannot predict the outcome of the action at this
time, and can give no assurance that these claims will not have a material
adverse effect on our financial position or results of operations.





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, total claim and expense payments of $1,487,000 have been
disbursed.





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


16


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





This
quarterly report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based on
information available to us as of the date hereof. Actual results could differ
materially from those stated or implied in our forward-looking statements due to
risks and uncertainties associated with our business, including, without
limitation, those concerning economic, political and sociological conditions;
the acceptance rate of new technology, and our ability to successfully implement
new technology on a national basis; market acceptance of our services; the
successful execution of marketing strategies to cost effectively drive patients
to our vision centers; competition in the laser vision correction industry; an
inability to attract new patients; the possibility of long-term side effects and
adverse publicity regarding laser vision correction; operational and management
instability; legal or regulatory action against us or others in the laser vision
correction industry; our ability to profitably operate vision centers and retain
qualified personnel during periods of lower procedure volumes; the relatively
high fixed cost structure of our business; the continued availability of
non-recourse third-party financing for our patients on terms similar to what we
have paid historically; and the future value of revenues financed by us and our
ability to collect on such financings, which will depend on a number of factors
including the worsening consumer credit environment and our ability to manage
credit risk related to consumer debt, bankruptcies and other credit trends.
Except to the extent required under the federal securities laws and the rules
and regulations promulgated by the Securities and Exchange Commission, we assume
no obligation to update the information included in this report, whether as a
result of new information, future events or circumstances, or otherwise. In
addition to the information given herein, please refer to “Item
1A.  Risk Factors” in this report and our annual report on Form 10-K
for the fiscal year ended December 31, 2008, for a discussion of important
factors that could affect our results.





The
following discussion and analysis of our financial condition and results of
operations should be read together with our Condensed Consolidated Financial
Statements and the accompanying Notes included in this Quarterly
Report.





Overview




We are a
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.





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.




·
            The
      effect of competition and discounting practices in our
      industry.




Other
factors that may impact our revenues include:




·
              Deferred
      revenue from the sale, prior to June 15, 2007, of separately priced
      extended warranties.


·
            Our
      mix of procedures among the different types of laser
      technology.




Our
operating costs and expenses include:





·
            Medical
      professional and license fees, including per procedure fees for the
      ophthalmologists performing laser vision correction and 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.




·
            Depreciation
      of equipment.


17


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
                    
                    
                    
                    
                    
                    
                    30,086Third
      Quarter
                    
                    
                    
                    
                    
                    
                    21,484Fourth
      Quarter
                    
                    
                    
                    
                    
                    
                    19,424Year
                    
                    
                    27,859
                    
                    
                    
                    115,153





Our
procedure volume has been severely affected by the deepening credit crisis,
depressed housing prices and general economic slowdown in North America,
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 are 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.





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).


18





Lifetime if Base
                      Price Includes
                      theOne-Year
                      AcuityPlan
                    
                    
                    Lifetime if Base
                      Price Does Not
                      Include an
                      AcuityPlan
                    
                    
                    TotalBalance
      as of March 31, 2009
                    
                    
                    $
                    17,104
                    
                    
                    $
                    2,947
                    
                    
                    $
                    20,051Estimated
      amortization:2009
      Q2
                    
                    
                    $
                    1,972
                    
                    
                    $
                    322
                    
                    
                    $
                    2,2942009
      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 March 31, 2009 and 2008





Revenues


In the
first quarter of 2009, revenues decreased by $31,647,000, or 39.8%, to
$47,921,000 from $79,568,000 in the first quarter of 2008.  Procedure
volume decreased 36.9% to 27,859 from 44,159 in the first quarter of
2008.  For vision centers open at least 12 months, procedure volume
decreased by approximately 38.0% in the first quarter of 2009 to 26,940, as
compared to 43,438 in the first quarter of 2008.  The components of
the revenue change include (dollars in thousands):





Decrease
      in revenue from lower procedure volume
                  
                  $
                  (27,304
                  )Impact
      from decrease in average selling price, before revenue
      deferral
                  
                  
                  (1,804
                  )Change
      in deferred revenue
                  
                  
                  (2,539
                  )Decrease
      in revenues
                  
                  $
                  (31,647
                  )





The
average reported revenue per procedure, which includes the impact of deferring
revenue from separately priced extended warranties, decreased 4.5% to $1,720 in
the first quarter of 2009 from $1,802 in the first quarter of 2008.





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





Medical
professional and license fees


Medical
professional and license fees in the first quarter of 2009 decreased by
$3,985,000, or 27.0%, from the first quarter of 2008.  This decrease
was due primarily to lower physician fees and license fees associated with lower
revenues.  The amortization of the deferred medical professional fees
attributable to prior years was $306,000 in the first quarter of 2009 and
$560,000 in the first quarter of 2008.  Comparing the first quarter of
2009 to the first quarter of 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 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 first quarter
of 2009 decreased by $6,635,000, or 27.1%, from the first quarter of
2008.  This decrease was principally the result of lower costs for
salaries and fringe benefits, professional liability insurance, bad debt,
surgical supplies and financing fees due to lower procedure volumes and
workforce reductions.


19


General
and administrative


General
and administrative expenses in the first quarter of 2009 decreased by $773,000,
or 14.9%, from the first quarter of 2008.  This was due primarily to a
decrease in salaries and fringe benefits and professional services, partially
offset by an increase in rent/utilities and travel and entertainment related to
regional marketing planning sessions.  The decrease in salaries and
fringe benefits was principally the result of lower procedure volumes and
related workforce reductions.





Marketing
and advertising expenses


Marketing
and advertising expenses in the first quarter of 2009 decreased by $6,958,000,
or 34.8%, from the first quarter of 2008.  These expenses were 27.2%
of revenues in the first quarter of 2009 compared to 25.1% during the first
quarter of 2008.  Due largely to declining consumer confidence that
resulted in deteriorating returns on some marketing initiatives, we reduced
marketing spending levels significantly in the first quarter of
2009.  We made this decrease to align our spending better with
anticipated consumer demand. We are continuing to work to develop more efficient
marketing techniques and in the fourth quarter of 2008 we consolidated our media
programs under a single, proven lead agency that now manages our marketing
programs and vendors.  Our future operating profitability will depend
in large part on the success of our efforts in this regard.





Consent
revocation expense


In the
first quarter of 2009, we incurred $804,000 in expenses related to our
successful defense of a consent solicitation initiated by a dissident
stockholder group.





Restructuring
Expense


As a
result of the closing of the Tulsa, Oklahoma and Little Rock, Arkansas centers,
we incurred $902,000 in costs related to contract terminations.





The
following table summarizes changes in the Restructuring Reserve (dollars in
thousands):





Balance
      at December 31, 2008
                  
                  $
                  1,292Rent
      accrual
                  
                  
                  902Rent
      paid
                  
                  
                  (138
                  )Write-off
      fixed assets
                  
                  
                  (804
                  )Balance
      at March 31, 2009
                  
                  $
                  1,252





Non-operating
income and expenses


Net
investment income in the first quarter of 2009 decreased $913,000, or 124.0%,
due to a decrease in investment income of $381,000, a $365,000
other-than-temporary impairment of our auction rate securities and equity
investments, and a decrease of $167,000 in patient financing
income.





Income
taxes


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





March
      31,2009
                  
                  
                  2008Federal
      income tax (benefit) expense
                  
                  $
                  (1,258
                  )
                  
                  $
                  3,685State
      income tax (benefit) expense, net of federal benefit
                  
                  
                  (225
                  )
                  
                  
                  720Income
      tax (benefit) expense
                  
                  $
                  (1,483
                  )
                  
                  $
                  4,405Effective
      income tax rate
                  
                  
                  34.3
                  %
                  
                  
                  39.0
                  %





The
decrease in the effective income tax rate is attributable principally to the
non-deductibility of the loss on investments recorded in the three-month period
ended March 31, 2009.





Liquidity
and Capital Resources





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).


20





Period
      Ending March 31,2009
                  
                  
                  2008Cash
      provided (used) by:Operating
      activities
                  
                  $
                  7,331
                  
                  
                  $
                  8,889Investing
      activities
                  
                  
                  124
                  
                  
                  
                  3,495Financing
      activities
                  
                  
                  (1,889
                  )
                  
                  
                  (3,962
                  )Net
      increase in cash and cash equivalents
                  
                  $
                  5,566
                  
                  
                  $
                  8,422





Cash
flows generated from operating activities, a major source of our liquidity,
amounted to $7,331,000 and $8,889,000 for the quarter ended March 31, 2009 and
2008, respectively.  The decrease in cash flow generated from
operating activities during 2009 reflects primarily lower earnings on reduced
procedure volumes.  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 2008, reduced marketing expense 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.  Accounts payable increased $1,109,000 in 2009, as a
result of timing of payment processing. At March 31, 2009, working capital
(excluding debt due within one year) amounted to $62,980,000 compared to
$62,519,000 at December 31, 2008.  Liquid assets (cash and cash
equivalents, short-term investments, and accounts receivable) amounted to 199.5%
of current liabilities, compared to 200.8% at December 31, 2008.





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
$16,013,000 at March 31, 2009. The loan agreement contains no financial
covenants and, as with our capital lease obligations, is secured by certain
medical equipment.




At March
31, 2009 and December 31, 2008, we held $5,075,000 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 have
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 2017 to 2036. Since these auctions first failed in early
2008, $15.9 million of the related securities have been redeemed at par by their
issuers.  See notes to condensed consolidated financial statements for
further information regarding our auction rate security
investments.


21


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 have
not opened any new vision centers in 2009.  Capital expenditures
through March 31, 2009 were $157,000.





We
continue to offer our own sponsored patient financing. As of March 31, 2009, we
had $10,862,000 in patient receivables, net of allowance for doubtful accounts,
which was a decrease of $1,461,000, or 11.9%, since December 31,
2008.  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.




We have
repositioned the company to be cash-flow positive at 2008 procedure volume
levels.  We believe that our current cash and investment resources
provide us with significant staying power should the current recession be
prolonged.  For example, we believe that current cash and investment
resources are sufficient to fund operations for more than three years even if
annual procedure volumes decline 22% from 2008 levels to 90,000 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.





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 March 31, 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.


22


(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 March 31, 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
March 31, 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





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.  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. We are named as a nominal defendant in the complaint, although the
action is derivative in nature.  The plaintiff demands damages and
attorneys fees, and seeks other equitable relief.  On December 20, 2007,
the court stayed this action, pursuant to a stipulation of the parties, pending
the resolution of the motion to dismiss filed in the consolidated class action,
discussed above.  We are in the process of evaluating these
claims.  However, due to the inherent uncertainty of litigation, we cannot
predict the outcome of the action at this time, and can give no assurance that
these claims will not have a material adverse effect on our financial position
or results of operations.





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, it has disbursed total claim and expense payments of
$1,487,000.





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.


23


Item 1A.  Risk
Factors





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 outcome of this review could
potentially impact negatively the acceptance of Lasik.  In addition to
the risk factors discussed in our Form 10-K, the acceptance rate of IntraLase
technology and our ability to successfully implement the IntraLase technology on
a national basis create additional risk.





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





None.





Item 6. Exhibits




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




24


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


25