U.S.
SECURITIES AND EXCHANGE COMMISSION


Washington,
DC  20549


Form
10-Q





(Mark
One)


x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE
      SECURITIES EXCHANGE ACT OF 1934.
                For
      the quarterly period ended March 31,
2010.





o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF
              THE
      SECURITIES EXCHANGE ACT.
                For
      the transition period from __________ to
  __________




Commission
file number 0-27610


LCA-Vision
Inc.


(Exact
name of registrant as specified in its charter)




Delaware
                11-2882328(State
      or other jurisdiction of
                (IRS
      Employerincorporation
      or organization)
                Identification
      No.)





7840 Montgomery Road,
Cincinnati, Ohio  45236


(Address
of principal executive offices)




(513)
792-9292


(Registrant's
telephone number, including area code)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.





Yes  x                     No
o





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 (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





Yes   o                     No
o





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





Large
accelerated filer  o                          Accelerated
filer  x


Non-accelerated
filer    o                          Smaller
reporting company  o





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





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: 18,663,421 shares as of April 22,
2010.








LCA-Vision
Inc.


TABLE
OF CONTENTS





Part
      I.  FINANCIAL INFORMATIONItem
      1.
                      Financial
      StatementsCondensed
      Consolidated Balance Sheets (Unaudited)March
      31, 2010 and December 31, 2009
                      3Condensed
      Consolidated Statements of Operations (Unaudited)Three
      Months Ended March 31, 2010 and 2009
                      4Condensed
      Consolidated Statements of Cash Flows (Unaudited)Three
      Months Ended March 31, 2010 and 2009
                      5Notes
      to Condensed Consolidated Financial Statements (Unaudited)
                      6Item
      2.
                      Management's
      Discussion and Analysis of Financial Condition andResults
      of Operations
                      15Item
      3.
                      Quantitative
      and Qualitative Disclosures About Market Risk
                      20Item
      4.
                      Controls
      and Procedures
                      21Part
      II.  OTHER INFORMATIONItem
      1.
                      Legal
      Proceedings
                      21Item
      1A.
                      Risk
      Factors
                      21Item
      2.
                      Unregistered
      Sales of Equity Securities and Use of Proceeds
                      21Item
      3.
                      Defaults
      Upon Senior Securities
                      21Item
      4.
                      (Removed
      and Reserved)
                      21Item
      5.
                      Other
      Information
                      21Item
      6.
                      Exhibits
                      22Signatures
                      23




2


PART
I.  FINANCIAL INFORMATION





Item 1. Financial
Statements





LCA-Vision
Inc.


Condensed
Consolidated Balance Sheets (Unaudited)


(Dollars
in thousands)





March
      31, 2010
                  
                  
                  December
      31, 2009AssetsCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  17,778
                  
                  
                  $
                  24,049Short-term
      investments
                  
                  
                  36,488
                  
                  
                  
                  28,455Patient
      receivables, net of allowance for doubtful accounts of $2,104 and
      $1,645
                  
                  
                  3,863
                  
                  
                  
                  4,562Other
      accounts receivable
                  
                  
                  3,165
                  
                  
                  
                  2,002Assets
      held for sale
                  
                  
                  405
                  
                  
                  
                  1,031Prepaid
      professional fees
                  
                  
                  571
                  
                  
                  
                  615Prepaid
      income taxes
                  
                  
                  12,090
                  
                  
                  
                  12,270Deferred
      compensation plan assets
                  
                  
                  -
                  
                  
                  
                  400Prepaid
      expenses and other
                  
                  
                  4,053
                  
                  
                  
                  5,582Total
      current assets
                  
                  
                  78,413
                  
                  
                  
                  78,966Property
      and equipment
                  
                  
                  79,860
                  
                  
                  
                  79,993Accumulated
      depreciation and amortization
                  
                  
                  (56,381
                  )
                  
                  
                  (53,995
                  )Property
      and equipment, net
                  
                  
                  23,479
                  
                  
                  
                  25,998Long-term
      investments
                  
                  
                  2,078
                  
                  
                  
                  2,090Patient
      receivables, net of allowance for doubtful accounts of $586 and
      $1,674
                  
                  
                  681
                  
                  
                  
                  854Investment
      in unconsolidated businesses
                  
                  
                  167
                  
                  
                  
                  137Other
      assets
                  
                  
                  4,466
                  
                  
                  
                  4,590Total
      assets
                  
                  $
                  109,284
                  
                  
                  $
                  112,635Liabilities
      and Stockholders' InvestmentCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  8,537
                  
                  
                  $
                  6,504Accrued
      liabilities and other
                  
                  
                  11,800
                  
                  
                  
                  11,581Deferred
      revenue
                  
                  
                  5,707
                  
                  
                  
                  6,151Deferred
      compensation liability
                  
                  
                  -
                  
                  
                  
                  400Debt
      obligations maturing in one year
                  
                  
                  3,557
                  
                  
                  
                  3,998Total
      current liabilities
                  
                  
                  29,601
                  
                  
                  
                  28,634Long-term
      rent obligations and other
                  
                  
                  2,247
                  
                  
                  
                  2,395Long-term
      debt obligations (less current portion)
                  
                  
                  7,502
                  
                  
                  
                  9,145Insurance
      reserve
                  
                  
                  8,603
                  
                  
                  
                  9,154Deferred
      license fee
                  
                  
                  4,087
                  
                  
                  
                  4,428Deferred
      revenue
                  
                  
                  6,583
                  
                  
                  
                  7,852Stockholders'
      InvestmentCommon
      stock ($.001 par value;  25,291,637 and 25,287,387 shares
      and18,663,421
      and 18,619,185 shares issued and outstanding,
respectively)
                  
                  
                  25
                  
                  
                  
                  25Contributed
      capital
                  
                  
                  174,515
                  
                  
                  
                  174,325Common
      stock in treasury, at cost (6,628,216 shares and 6,668,202
      shares)
                  
                  
                  (114,394
                  )
                  
                  
                  (114,668
                  )Retained
      deficit
                  
                  
                  (10,760
                  )
                  
                  
                  (9,729
                  )Accumulated
      other comprehensive income
                  
                  
                  1,275
                  
                  
                  
                  1,074Total
      stockholders' investment
                  
                  
                  50,661
                  
                  
                  
                  51,027Total
      liabilities and stockholders' investment
                  
                  $
                  109,284
                  
                  
                  $
                  112,635





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 31,2010
                  
                  
                  2009Revenues
      - Laser refractive surgery
                  
                  $
                  34,013
                  
                  
                  $
                  47,921Operating
      costs and expensesMedical
      professional and license fees
                  
                  
                  8,337
                  
                  
                  
                  10,776Direct
      costs of services
                  
                  
                  13,114
                  
                  
                  
                  17,816General
      and administrative expenses
                  
                  
                  3,789
                  
                  
                  
                  4,418Marketing
      and advertising
                  
                  
                  7,867
                  
                  
                  
                  13,026Depreciation
                  
                  
                  2,542
                  
                  
                  
                  4,358Consent
      revocation solicitation charges
                  
                  
                  -
                  
                  
                  
                  804Restructuring
      charges
                  
                  
                  338
                  
                  
                  
                  916Other,
      net
                  
                  
                  -
                  
                  
                  
                  (14
                  )35,987
                  
                  
                  
                  52,100Gain
      on sale of assets
                  
                  
                  1,293
                  
                  
                  
                  2Operating
      loss
                  
                  
                  (681
                  )
                  
                  
                  (4,177
                  )Equity
      in earnings from unconsolidated businesses
                  
                  
                  25
                  
                  
                  
                  27Net
      investment income (loss)
                  
                  
                  151
                  
                  
                  
                  (177
                  )Loss
      before taxes on income
                  
                  
                  (505
                  )
                  
                  
                  (4,327
                  )Income
      tax expense (benefit)
                  
                  
                  59
                  
                  
                  
                  (1,483
                  )Net
      loss
                  
                  $
                  (564
                  )
                  
                  $
                  (2,844
                  )Loss
      per common shareBasic
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.15
                  )Diluted
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.15
                  )Weighted
      average shares outstandingBasic
                  
                  
                  18,633
                  
                  
                  
                  18,561Diluted
                  
                  
                  18,633
                  
                  
                  
                  18,561





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 31,2010
                
                
                2009Cash
      flow from operating activities:Net
      loss
                
                $
                (564
                )
                
                $
                (2,844
                )Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                
                
                2,542
                
                
                
                4,358Provision
      for loss on doubtful accounts
                
                
                828
                
                
                
                1,175Loss
      on investments
                
                
                -
                
                
                
                365Impairment
      charges
                
                
                -
                
                
                
                872Gain
      on sale of assets
                
                
                (1,293
                )
                
                
                (2
                )Deferred
      income taxes
                
                
                -
                
                
                
                (136
                )Stock-based
      compensation
                
                
                176
                
                
                
                (8
                )Insurance
      reserve
                
                
                (551
                )
                
                
                167Equity
      in earnings of unconsolidated affiliates
                
                
                (25
                )
                
                
                (27
                )Changes
      in operating assets and liabilities:Patient
      accounts receivable
                
                
                44
                
                
                
                286Other
      accounts receivable
                
                
                (368
                )
                
                
                (1,327
                )Prepaid
      income taxes
                
                
                180
                
                
                
                1,399Prepaid
      expenses and other
                
                
                1,529
                
                
                
                (72
                )Accounts
      payable
                
                
                2,033
                
                
                
                1,109Deferred
      revenue, net of professional fees
                
                
                (1,542
                )
                
                
                (2,753
                )Accrued
      liabilities and other
                
                
                56
                
                
                
                4,769Net
      cash provided by operations
                
                
                3,045
                
                
                
                7,331Cash
      flow from investing activities:Purchases
      of property and equipment
                
                
                (20
                )
                
                
                (157
                )Proceeds
      from sale of assets held for sale
                
                
                1,124
                
                
                
                -Purchases
      of investment securities
                
                
                (81,771
                )
                
                
                (81,478
                )Proceeds
      from sale of investment securities
                
                
                73,752
                
                
                
                81,841Other,
      net
                
                
                (65
                )
                
                
                (206
                )Net
      cash used in investing activities
                
                
                (6,980
                )
                
                
                -Cash
      flow from financing activities:Principal
      payments of capital lease obligations and loan
                
                
                (2,084
                )
                
                
                (1,853
                )Shares
      repurchased for treasury stock
                
                
                (192
                )
                
                
                (36
                )Exercise
      of stock options
                
                
                14
                
                
                
                -Net
      cash used in financing activities
                
                
                (2,262
                )
                
                
                (1,889
                )Net
      effect of exchange rate changes on cash and cash
    equivalents
                
                
                (74
                )
                
                
                124(Decrease)
      increase in cash and cash equivalents
                
                
                (6,271
                )
                
                
                5,566Cash
      and cash equivalents at beginning of period
                
                
                24,049
                
                
                
                23,648Cash
      and cash equivalents at end of period
                
                $
                17,778
                
                
                $
                29,214





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)





1.  Description
of Business and Accounting Policies





Description
of Business


We are a
provider of fixed-site laser visioncorrection services at
our LasikPlus®
vision centers.  Our vision centers provide the staff, facilities,
equipment and support services for performing laser vision correction that
employ advanced laser technologies to help correct nearsightedness,
farsightedness and astigmatism.  We currently use two suppliers for
fixed-site excimer lasers:  Abbott Medical Optics (“AMO”) and Alcon,
Inc. (“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 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, 2010, we operated 62 LasikPlus®
fixed-site laser vision correction centers in the United
States.  Included in the 62 vision centers are two vision centers
licensed to ophthalmologists who use our trademarks.  Due to the
nature of our operations and organization, we operate in only one business
segment.





Basis
of Presentation


Our
Condensed Consolidated Financial Statements have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission (“SEC”) and, in
the opinion of management, include all adjustments necessary for a fair
presentation of our financial position, results of operations, and cash flows
for each period presented.  The adjustments referred to above are of a
normal and recurring nature unless otherwise disclosed
herein.  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to SEC rules and regulations.





We
derived the Condensed Consolidated Balance Sheet as of December 31, 2009 from
audited financial statements, but did not include all disclosures required by
U.S. generally accepted accounting principles (“U.S. GAAP”).  These
Condensed Consolidated Financial Statements should be read in conjunction with
our 2009 Annual Report on Form 10-K.  Operating results for the
three-month period ended March 31, 2010 are not necessarily indicative of the
results expected in subsequent quarters or for the year ending December 31,
2010.





Use
of Estimates


The
preparation of our Condensed Consolidated Financial Statements in conformity
with U.S. GAAP 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.





Reclassifications


We have
reclassified certain prior-period amounts in the Condensed Consolidated
Statements of Operations and Statements of Cash Flows to conform to current
period presentation. The reclassifications were not material to the Condensed
Consolidated Financial Statements.





Subsequent
Events


We
evaluated all events or transactions that occurred after March 31, 2010 through
the date we issued these Condensed Consolidated Financial Statements. During
this period, we did not have any material recognizable subsequent
events.




6


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




2.  Investments





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





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, 2010 and December 31, 2009.  Short-term and long-term investments,
designated as available-for-sale, consist of the following (dollars in
thousands):





March
      31,
                            
                            
                            December
      31,2010
                            
                            
                            2009Short-term
      investments:Corporate
      obligations
                            
                            $
                            13,155
                            
                            
                            $
                            13,818U.S.
      governmental notes and agencies
                            
                            
                            13,424
                            
                            
                            
                            3,728Municipal
      securities
                            
                            
                            7,451
                            
                            
                            
                            8,544Equities
                            
                            
                            2,458
                            
                            
                            
                            2,365Total
      short-term investments
                            
                            
                            36,488
                            
                            
                            
                            28,455Long-term
      investments:Auction
      rate municipal debt
                            
                            
                            1,068
                            
                            
                            
                            1,062Auction
      rate preferred securities
                            
                            
                            1,010
                            
                            
                            
                            1,028Total
      long-term investments
                            
                            
                            2,078
                            
                            
                            
                            2,090Total
      investments
                            
                            $
                            38,566
                            
                            
                            $
                            30,545





The
following table shows the net carrying value (amortized cost) and estimated fair
value of debt and equity securities at March 31, 2010 by contractual maturity
(dollars in thousands).  Expected maturities may differ from
contractual maturities because the issuers of the securities may have the right
or obligation to prepay obligations without prepayment penalties.





Amortized
                            Cost
                          
                          
                          Estimated
                            Fair ValueDue
      in one year or less
                          
                          $
                          25,267
                          
                          
                          $
                          25,306Due
      after one year through three years
                          
                          
                          6,078
                          
                          
                          
                          6,081Due
      after three years
                          
                          
                          4,619
                          
                          
                          
                          4,721Total
      debt securities
                          
                          
                          35,964
                          
                          
                          
                          36,108Equities
                          
                          
                          1,487
                          
                          
                          
                          2,458Total
      investments
                          
                          $
                          37,451
                          
                          
                          $
                          38,566




7





LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




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





March
      31, 2010Adjusted
                                        Cost
                                      
                                      
                                      Gross
                                        Unrealized
                                        Gains
                                      
                                      Gross
                                        Unrealized
                                        Losses
                                      
                                      Fair
      ValueCorporate
      obligations
                                      
                                      $
                                      13,161
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      (6
                                      )
                                      
                                      $
                                      13,155U.
      S. government notes and agencies
                                      
                                      
                                      13,421
                                      
                                      
                                      
                                      17
                                      
                                      
                                      
                                      (14
                                      )
                                      
                                      
                                      13,424Municipal
      securities
                                      
                                      
                                      7,394
                                      
                                      
                                      
                                      59
                                      
                                      
                                      
                                      (2
                                      )
                                      
                                      
                                      7,451Equities
                                      
                                      
                                      1,488
                                      
                                      
                                      
                                      970
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,458Auction
      rate municipal securities
                                      
                                      
                                      1,010
                                      
                                      
                                      
                                      58
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,068Auction
      rate preferred securities
                                      
                                      
                                      977
                                      
                                      
                                      
                                      33
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,010Total
      investments
                                      
                                      $
                                      37,451
                                      
                                      
                                      $
                                      1,137
                                      
                                      
                                      $
                                      (22
                                      )
                                      
                                      $
                                      38,566December
      31, 2009Adjusted
                                        Cost
                                      
                                      
                                      Gross
                                        Unrealized
                                        Gains
                                      
                                      Gross
                                        Unrealized
                                        Losses
                                      
                                      Fair
      ValueCorporate
      obligations
                                      
                                      $
                                      13,818
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      13,818U.
      S. government notes and agencies
                                      
                                      
                                      3,728
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3,728Municipal
      securities
                                      
                                      
                                      8,459
                                      
                                      
                                      
                                      85
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      8,544Equities
                                      
                                      
                                      1,487
                                      
                                      
                                      
                                      878
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      2,365Auction
      rate municipal securities
                                      
                                      
                                      1,010
                                      
                                      
                                      
                                      52
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,062Auction
      rate preferred securities
                                      
                                      
                                      999
                                      
                                      
                                      
                                      29
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1,028Total
      investments
                                      
                                      $
                                      29,501
                                      
                                      
                                      $
                                      1,044
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      30,545





We
realized gains of $3,000 and losses of $8,000 on the sale of marketable
securities for the three months ended March 31, 2010.  We had no
realized gains or losses on the sale of marketable securities for the three
months ended March 31, 2009.





We
recognized unrealized gains of $93,000 and unrealized losses of $22,000 in
accumulated other comprehensive income during the three months ended March 31,
2010.  We recognized $29,000 before tax, in other-than-temporary
impairments to certain of our auction rate securities during the three months
ended March 31, 2009.  There were no other-than-temporary impairments
to auction rate securities for the three-months ended March 31,
2010.  Given the duration and extent of the decline in fair values
associated with our equity securities (comprised primarily of various equity
mutual funds), we recognized an other-than-temporary impairment of $336,000,
before tax, during the three months ended March 31, 2009.  There were
no declines in the fair value of our equity securities during the three months
ended March 31, 2010.  When evaluating the investments for
other-than-temporary impairment, we reviewed factors such as the length of time
and extent to which fair value has been below cost basis, the financial
condition of the issuer of the investment securities and any changes thereto,
and our intent to sell, or whether it is more-likely-than-not we would be
required to sell the investment before recovery of the investment’s amortized
cost basis.




8





LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




The
following table presents gross unrealized losses and fair values for those
investments that were in an unrealized loss position as of March 31, 2010,
aggregated by investment category and the length of time that the individual
securities have been in a continuous loss position (dollars in
thousands):





As
      of March 31, 2010Less
      than 12 MonthsSecurity
      Description
                              
                              Fair
      Value
                              
                              
                              Unrealized
                                LossesCorporate
      obligations
                              
                              $
                              2,137
                              
                              
                              $
                              (6
                              )U.
      S. government notes and agencies
                              
                              
                              3,865
                              
                              
                              
                              (14
                              )Municipal
      securities
                              
                              
                              2,150
                              
                              
                              
                              (2
                              )Total
                              
                              $
                              8,152
                              
                              
                              $
                              (22
                              )




As of
March 31, 2010, we did not have any investments in marketable securities that
were in an unrealized loss position for 12 months or greater.  As of
December 31, 2009, we did not have any investments in marketable securities that
were in an unrealized loss position.





Auction
Rate Securities


At March
31, 2010 and December 31, 2009, we held $2.3 million and $2.4 million 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.  Maturity dates for our
auction rate securities range from 2016 to 2036.  In the first quarter
of 2010, $25,000 of the related securities was called at par by their
issuers.  In the full year of 2009, $1.0 million of the securities
were called at par by their issuers and we redeemed an additional $2.3 million
in auction rate securities at 46.9% of original par value.





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 prior to March
31, 2010 as long-term. At March 31, 2010, the fair value and par value of our
long-term auction rate instruments were $2.1 million and $2.3 million,
respectively.





3.  Fair
Values of Financial Instruments





Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset and liability in an orderly transaction
between market participants at the measurement date.  U.S. GAAP
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 1 that are observable for the
      asset or liability through corroboration with market data at the
      measurement date.Level
      3
            
            Unobservable
      inputs that reflect management’s best estimate of what market participants
      would use in pricing the asset or liability at the measurement
      date.





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




9


LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




The
following tables summarize fair value measurements by level at March 31,
2010 and December 31, 2009 for assets and liabilities measured at fair value on
a recurring basis (dollars in thousands):




Fair
      Value Measurements as of March 31, 2010 UsingQuoted
      Prices in
                          
                          
                          
                          
                          
                          SignificantActive
      Markets for
                          
                          
                          Significant
      Other
                          
                          
                          UnobservableIdentical
      Assets
                          
                          
                          Observable
      Inputs
                          
                          
                          InputsDescription
                          
                          (Level
      1)
                          
                          
                          (Level
      2)
                          
                          
                          (Level
      3)
                          
                          
                          TotalAssets:Cash
      and cash equivalents
                          
                          $
                          17,778
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          17,778Investments
                          
                          
                          2,458
                          
                          
                          
                          34,030
                          
                          
                          
                          2,078
                          
                          
                          
                          38,566Total
                          
                          $
                          20,236
                          
                          
                          $
                          34,030
                          
                          
                          $
                          2,078
                          
                          
                          $
                          56,344




Fair
      Value Measurements as of December 31, 2009 UsingDescription
                            
                            Quoted
      Prices in
                              Active
      Markets for
                              Identical
      Assets
                              (Level
      1)
                            
                            
                            Significant
      Other
                              Observable
      Inputs
                              (Level
      2)
                            
                            
                            Significant
                              Unobservable
      Inputs
                              (Level
      3)
                            
                            
                            TotalAssets:Cash
      and cash equivalents
                            
                            $
                            24,049
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            24,049Investments
                            
                            
                            2,365
                            
                            
                            
                            26,090
                            
                            
                            
                            2,090
                            
                            
                            
                            30,545Deferred
      compensation assets
                            
                            
                            400
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            400Total
                            
                            $
                            26,814
                            
                            
                            $
                            26,090
                            
                            
                            $
                            2,090
                            
                            
                            $
                            54,994Liabilities:Deferred
      compensation liabilities
                            
                            $
                            400
                            
                            
                            $
                            -
                            
                            
                            $
                            -
                            
                            
                            $
                            400





Cash and
cash equivalents are comprised of either bank deposits or amounts invested in
money market funds, the fair value of which is based on quoted market
prices.  The fair values of some investment securities included within
our investment portfolio are based on quoted market prices from various stock
and bond exchanges.  Certain of our debt securities are classified at
fair value utilizing Level 2 inputs.  For these securities, fair value
is measured using observable market data that includes dealer quotes, live
trading levels, trade execution data, credit information and the bond’s terms
and conditions.  The fair values of our auction rate instruments are
classified in Level 3 because they are valued using a trinomial discount model
as there was insufficient observable auction rate market information available
to determine the fair value of these investments. The determination of the fair
value of the auction rate instruments employed assumptions included financial
standing of the issuer of the instruments, 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.  We
previously maintained a self-directed deferred compensation plan structured as a
rabbi trust for certain highly compensated individuals.  The
investment assets of the rabbi trust were valued using quoted market
prices.  The related deferred compensation liability represents the
fair value of the participants’ investment elections, determined using quoted
market prices.  In 2009, our Compensation Committee approved
terminating the deferred compensation plan as of December 31,
2009.  Distributions were made to all participants by January
2010.




10





LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




The
following table sets forth a reconciliation of beginning and ending balances for
each major category for assets measured at fair value using significant
unobservable inputs (Level 3) (dollars in thousands):





Three
      Months EndedMarch
      31,2010
                              
                              
                              2009Balance
      as of January 1
                              
                              $
                              2,090
                              
                              
                              $
                              3,126Assets
      acquired
                              
                              
                              -
                              
                              
                              
                              -Assets
      sold
                              
                              
                              (22
                              )
                              
                              
                              -Transfers
      in (out) of Level 3
                              
                              
                              -
                              
                              
                              
                              -Gains
      included in other comprehensive loss
                              
                              
                              10
                              
                              
                              
                              58Losses
      included in earnings
                              
                              
                              -
                              
                              
                              
                              (29
                              )Balance
      as of March 31
                              
                              $
                              2,078
                              
                              
                              $
                              3,155





4.  Assets
Held For Sale





We had
assets held for sale of $405,000 and $1.0 million at March 31, 2010 and December
31, 2009, respectively, related to unused excimer and femtosecond
lasers.  During the three months ended March 31, 2010, we were able to
sell some of our excimer and femtosecond lasers held for sale with a combined
net book value of $626,000 for total cash proceeds of approximately $1.1 million
and notes receivable of $836,000, resulting in a gain of approximately $1.3
million before tax.





5.  Income
Taxes





The
following table presents the components of our income tax provision (benefit)
for the following periods  (dollars in thousands):





Three
      Months EndedMarch
      31,2010
                                
                                
                                2009Current:Federal
                                
                                $
                                23
                                
                                
                                $
                                (1,294
                                )State
      and local
                                
                                
                                36
                                
                                
                                
                                (53
                                )Total
      Current
                                
                                
                                59
                                
                                
                                
                                (1,347
                                )Deferred:Federal
                                
                                $
                                -
                                
                                
                                $
                                35State
      and local
                                
                                
                                -
                                
                                
                                
                                (171
                                )Total
      Deferred
                                
                                
                                -
                                
                                
                                
                                (136
                                )Income
      tax expense (benefit)
                                
                                $
                                59
                                
                                
                                $
                                (1,483
                                )Effective
      income tax rate
                                
                                
                                -11.7
                                %
                                
                                
                                34.3
                                %




Our
effective tax rate for the three-month period ended March 31, 2010 was impacted
by a full valuation allowance against all of our deferred tax assets, net of
deferred tax liabilities.





As of
March 31, 2010 and December 31, 2009, deferred tax assets net of deferred tax
liabilities totaled $13.7 million and $13.3 million, respectively, offset by
full valuation allowances.  Due to the lack of positive evidence that
the deferred tax assets will be realized as required by U.S. GAAP, we were
unable to record tax benefits with respect to our losses in the U.S. and state
jurisdictions during the three months ended March 31, 2010.  Income
tax expense for the three months ended March 31, 2010 includes the interest on
unrecognized tax benefits and state taxes in certain
jurisdictions.


11




LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




We have
recorded a tax refund receivable related to the tax benefit of those federal and
state net operating losses generated through December 31, 2009 where we can
carryback the net operating loss to a prior tax year.





During
the three months ended March 31, 2010, 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 at each of March 31, 2010 and December 31, 2009 was
approximately $555,000.  It is reasonably possible that the amount of
the total unrecognized tax benefits may change in the next 12
months.  However, we do not believe that any anticipated change will
be material to the Condensed Consolidated Financial Statements.  In
2009, the Internal Revenue Service began an audit of our 2008 tax
year.  Based on the early status of the audit and the protocol of
finalizing audits by the relevant authorities, it is not possible to estimate
the impact of the changes, if any, to the previously recorded liability for
unrecognized tax benefits.





6.  Per
Common Share Data





We
calculate basic earnings per common share data using the weighted average number
of common shares outstanding during the period.  Diluted per share
data reflects the potential dilution that would occur if common stock
equivalents were exercised or converted to common stock but only to the extent
that they are considered dilutive to our earnings.  The following
table is a reconciliation of basic and diluted per share data for the following
periods (dollars in thousands, except per share amounts):





Three
      Months EndedMarch
      31,2010
                        
                        
                        2009Basic LossNet
      loss
                        
                        $
                        (564
                        )
                        
                        $
                        (2,844
                        )Weighted
      average shares outstanding
                        
                        
                        18,633
                        
                        
                        
                        18,561Basic
      loss
                        
                        $
                        (0.03
                        )
                        
                        $
                        (0.15
                        )Diluted LossNet
      loss
                        
                        $
                        (564
                        )
                        
                        $
                        (2,844
                        )Weighted
      average shares outstanding
                        
                        
                        18,633
                        
                        
                        
                        18,561Effect
      of dilutive securitiesStock
      options
                        
                        
                        -
                        
                        
                        
                        -Restricted
      stock
                        
                        
                        -
                        
                        
                        
                        -Weighted
      average common shares and potential dilutive shares
                        
                        
                        18,633
                        
                        
                        
                        18,561Diluted
      loss per common share
                        
                        $
                        (0.03
                        )
                        
                        $
                        (0.15
                        )




For the
three months ended March 31, 2010 and 2009, we did not include outstanding stock
options and restricted stock awards having a grant price greater than the
average market price of the common shares for the period in the computation of
diluted earnings per share because the effect of these share-based awards would
be antidilutive.  For the three months ended March 31, 2010, the total
number of these shares was 400,071.  For the three months ended March
31, 2009, the number of outstanding options and restricted stock awards that
were antidilutive were 540,753.  We excluded all outstanding stock
options and restricted stock awards from the computation of our diluted earnings
per share because the effect of these share-based awards was antidilutive due to
our net loss.




12





LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




7.  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 following periods (dollars in
thousands):





Three
      Months EndedMarch
      31,2010
                                
                                
                                2009Stock
      options
                                
                                $
                                (13
                                )
                                
                                $
                                141Restricted
      stock units
                                
                                
                                189
                                
                                
                                
                                (150
                                )176
                                
                                
                                
                                (9
                                )Income
      tax effect
                                
                                
                                68
                                
                                
                                
                                (11
                                )$
                                108
                                
                                
                                $
                                2





Our
restricted stock unit awards include time-based awards that vest ratably over
three years and performance-based awards that will be issued only subject to
certain performance criteria.  If this performance criteria is met,
the performance-based restricted stock units are subject to three-year cliff
vesting.





8.
            Consent
      Revocation Expense





For the
three months ended March 31, 2009, we incurred $804,000 in expenses related to
our successful defense of a consent solicitation initiated by a dissident
stockholder group.





9.
            Restructuring
      Charges





For the
three months ended March 31, 2010, we incurred a net restructuring charge of
$338,000.  The charges were primarily vision center closing costs. We
incurred restructuring charges totaling $916,000 for the three months ended
March 31, 2009, which included $873,000 of contract termination costs and
$43,000 of employee separation benefits.





At March
31, 2010 and December 31, 2009, we included current restructuring reserves of
$410,000 and $1.1 million, respectively, in “Accrued liabilities and other” in
the Condensed Consolidated Balance Sheets.  Long-term restructuring
reserves were $258,000 and $267,000 at March 31, 2010 and December 31, 2009,
respectively, and were included in “Long-term rent obligations and
other.”   The fair value measurements in all periods utilized
internal discounted cash flow analysis in determining fair value, which is a
Level 3 input under U.S. GAAP.





The
following table summarizes the restructuring reserve activities for the three
months ended March 31, 2010 (dollars in thousands):





Employee
                          
                          
                          ContractSeparation
                          
                          
                          TerminationCosts
                          
                          
                          Costs
                          
                          
                          TotalBalance
      at December 31, 2009
                          
                          $
                          237
                          
                          
                          $
                          1,092
                          
                          
                          $
                          1,329Liabilities
      recognized
                          
                          
                          4
                          
                          
                          
                          334
                          
                          
                          
                          338Utilized
                          
                          
                          (109
                          )
                          
                          
                          (890
                          )
                          
                          
                          (999
                          )Balance
      at March 31, 2010
                          
                          $
                          132
                          
                          
                          $
                          536
                          
                          
                          $
                          668




13





LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)




10.  Debt
and Leasing Arrangements





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





March
      31,
                            2010
                          
                          
                          December
      31,
                            2009Capitalized
      lease obligations
                          
                          $
                          222
                          
                          
                          $
                          390Bank
      loan
                          
                          
                          10,837
                          
                          
                          
                          12,753Total
      long-term debt obligations
                          
                          $
                          11,059
                          
                          
                          $
                          13,143Debt
      obligations maturing in one year
                          
                          
                          (3,557
                          )
                          
                          
                          (3,998
                          )Long-term
      obligations (less current portion)
                          
                          $
                          7,502
                          
                          
                          $
                          9,145





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





In April
2008, we entered into a five-year bank loan agreement for $19.2 million to
finance medical equipment at a fixed interest rate of 4.96%. The loan agreement
contains no financial covenants.  Loan repayments increased
approximately $231,000 for the three months ended March 31, 2010 compared to the
same period in 2009 due primarily to additional payoffs of excimer lasers that
were sold.





Both the
capital lease obligations and the bank loan are secured by certain medical
equipment.





The
estimated fair value of our long-term debt and capital lease obligations is
$10.6 million based on the present value of the underlying cash flows discounted
at our incremental borrowing rate.  Within the hierarchy of fair value
measurements, these are Level 3 fair value measurements.





11.  Comprehensive
Income (Loss)





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


March
      31,
                            
                            
                            December
      31,2010
                            
                            
                            2009Unrealized
      investment gain, net of tax of $447 and $417
                            
                            $
                            698
                            
                            
                            $
                            626Foreign
      currency translation adjustment
                            
                            
                            577
                            
                            
                            
                            448Accumulated
      other comprehensive income
                            
                            $
                            1,275
                            
                            
                            $
                            1,074





The
components of comprehensive loss consisted of the following for the following
periods (dollars in thousands):


Three
      Months EndedMarch
      31,2010
                                
                                
                                2009Net
      loss
                                
                                $
                                (564
                                )
                                
                                $
                                (2,844
                                )Unrealized
      investment gain, net of tax of $29 and $80
                                
                                
                                72
                                
                                
                                
                                120Foreign
      currency translation
                                
                                
                                129
                                
                                
                                
                                (82
                                )Comprehensive
      loss
                                
                                $
                                (363
                                )
                                
                                $
                                (2,806
                                )




14




LCA-Vision
Inc.


Notes to
Condensed Consolidated Financial Statements (Unaudited)





12.  Commitments
and Contingencies





Our
business results in medical malpractice lawsuits.  Claims reported to
us prior to December 18, 2002 were generally covered by external insurance
policies and to date have not had a material financial impact on our business
other than the cost of insurance and our deductibles under these
policies.  Effective in December 2002, we established a captive
insurance company to provide coverage for claims brought against us after
December 17, 2002.  We use the captive insurance company for both
primary insurance and excess liability coverage.  A number of claims
are now pending with our captive insurance company.  Since the
inception of the captive insurance company in 2002, total claims and expense
payments of $2.9 million have been disbursed.





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





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





Information
included in this Quarterly Report on Form 10-Q contains forward-looking
statements that involve potential risks and uncertainties.  Actual
results could differ materially from those discussed herein.  Factors
that could cause or contribute to such differences include, but are not limited
to, those discussed herein and those discussed in our Annual Report on Form 10-K
for the year ended December 31, 2009.  Readers are cautioned not to
place undue reliance on these forward-looking statements that speak only as of
the date thereof.





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





The
financial results for the three months ended March 31, 2010 and 2009 referred to
in this discussion should be read in conjunction with our Condensed Consolidated
Financial Statements and the accompanying Notes in this Quarterly Report on Form
10-Q.  Results of interim periods may not be indicative of the results
for subsequent periods or the full year.





Overview





Key
financial highlights for the three months ended March 31, 2010 include (all
comparisons are with the same period of 2009):





·
            Revenues
      were $34.0 million compared with $47.9 million; adjusted revenues were
      $32.3 million compared with $44.9
million.


·
            Procedure
      volume was 19,066 procedures (62 vision centers) compared with 27,859
      procedures (75 vision centers) and 25,491 same-store
      procedures.


·
            Same-store
      revenues (62 vision centers) decreased 23.1%; adjusted same-store revenues
      decreased 21.6%.


·
            Operating
      loss was $681,000 compared with operating loss of $4.2 million; adjusted
      operating loss was $2.2 million compared with adjusted operating loss of
      $6.9 million.


·
            Operating
      loss and adjusted operating loss for the first quarter of 2010 includes
      $1.3 million from the gain on sale of equipment and $338,000 in
      restructuring expense. Operating loss and adjusted operating loss for the
      first quarter of 2009 includes $916,000 in restructuring expense and
      $804,000 in consent revocation
expenses.


·
            Net
      loss was $564,000, or $0.03 per share, compared with net loss of $2.8
      million, or $0.15 per share.


·
            Cash
      and investments totaled $56.3 million as of March 31, 2010, compared with
      $54.6 million as of December 31,
2009.


15





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





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


·
            Our
      ability to generate customers through our arrangements with managed care
      companies, direct-to-consumer advertising, and word-of-mouth
      referrals,


·
            The
      availability of patient financing,


·
            The
      level of consumer acceptance of laser vision correction,
    and


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





Other
factors that may impact our revenues include:





·
            Deferred
      revenue from the sale, prior to June 15, 2007, of separately priced acuity
      programs, and


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





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.





2010
                            
                            
                            2009First
      Quarter
                            
                            
                            19,066
                            
                            
                            
                            27,859Second
      Quarter
                            
                            
                            
                            
                            
                            
                            17,864Third
      Quarter
                            
                            
                            
                            
                            
                            
                            15,335Fourth
      Quarter
                            
                            
                            
                            
                            
                            
                            11,718Year
                            
                            
                            19,066
                            
                            
                            
                            72,776





Our
procedure volume and operating results have been severely affected by the
general economic slowdown in the United States, resulting in a decline in
consumer confidence levels and a reduction in high-end discretionary
expenditures for many consumers.  In response, in 2009 we reduced our
workforce so that our staffing levels would be appropriate for our anticipated
procedure volume.  Since January 1, 2009, we have closed 13 vision
centers and converted two vision centers into licensed facilities. We have no
current plans to open vision centers in new markets until the economy
improves.  We are leveraging consumer insights from extensive market
research conducted over the past several months in an effort to optimize our
marketing efforts.




16


We have
provided both adjusted revenues and operating losses as a means of measuring
performance that adjusts for the non-cash impact of accounting for separately
priced extended warranties which we offered prior to June 15,
2007.  We believe the adjusted information better reflects operating
performance and therefore is more meaningful to investors.  A
reconciliation of revenues and operating losses reported in accordance with U.S.
Generally Accepted Accounting Principles (“U.S. GAAP”) is provided below
(dollars in thousands).


Three Months Ended March 31,2010
                        
                        
                        2009RevenuesReported
      U.S. GAAP
                        
                        $
                        34,013
                        
                        
                        $
                        47,921AdjustmentsAmortization
      of prior deferred revenue
                        
                        
                        (1,713
                        )
                        
                        
                        (3,059
                        )Adjusted
      revenues
                        
                        $
                        32,300
                        
                        
                        $
                        44,862Operating
      LossReported
      U.S. GAAP
                        
                        $
                        (681
                        )
                        
                        $
                        (4,177
                        )AdjustmentsAmortization
      of prior deferred revenue
                        
                        
                        (1,713
                        )
                        
                        
                        (3,059
                        )Amortization
      of prior professional fees
                        
                        
                        171
                        
                        
                        
                        306Adjusted
      operating loss
                        
                        $
                        (2,223
                        )
                        
                        $
                        (6,930
                        )





Revenues


In the
first quarter of 2010, revenues decreased by $13.9 million, or 29.0%, to $34.0
million from $47.9 million in the first quarter of 2009.  Procedure
volume decreased 31.6% to 19,066 in the first quarter of 2010 from 27,859 in the
first quarter of 2009.  Procedure volume is seasonal, however, severe
inclement weather, particularly on the East Coast, had a negative effect on our
business in the first quarter of 2010.  The components of the revenue
change include (dollars in thousands):





Decrease
      in revenue from lower procedure volume
                  
                  $
                  (14,159
                  )Impact
      from increase in average selling price, before revenue
      deferral
                  
                  
                  1,597Change
      in deferred revenue
                  
                  
                  (1,346
                  )Decrease
      in revenues
                  
                  $
                  (13,908
                  )




The
adjusted average reported revenue per procedure, which excludes the impact of
deferring revenue from separately priced extended warranties, increased 5.2% to
$1,694 in the first quarter of 2010 from $1,610 in the first quarter of
2009.





We
experienced a slight increase in both appointment show rates and treatment show
rates in the first quarter of 2010 compared to the same period in
2009.  We attribute these improvements in operational metrics
primarily to patient acquisition and operations efficiency
measures.  Although candidacy rates remained flat quarter over
quarter, we have seen a slight decline in conversion rates compared to the first
quarter 2009.  Patient activity in regards to inquiries is also down.
We believe this is due to the current period of economic uncertainty and other
macroeconomic factors.  Industry sources indicate that the entire
laser vision correction industry continues to be impacted
negatively.




17





Operating
costs and expenses


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 the salary component of physician
      compensation for certain physicians employed by us, staff, facility costs
      of operating laser vision correction centers, equipment lease and
      maintenance costs, surgical supplies, financing charges for third-party
      patient financing, and other costs related to
  revenues,


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


·
            Marketing
      and advertising costs, and


·
            Depreciation
      of equipment.





Medical
professional and license fees


Medical
professional and license fees in the first quarter of 2010 decreased by $2.4
million, or 22.6%, from the first quarter of 2009.  The decrease was
due to decreased license fees of $943,000 and physician fees of $1.4 million
associated with decreased revenues, partially offset by an increase in our
enhancement expense.  The amortization of the deferred medical
professional fees attributable to prior years was $171,000 in the first quarter
of 2010 and $306,000 in the first quarter of 2009.





Direct
costs of services


Direct
costs of services decreased $4.7 million, or 26.4%, in the first quarter of 2010
to $13.1 million from $17.8 million in the first quarter of
2009.  Lower salaries, rent and utilities, fringe benefits, employee
incentives, travel and entertainment expense as a result of our restructuring
plans primarily drove the decrease in direct costs of services this quarter
compared to the same period in 2009.  This decrease was also the
result of lower procedure volumes, which drove lower bad debt, financing fees,
insurance, and equipment expense, partially offset by an increase in stock
compensation expense.





General
and administrative


General
and administrative expenses in the first quarter of 2010 decreased by $629,000,
or 14.2%, from the first quarter of 2009, due primarily to workforce reductions
and decreased revenues which drove reduced contract services, professional
services, telecommunications, travel and entertainment, and stock-based
compensation expense.





Marketing
and advertising


Marketing
and advertising expenses in the first quarter of 2010 decreased by $5.2 million,
or 39.6%, from the first quarter of 2009.  These expenses were 23.1%
of revenues in the first quarter of 2010 compared to 27.2% during the first
quarter of 2009.  In the first quarter of 2010, we reduced our
marketing spend levels to better align spending levels with consumer
demand.  We believe the decrease in monetary expenditures better
aligns our spending with anticipated consumer demand. We are continuing to work
to develop more efficient marketing techniques and expanding local initiatives
as a means to attract customers.  Our future operating profitability
will depend in large part on the success of our efforts in this
regard.





Gain
on sale of assets


We sold
excimer and femtosecond lasers held for sale for a gain of approximately $1.3
million in the first quarter of 2010.  Gain on sale of assets was
minimal for the first quarter of 2009.





Restructuring
charges


The net
restructuring charges in the first quarter of 2010 were $338,000, which were
primarily comprised of vision center closing costs.  The closure costs
were a result of our decision to close vision centers and reduce our workforce
as part of our priority of conserving cash.





Non-operating
income and expenses


Net
investment income in the first quarter of 2010 increased $328,000, or
185.3%.  This is due primarily to the $365,000 other-than-temporary
impairment of auction rate securities and equity investments recognized in the
first quarter of 2009.  Patient financing income declined $248,000 on
lower procedure volume offset by investment income of $211,000.




18





Income
taxes


Due to
the lack of positive evidence that the deferred tax assets will be realized as
required by U.S. GAAP, we were unable to record tax benefits with respect to our
losses in the U.S. and state jurisdictions in the three months ended March 31,
2010.  Income tax expense for the three months ended March 31, 2010
includes the interest on unrecognized tax benefits and state taxes in certain
jurisdictions.





Liquidity
and Capital Resources





At March
31, 2010, we held $54.3 million in cash and cash equivalents and short-term
investments, an increase of $1.8 million from $52.5 million at December 31,
2009.  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):





Three Months EndingMarch 31,2010
                  
                  
                  2009Cash
      provided (used) by:Operating
      activities
                  
                  $
                  3,045
                  
                  
                  $
                  7,331Investing
      activities
                  
                  
                  (6,980
                  )
                  
                  
                  -Financing
      activities
                  
                  
                  (2,262
                  )
                  
                  
                  (1,889
                  )Net
      effect of exchange rate changes on cash and cash
    equivalents
                  
                  
                  (74
                  )
                  
                  
                  124Net
      (decrease) increase in cash and cash equivalents
                  
                  $
                  (6,271
                  )
                  
                  $
                  5,566





Cash
flows generated from operating activities declined to $3.0 million from $7.3
million for the three months ended March 31, 2010 compared with the three months
ended March 31, 2009.  This decrease was due primarily to reduced
revenues generated from reduced procedure volume.  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 closed under-performing vision centers and reduced headcount in
the vision centers, national call center and corporate offices during 2009 and
2008, reduced marketing spend significantly, and are reducing costs in all other
discretionary areas.  We also are managing closely working capital
with particular focus on ensuring timely collection of outstanding patient
receivables and the management of our trade payable
obligations.  Gross patient receivables decreased $1.5 million in the
three months ended March 31, 2010. At March 31, 2010, working capital (excluding
debt due within one year) amounted to $52.4 million compared to $54.3 million at
December 31, 2009.  Liquid assets (cash and cash equivalents,
short-term investments, and accounts receivable) amounted to 196.4% of current
liabilities at March 31, 2010, compared to 199.3% at December 31,
2009.





We
continue to offer our own sponsored patient financing. As of March 31, 2010, we
had $4.5 million in patient receivables, net of allowance for doubtful accounts,
which was a decrease of $872,000, or 16.1% from December 31, 2009.  We
continually monitor the allowance for doubtful accounts and will adjust our
lending criteria or require greater down payments if our experience indicates
that is necessary.  However, our ability to successfully collect
patient accounts is dependent, in part, on overall economic
conditions.  Bad debt expense was 2.4% and 2.5% of revenue for the
three months ended March 31, 2010 and 2009, respectively.





We had
assets held for sale of $405,000 and $1.0 million at March 31, 2010 and December
31, 2009, respectively, related to unused excimer and femtosecond
lasers.  During the three months ended March 31, 2010, we were able to
sell some of our excimer and femtosecond lasers held for sale with a combined
net book value of $626,000 for total cash proceeds of approximately $1.1 million
and notes receivable of $836,000, resulting in a gain of approximately $1.3
million before tax.





In April
2008, we entered into a five-year loan agreement with PNC Equipment Finance, LLC
to finance the majority of the IntraLase units which we
purchased.  The remaining unpaid balance on the bank loan was $10.8
million at March 31, 2010. The loan agreement contains no financial covenants
and, as with our capital lease obligations, is secured by certain medical
equipment.  Loan repayments increased approximately $231,000 for the
three months ended March 31, 2010 compared to the same period in 2009 due
primarily to additional payoffs of excimer lasers that were sold.




19





At March
31, 2010 and December 31, 2009, we held $2.3 million and $2.4 million,
respectively, par value of various auction rate securities.  The
assets underlying the auction rate instruments are primarily municipal bonds and
preferred closed end funds.  Our auction rate instruments are not
currently liquid.  Maturity dates for our auction rate securities
range from 2016 to 2036.  In the first quarter of 2010, $25,000 of the
related securities was called at par by their issuers.  In the full
year of 2009, $1.0 million of the securities were called at par by their issuers
and we redeemed an additional $2.3 million at 46.9% of original par
value.  See Note 2 to Condensed Consolidated Financial Statements for
further information regarding our auction rate security
investments.





Investing
activities for the three months ended March 31, 2010 included purchases of
investment in excess of proceeds from sales of investments of approximately $8.0
million.  This net investment was made from excess cash to improve our
investment income.





We have
not opened any new vision centers in 2010 or 2009.  Capital
expenditures through March 31, 2010 and 2009 were $20,000 and $157,000,
respectively.  In January 2010, we closed our San Jose, CA vision
center.





We
believe that cash flow from operations, available cash and short-term
investments provide sufficient cash reserves and liquidity to fund our working
capital needs, capital expenditures and debt and capital lease obligations for
at least the next 12 months.  We are balancing cash conservation in
the current challenging economic environment against our longer-term objective
of managing to profitability and growth when the economy improves.  As
a result of aggressive efforts to reduce costs, the number of procedures per
vision center required to reach breakeven has declined to 95 per
month.  We estimate the number of procedures companywide required for
breakeven cash flow, excluding any tax refunds and after capital expenditures
and debt service, to be approximately 95,000 per year.  We believe
that we have sufficient cash and investments to fund our business beyond 2012 if
we perform at least 65,000 procedures annually. We performed 72,776 procedures
in 2009.  There can be no assurance as to the number of procedures we
will perform in 2010.





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, 2009.





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.




20





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 Operating Officer (COO) and Chief Financial Officer (CFO), an
evaluation of the effectiveness of our disclosure controls and procedures was
performed as of March 31, 2010. Based on this evaluation, the COO and CFO
concluded that our disclosure controls and procedures are effective to ensure
that material information is (1) accumulated and communicated to our management
as appropriate to allow timely decisions regarding disclosure and (2) recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.





(b)          Changes
in Internal Control over Financial Reporting





Under the
supervision of and with the participation of our management, including the COO
and CFO, an evaluation of our internal control over financial reporting was
performed as of March 31, 2010.  Based on this evaluation, management
concluded that there were no changes in our internal control over financial
reporting that occurred during the quarter ended March 31, 2010 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.





PART
II.   OTHER INFORMATION.





Item 1. Legal
Proceedings





Not
applicable.





Item 1A.  Risk
Factors





In
addition to the risk factors discussed in our Form 10-K and other filings with
the Securities and Exchange Commission, there are a number of other risks and
uncertainties from laser vision correction associated with our business,
including, without limitation, the successful execution of marketing strategies
cost effectively to drive patients to our vision centers; the impact of low
consumer confidence and discretionary spending; competition in the laser vision
correction industry; our ability to attract new patients; the possibility of
adverse outcomes or long-term side effects and negative publicity regarding
laser vision correction; our ability to operate profitable vision centers and
retain qualified personnel during periods of lower procedure volumes; the
continued availability of non-recourse third-party financing for our patients on
terms similar to what we have paid historically; and the future value of
revenues financed by us and our ability to collect on such financings, which
will depend on a number of factors, including the weak consumer credit
environment and our ability to manage credit risk related to consumer debt,
bankruptcies and other credit trends.  Further, the FDA’s advisory
board on ophthalmic devises is currently reviewing concerns about post-LASIK
quality of life matters and the FDA has planned a major new study on LASIK
outcomes and quality of life that is expected to end in 2012.  The FDA
or another agency could take legal or regulatory action against us or others in
the laser vision correction industry.  The outcome of this review or
legal or regulatory action could potentially impact negatively the acceptance of
LASIK.  In addition, the acceptance rate of new
technologies  and our ability to implement successfully new
technologies on a national basis create additional risk.





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





Not
applicable.





Item 3.  Defaults
Upon Senior Securities





Not
applicable.





Item 4.  (Removed
and Reserved).





Item 5.  Other
Information





Not
applicable.




21




Item
6.Exhibits





ExhibitsNumber
                  
                  Description31.1
                  
                  COO
      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




22


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
      27, 2010
              /s/ David L. ThomasDavid
      L. ThomasChief
      Operating OfficerDate:  April
      27, 2010
              /s/ Michael J.
CelebrezzeMichael
      J. CelebrezzeSenior
      Vice President of Finance,Chief
      Financial Officer and
Treasurer




23