UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549








FORM
10-K





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


For the
fiscal year ended December 31, 2009





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





For the
Transition Period From        to





Commission
file number 0-27610


LCA-Vision
Inc.





(Exact
name of registrant as specified in charter)


Delaware
                
                11-2882328(State
      or other jurisdiction of
                
                (I.R.S.
      Employer Identification Number)incorporation or organization)




7840 Montgomery Road, Cincinnati, OH
                
                45236(Address of principal executive offices)
                
                (Zip Code)




Registrant’s telephone number,
including area code:  (513) 792-9292


Securities
registered pursuant to Section 12(b) of the Act:


Title of each class
              
              Name of each exchange on which
      registeredCommon
      Stock, $.001 par value
              
              The
      NASDAQ Stock Market





Securities
registered pursuant to Section 12(g) of the Act: None




Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.


Yes  ̈    No  x


Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act.


Yes  ̈    No
x


Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months, and (2)
has been subject to such filing requirements for the past 90 days. Yes
x    No
 ̈


Indicate
by check mark whether the registrant has submitted and posted pursuant to Rule
405 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 if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.  ̈


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.


Large accelerated filer
                           ̈
                          Accelerated filer
                          x
                          Non-accelerated filer
                           ̈
                          Smaller reporting company
                           ̈


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈    No
x





The
aggregate market value of the Common Stock held by non-affiliates of the
registrant as of June 30, 2009, the last business day of the registrant’s most
recently completed second quarter, was approximately $78,508,137 based on the
closing price as reported on The NASDAQ Stock Market.





The
number of shares outstanding of the registrant's Common Stock as of February 18,
2010 was 18,619,685.





DOCUMENTS
INCORPORATED BY REFERENCE





Portions
of the registrant’s definitive Proxy Statement for its Annual Meeting of
Stockholders to be held May 18, 2010 are incorporated by reference in Items 10,
11, 12, 13 and 14 of Part III of this Report.







LCA-VISION
INC.





FISCAL
YEAR 2009 FORM 10-K ANNUAL REPORT





TABLE
OF CONTENTS





PagePart
      IItem
      1.
                                                                    Business
                                                                    3Item
      1A.
                                                                    Risk
      Factors
                                                                    10Item
      1B.
                                                                    Unresolved
      Staff Comments
                                                                    16Item
      2.
                                                                    Properties
                                                                    16Item
      3.
                                                                    Legal
      Proceedings
                                                                    16Item
      4.
                                                                    Submission
      of Matters to a Vote of Security Holders
                                                                    17Part
      IIItem
      5.
                                                                    Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                                    17Item
      6.
                                                                    Selected
      Financial Data
                                                                    18Item
      7.
                                                                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                    19Item
      7A.
                                                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                                                    30Item
      8.
                                                                    Financial
      Statements and Supplementary Data
                                                                    31Item
      9.
                                                                    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                                    57Item
      9A.
                                                                    Controls
      and Procedures
                                                                    57Item
      9B.
                                                                    Other
      Information
                                                                    57Part
      IIIItem
      10.
                                                                    Directors,
      Executive Officers and Corporate Governance
                                                                    58Item
      11.
                                                                    Executive
      Compensation
                                                                    58Item
      12.
                                                                    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                                    58Item
      13.
                                                                    Certain
      Relationships and Related Transactions, and Director
      Independence
                                                                    58Item
      14.
                                                                    Principal
      Accountant Fees and Services
                                                                    58Part
      IVItem
      15.
                                                                    Exhibits,
      Financial Statement Schedules
                                                                    59Signatures
                                                                    61


2


PART
I





SPECIAL
NOTE REGARDING FORWARD-LOOKING INFORMATION





Certain
statements contained in this Annual Report on Form 10-K, including information
with respect to our future business plans, constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. For this purpose, any
statements that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "may," "will," "estimates," "continues," "anticipates," "intends,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. There are a number of important factors that could
cause our results to differ materially from those indicated by our
forward-looking statements. These factors include those set forth in "Item 1A -
Risk Factors."





Item 1.
Business.





Background
and History of Company





We are a
leading provider of fixed-site laser vision correction services at our
LasikPlus®vision centers. Our
vision centers provide the staff, facilities, equipment and support services for
performing laser vision correction procedures that employ advanced laser
technologies to help correct nearsightedness, farsightedness and
astigmatism.  Our vision centers are supported by independent,
board-certified ophthalmologists and credentialed optometrists, as well as other
health care 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. We have performed over 1.1 million laser vision correction procedures
in our vision centers in the United States and Canada since
1991.   Most of our patients currently receive a procedure called
laser-assisted in situ keratomileusis (“LASIK”), which we began performing in
the United States in 1997.





As of
December 31, 2009, we operated 63 LasikPlus®fixed-site laser vision
correction centers generally located in larger metropolitan markets in the
United States, including one vision center licensed to an ophthalmologist to
operate using our trademarks.  We also have a joint venture in
Canada.





We derive
all of our operating revenues from laser refractive surgery, our only operating
segment.  Financial information concerning revenues, profit and loss
and total assets are contained in “Item 8. Financial Statements and
Supplementary Data” under “Consolidated Balance Sheets” and “Consolidated
Statements of Operations.”  See Note 1 of the “Notes to Consolidated
Financial Statements” for financial information by geographic area.





Procedure
volume in our industry is highly correlated with the Consumer Confidence Index
and has been severely affected by the general economic slowdown in the United
States.  In general, industry demand improved during the years 2003
through 2007 alongside strong consumer confidence and declined in 2008 and 2009
with declining consumer confidence.  We anticipate that difficult
economic conditions will continue into 2010 and that industry procedure volume
is likely to continue to decline compared to prior years.  We expect
this will negatively affect our revenues.





Laser
Vision Correction Procedures




We use
laser vision correction procedures to reshape the outer layers of the cornea to
help correct refractive vision disorders by changing its curvature with an
excimer laser, which may reduce the need for wearing corrective lenses such as
glasses and contact lenses.  Our professionals make an assessment of a
patient’s candidacy for the treatment and the correction required to program the
excimer laser prior to the laser vision correction procedure.  The
software of the excimer laser then calculates the number of pulses needed to
achieve the intended correction using a specially developed algorithm. The
ophthalmologist inserts a speculum to prevent blinking and applies topical
anesthetic eye drops. The patient reclines on a bed, eyes focused on a fixed
target, while the ophthalmologist positions the patient’s cornea for the
procedure. The excimer laser emits energy in a series of pulses, with each pulse
typically lasting only a fraction of a second. High-energy ultraviolet light
produced by the excimer laser creates a ‘‘non-thermal’’ ablation to remove
corneal tissue and reshape the cornea. The amount of tissue removed depends upon
the degree of the vision disorder being corrected. Following the procedure, the
front surface of the eye is flatter when corrected for nearsightedness, and
steeper when corrected for farsightedness.  We schedule a series of
patient follow-up visits with an optometrist or ophthalmologist to monitor the
corneal healing process, to check that there are no complications and to test
the correction achieved by the procedure. The typical procedure takes 15 to 30
minutes from set-up to completion.





During
the first three quarters of 2009, we migrated from three suppliers of excimer
lasers to two suppliers.  Our two current suppliers are Abbott Medical
Optics (“AMO”) and Alcon Inc. (“Alcon”).





We
provide primarily two types of procedures in our vision
centers:


3





PRK
and Surface Ablation.TheU.S. Food and Drug Administration (“FDA”) approved PRK for commercial use
in the United States in 1995. In PRK procedures, the ophthalmologist removes the
thin layer of cells covering the outer surface of the cornea (the epithelium) in
order to apply the excimer laser pulses directly to the surface of the cornea.
Following the PRK procedure, the ophthalmologist places a contact lens bandage
on the eye to protect it. The patient may experience discomfort and blurred
vision until the epithelium heals, which can take several days or
longer.  The doctor generally will prescribe certain topical
pharmaceuticals for use by the patient post-procedure to assist in alleviating
discomfort, minimizing infection and helping to promote corneal
healing.





Although
a patient generally experiences substantial improvement in clarity of vision
within a few days following the procedure, it can take several months for the
full benefits of the PRK procedure to be realized. Some patients elect to have
one eye treated in one visit and the second eye treated at a later
date.  Some ophthalmologists also perform Epi-LASIK or LASEK, in which
a portion of the surface tissue is lifted from the eye prior to laser treatment
and then replaced.





LASIK.In 1997,we began
performing LASIK, which now accounts for the majority of our laser vision
correction procedures in the United States. In LASIK procedures, our surgeons
typically use a femtosecond laser to create a thin flap, which remains hinged to
the eye. The surgeon then lays back the corneal flap and applies excimer laser
pulses to the exposed surface of the cornea to treat the eye according to the
patient’s prescription. The physician then folds the corneal flap back to its
original position and inspects it to ensure that it remains secured in position
by the natural suction of the cornea.  Because the surface layer of
the cornea remains intact with LASIK, a bandage contact lens is normally not
required and the patient typically experiences little discomfort. LASIK often
has the advantage of more rapid recovery than PRK, with most patients seeing
well enough to drive a car the next day. The LASIK procedure generally allows an
ophthalmologist to treat both eyes of a patient during the same visit and
produces prompt results, frequently enabling patients to see well
postoperatively almost immediately.  LASIK technology was expanded in
2003 to include wavefront-guided technology, a system that customizes the
procedures based on higher order aberrations of certain
patients.





The
Laser Vision Correction Market




More than
182 million Americans, or approximately 60% of the U.S. population, require
eyeglasses or contact lenses to correct common vision problems. Most people
seeking vision correction suffer from one or more refractive vision disorders,
which often result from improper curvature of the cornea as related to the size
and shape of the eye. If the cornea’s curvature is not precisely correct, it
cannot properly focus the light passing through it onto the retina, and the
viewer will see a blurred image.  Three common refractive vision
disorders are:





·
            Myopia
      (nearsightedness)—images are focused in front of the retina, resulting in
      the blurred perception of distant
objects


·
            Hyperopia
      (farsightedness)—images are focused behind the retina, resulting in the
      blurred perception of near objects


·
            Astigmatism—images
      are not focused on any point due to the varying curvature of the eye along
      different axes.





Since the
FDA approved the first laser to perform laser vision correction procedures in
the United States in 1995, industry sources estimate that approximately 7.6
million patients have been treated.  Laser vision correction is
currently one of the most widely performed elective surgical procedures in the
United States, with an estimated 748,855 laser vision correction procedures
performed in 2009.Industry reports on the
U.S. refractive market estimate that the potential market for laser vision
correction procedures in the United States is approximately 128 million
procedures.  Laser vision correction is typically a private pay
procedure performed on an outpatient basis.


4


Estimated
Number of Laser Vision Correction Procedures in North America per
Year








Source:
            Market
      Scope, December 2009


(f) =
2010 data forecasted by Market Scope





Our
Business Strategy





Our
business strategy is to provide quality laser vision correction services at an
affordable price. We operate our vision centers as closed-access facilities,
where we are responsible for marketing and patient acquisition and contract with
independent ophthalmologists for their services.





We intend
to grow our business through increased penetration in our current markets and,
after the economy and the Company’s cash flow improve, expand into new markets.
Key elements of our business strategy include:





·
            Recruiting
      and retaining independent, board certified ophthalmologists and
      credentialed optometrists


·
            Providing
      patients with a “Continuum of Care” under our “Lifetime Vision”
      model


·
            Providing
      attractive patient financing
alternatives


·
            Nurturing
      relationships with leading managed care providers in the United States to
      source additional patients


·
            Developing
      and implementing innovative marketing
campaigns


·
            Opening
      and operating new laser vision correction centers when the economy and
      cash flow improve





Recruiting and retaining
independent, board certified ophthalmologists and credentialed
optometrists.We generally focus our recruiting efforts on
leading independent ophthalmologists and optometrists with a reputation for
providing quality eye care within their respective markets and with experience
in laser vision correction procedures.  Our ophthalmologists have
completed extensive FDA-mandated training and also have met our qualification
criteria, which includes a review of state licensure, board certification,
malpractice insurance and surgical experience.





Providing patients with a “Continuum
of Care” under our “Lifetime Vision” model.  We strive to
achieve high patient satisfaction and have established a ‘‘Continuum of Care’’
program, the goal of which is to achieve the level of visual correction agreed
to by the patient and physician. This program begins with our initial contact
with the prospective patient. We train our call center personnel to answer
questions regarding procedures and generally we provide them access both to a
physician to address more difficult inquiries and to past patients who can
relate procedure experience. Once in the vision center, we provide potential
patients a free eye evaluation with the local vision center’s independent
ophthalmologist or optometrist to determine their candidacy for laser vision
correction as well as a consultation focused on educating the patient on vision
correction procedures, how the procedure may help correct the patient’s specific
refractive vision disorder and what results the patient may expect after the
procedure. Additionally, we design our vision centers to create a
patient-friendly environment and reduce any anxiety associated with having laser
vision correction. We schedule post-surgical follow-ups with patients who have
received the procedure to monitor results and provide enhancements to those
patients who do not receive the desired correction in the initial procedure. The
vast majority of our treated patients who respond to our customer satisfaction
surveys indicate that they are satisfied with the care they received in our
vision centers.  We are planning to expand our “Continuum of Care”
model in 2010 and beyond to include other medical and surgical eye services and
procedures under our “Lifetime Vision” model, which is intended to allow us to
utilize more fully our highly trained and skilled ophthalmic surgeons and
optometrists.  The “Lifetime Vision” model is based on the concept
that an individual should be a patient of LasikPlus® for life
and thereby become a repeat source of revenue.  We are pursuing our
Advanced Eye Health AnalysisTM (“AEHA”), which
constitutes a comprehensive eye exam that incorporates equipment and software to
screen for various eye diseases and irregularities, as well as determining a
patient’s candidacy for laser vision correction and other refractive surgical
procedures.  We designed the AEHA, the first program under our
expanded “Lifetime Vision” model, to improve patient acquisition and retention
and offer it free of charge to prospective LASIK patients.  We are
currently assessing the AEHA in various test markets, and we will continue to
assess its impact in 2010.  We also are evaluating additional
opportunities including premium intraocular lens surgery and Latisse, a
prescribed growth treatment for eyelashes.  We believe that continued
contact with our satisfied patient base will provide more word of mouth
referrals and repeat business with some patients.


5





Providing
attractive patient financing alternatives.Because laser
vision correction procedures are elective and generally not reimbursable by
third party payers, including governmental programs such as Medicare and
Medicaid, we currently offer patients several financing
alternatives.  A significant percentage
of our patients finance some or all of the cost of their
procedure.We work closely with an unaffiliated third party
finance company that offers multiple payment plans to qualifying customers.
These payment plans typically provide for payments over a 12-month to 60-month
period. We bear no credit risk for loans made under this third party program.
For patients not qualifying for these plans, we also currently offer our own
direct financing to customers under which we charge an up-front fee, with the
remaining balance paid by the customer in installments over a period of 12 to 36
months.  We bear the credit risk of our own direct financing
programs.





Nurturing relationships with leading
managed care providers in the United States to source additional
patients.  With an increasing number
of employers adding vision services to their employee benefit packages, we
continue to nurture, develop and grow relationships with managed care
organizations, through which we offer discounted rates to plan participants. In
general, the plan participant, and not the managed care organization, is
currently responsible for the payment of our fees under these
arrangements.We currently have agreements with seven of the
nation’s eight largest health and vision plans.  In addition to the
discounted programs, we now have a relationship with an insurance company that
offers a partially insured LASIK product that reimburses the patient for a
portion of the procedure cost.





Developing
and implementing innovative consumer marketing campaigns.Our marketing
programs seek to reinforce the LasikPlus®brand
name in addition to raising awareness concerning laser vision correction and
promoting our vision centers and the experience of our independent
ophthalmologists. In each market, we target a specific demographic group of
potential patients through the use of print media, radio, internet, television
and direct mail campaigns, among other strategies. In most advertisements, we
provide prospective patients a website address and a toll-free number to contact
us. Our call center representatives answer initial questions potential patients
may have, and attempt to schedule eye evaluation appointments with the local
vision center to determine whether the prospective patient is a candidate for
laser vision correction.  We are also reaching new prospects through
innovative programs such as partnerships with other companies that provide their
members with options such as reduced out-of-pocket procedure costs or other
incentives.   With the support of a
top-line, full-service advertising agency, we are refining our branding to
differentiate better LasikPlus®from our competitors and
develop more compelling messages.





Opening
and operating new laser vision correction centers.When our cash
flow and the economy improve, we plan to expand our business primarily through
the development of new vision centers in attractive new markets and within
existing markets. In evaluating new and current markets for opening a laser
vision correction center, we consider a number of factors, including population
demographics and competition, among other variables. We also typically interview
local ophthalmologists and optometrists. We target geographic markets that we
believe have the potential to generate break-even procedure volume within the
first six months of opening.  We have developed what we believe to be
relatively cost-efficient standardized vision center designs to be used in
building each new vision center to manage effectively patient flow and physician
and staff productivity.





Competition





Laser
vision correction, whether performed at one of our vision centers or elsewhere,
is an alternative to several surgical and non-surgical treatments to correct
refractive vision disorders, including eyeglasses, contact lenses, other types
of refractive surgery, intraocular lenses and corneal implants. In addition,
other technologies may ultimately prove to be more attractive and effective to
consumers than current laser vision correction technology.





We face
competition from other providers of laser vision correction. A fragmented system
of local providers, including individual or small groups of opticians,
optometrists and ophthalmologists, and chains of retail optical stores and
multi-site eye care vision centers deliver eye care services in the United
States. Industry sources estimate that such local providers represent
approximately 60% of the laser vision correction market. Corporate laser vision
correction providers, such as LasikPlus®, are a specialized type
of provider, operating multi-site eye care centers that primarily provide laser
vision correction.





In most
of our markets, we also compete with other laser vision correction center
chains.  These include TLC Vision Corporation, which also is a public
company, as well as with hospitals, surgical clinics, national and local
operators of vision centers and ophthalmology practices, among others, that have
purchased or rent their own lasers.  We believe the market is likely
to become progressively more competitive as it matures.


6





In the
past, certain competitors have utilized deeply-discounted pricing in an effort
to generate procedural volume. This practice has caused periods of intense price
competition in our industry. As a result, we have lowered our prices in the past
in order to remain competitive. We currently face competitors offering
discounted prices in some geographic markets where we conduct business. It is
possible that our business could be materially adversely affected in the future
by discounting practices of competitors, including from both a price and volume
perspective.





Employees





As of
January 15, 2010, we had approximately 450 employees, 368 of whom were
full-time. None of our employees are subject to a collective bargaining
agreement nor have we experienced any work stoppages. We believe our relations
with our employees are good.





Trademarks





We have
several registered trademarks in the United States, including the name
LasikPlus®.  We
have not registered all of the names we use for our products and services with
the United States Patent and Trademark Office. Where we use the “TM” (trademark)
symbol, we intend to claim trademark rights on those names under common law. The
duration of such trademarks under common law is the length of time we continue
to use them.





Suppliers
of Equipment





We are
not directly involved in the research, development or manufacture of ophthalmic
laser systems or diagnostic equipment.  Several
companies, including AMO and Alcon, our two current suppliers, offer
excimer laser systems which have been approved by the FDA for commercial sale in
the United States.  We currently rely primarily on AMO and McKesson
Corporation (“McKesson”) to provide us with patient interface kits and other
disposable items required in LASIK procedures.





Government
Regulation





Extensive
federal, state and local laws, rules and regulations affecting the healthcare
industry and the delivery of healthcare apply to our operations. Some of these
include laws and regulations, which vary significantly from state to state,
prohibiting unlawful rebates and division of fees, and limiting the manner in
which prospective patients may be solicited. Furthermore, state and federal
laws, some of which may be applicable to our business operations, regulate
extensively contractual arrangements with hospitals, surgery centers,
ophthalmologists and optometrists.





If we or
our excimer or femtosecond laser manufacturers fail to comply with applicable
FDA requirements, the FDA could take enforcement action, including product
seizures, recalls, withdrawal of approvals and civil and criminal penalties, any
one or more of which could have a material adverse effect on our business,
financial condition and results of operations. In addition, the FDA could
withdraw clearance or approvals in some circumstances.  If we, or our
principal suppliers, fail to comply with regulatory requirements, or any adverse
regulatory action, we could be named as a party in ensuing litigation or incur a
limitation on or prohibition of our use of excimer lasers, financing programs,
or other necessary services to our business, which in turn would have a material
adverse effect on our business, financial condition or results of operations.
Discovery of problems, violations of current laws or future legislative or
administrative action in the United States or elsewhere may adversely affect the
ability of our suppliers and partners to obtain or maintain appropriate
regulatory approval.  Furthermore, if AMO or Alcon, or any other
manufacturers or suppliers that supply or may supply excimer lasers, diagnostic
or other equipment or necessary services to us, fail to comply with applicable
federal, state, or foreign regulatory requirements, any adverse regulatory
action against such business suppliers and partners, could limit the supply of
lasers or limit our ability to use the lasers.





The
following is a more detailed description of certain laws and regulations that
affect our operations.





Restrictions
on medical devices


In the
United States, the FDA regulates the uses, manufacturing, labeling, distribution
and marketing of medical devices, including excimer and femtosecond lasers and
certain other equipment we use in laser vision correction
surgery.


7


Once FDA
approval is obtained, medical device manufacturers are subject to continuing FDA
obligations. For example, the FDA requires that medical devices be manufactured
in accordance with its Quality System Regulations. In essence, this means that
medical devices must be manufactured and records must be maintained in a
prescribed manner with respect to production, testing and control activities. In
addition, the FDA sometimes imposes restrictions and requirements regarding the
labeling and promotion of medical devices with which we must
comply.





Non-compliance
with FDA requirements could subject manufacturers to enforcement action,
including:





·
            Product
      seizures


·
            Recalls


·
            Withdrawal
      of approvals


·
            Civil
      and criminal penalties





Non-compliance
by us could subject us to civil and criminal penalties.  Any such
enforcement action could have a material adverse effect on our business,
financial condition and results of operations.





The FDA
has not approved the use of an excimer laser to treat both eyes on the same day
(bilateral treatment). The FDA has stated that it considers the use of the
excimer laser for bilateral treatment to be a practice of medicine decision,
which the FDA is not authorized to regulate.  Ophthalmologists,
including those practicing in our vision centers, widely perform bilateral
treatment in an exercise of professional judgment in connection with the
practice of medicine. There can be no assurance that the FDA will not seek to
challenge this practice in the future.   Should the FDA choose to
regulate this aspect of the use of excimer lasers in the future, any potential
resulting inconvenience to patients could discourage potential patients from
having laser vision correction, potentially having a material adverse effect on
our business, financial condition and results of operations by decreasing the
total number of procedures we perform.





The FDA
requires that some medical facilities report serious injuries involving medical
devices to device manufacturers, and deaths involving medical devices to the
FDA.  The FDA requires that subject medical facilities have specific
written procedures regarding such reporting obligations.  Those of our
vision centers that meet the FDA’s definition of user facilities are subject to
these requirements.  In 2009, the FDA issued warning letters to
certain facilities advising that written procedures were not
compliant.  We updated our written procedures in response to the FDA
letters.  Although we believe our procedures meet regulatory
requirements, should the FDA determine that our procedures or our reporting
practices are not adequate, we could be subject to FDA enforcement
action.  FDA enforcement action could discourage potential patients
from having laser vision correction, or could limit our ability to use medical
devices, potentially having a material adverse effect on our business, financial
condition and results of operations by decreasing the total number of procedures
we perform.





To
authorize new uses of medical devices, regulations require manufacturers to
obtain a supplemental FDA authorization. Obtaining these authorizations is time
consuming and expensive, and we cannot be sure that manufacturers of the devices
we use will be able to obtain any such additional FDA authorizations. Further,
later discovery of problems with the medical devices we use may result in
restrictions on use of the devices or enforcement action against the
manufacturers, including withdrawal of devices from the market. Changes in
legislation or regulation could affect whether and how we can use the devices.
These and other regulatory actions could limit the supply of devices we use or
our ability to use them, which could have a material adverse effect on our
business, financial condition and results of operations.





FDA
LASIK Review


The FDA’s
advisory board on ophthalmic devices 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 potentially could impact
negatively the acceptance of LASIK.





Federal
and state laws on “kickbacks” and physician referrals


Because
laser vision correction procedures currently are not reimbursable by Medicare,
Medicaid or other governmental health programs, we do not believe numerous
federal health care laws that frequently apply to health care providers’
business operations (such as the federal Anti-Kickback and “Stark” Physician
Self-Referral statutes) currently apply to us.  Any changes in the
reimbursement and coverage rules for these governmental health programs may
cause our services to be subject to such federal laws. Although we do not
anticipate such changes in the near future, we cannot predict this with any
degree of certainty.  Some states have enacted statutes, similar to
the federal Anti-Kickback and Stark statutes, that are applicable to our
operations because they cover all referrals of patients regardless of the payer
or type of health care service provided.  These state laws vary
significantly in their scope and penalties for violations.  Although
we have endeavored to structure our business operations to be in material
compliance with such state laws, authorities in those states could determine
that our business practices are in violation of their laws.  This
could have a material adverse effect on our business, financial condition and
results of operations.


8


Advertising
restrictions


Our
business is heavily dependent on advertising, which is subject to regulation by
the Federal Trade Commission (“FTC”). In 2002, the FTC conducted an extensive
review of our advertising practices. Following this review, the FTC concluded
that certain of our past advertisements contained claims that were not properly
substantiated. We elected to settle voluntarily with the FTC.  In July
2003,  the FTC formally entered a Complaint and an Agreement
Containing Consent Order in which we agreed, among other things, that we would
not represent in our advertising that our LASIK surgery services eliminate the
need for glasses and contacts for life, pose significantly less risk to
patients’ eye health than wearing glasses or contacts or eliminate the risk of
glare and haloing, unless, at the time made, we possess and rely upon competent
and reliable scientific evidence that substantiates the representation. No
monetary penalties were imposed on us. Although we consented to this order in
2003, we cannot be certain that this order will not be perceived negatively, and
thus restrict our ability to effectively generate demand for our laser vision
correction services.




In 2009
the FDA issued a letter to eye care professionals noting that the FDA’s
Ophthalmic Devices Panel had received complaints that advertisements for LASIK
procedures and FDA-approved lasers used for LASIK procedures failed to inform
consumers of the indications, limitations, and risks associated with LASIK
procedures and the approved lasers used for the LASIK procedures.  In
this letter, the FDA said that an advertisement may be considered misleading if
it fails to reveal facts that are material to representations made in the
advertisement.  We believe that we have structured our advertising
practices to be in material compliance with FDA and FTC laws and
guidance.  However, we cannot be certain that the FDA or the FTC will
not determine that our advertising practices are in violation of such laws and
guidance.





In
addition, the laws of many states restrict certain advertising practices by and
on behalf of physicians and optometrists.  Many states do not offer
clear guidance on the bounds of acceptable advertising practices or on the
limits of advertising provided by management companies on behalf of physicians
and optometrists.  Although we have endeavored to structure our
advertising practices to be in material compliance with such state laws,
authorities in those states could determine that our advertising practices are
in violation of those laws.





Fee-splitting


Many
states prohibit professionals (including ophthalmologists and optometrists) from
paying a portion of a professional fee to another individual unless that
individual is an employee or partner in the same professional practice. If we
violate a state’s fee-splitting prohibition, we may be subject to civil or
criminal fines, and the physician participating in such arrangements may lose
his  licensing privileges. Many states do not offer clear guidance on
what relationships constitute fee-splitting, particularly in the context of
providing management services for doctors. Although we have endeavored to
structure our business operations in material compliance with these laws, state
authorities could find that fee-splitting prohibitions apply to our business
practices in their states. If any aspect of our operations were found to violate
fee-splitting laws or regulations, this could have a material adverse effect on
our business, financial condition and results of operations.





Corporate
practice of medicine and optometry


The laws
of many states prohibit business corporations, such as us, from practicing
medicine and employing or engaging physicians to practice medicine. Some states
prohibit business corporations from practicing optometry or employing or
engaging optometrists to practice optometry. Such laws preclude companies that
are not owned entirely by eye care professionals from:





·
            Employing
      eye care professionals


·
            Controlling
      clinical decision making


·
            Engaging
      in other activities that are deemed to constitute the practice of
      optometry or ophthalmology





This
prohibition is generally referred to as the prohibition against the corporate
practice of medicine or optometry. Violation of this prohibition may result in
civil or criminal fines, as well as sanctions imposed against the professional
through licensing proceedings. Although we have endeavored to structure our
contractual relationships to be in material compliance with these laws, if any
aspect of our operations were found to violate state corporate practice of
medicine or optometry prohibitions, this could have a material adverse effect on
our business, financial condition and results of operations.





Facility
licensure and certificates of need


State
Departments of Health may require us to obtain licenses in the various states in
which we have or acquire laser vision correction centers or other business
operations. We believe that we have obtained the necessary material licensure in
states where licensure is required and that we are not required to obtain
licenses in other states. However, not all of the regulations governing the need
for licensure are clear and there is limited guidance available regarding
certain interpretative issues. Therefore, it is possible that a state regulatory
authority could determine that we are improperly conducting business operations
without a license in that state. This could subject us to significant fines or
penalties, result in our being required to cease operations in that state or
otherwise have a material adverse effect on our business, financial condition
and results of operations. Although we currently have no reason to believe that
we will be unable to obtain necessary licenses without unreasonable expense or
delay, there can be no assurance that we will be able to obtain any required
licensure.


9





Some
states require permission by the State Department of Health in the form of a
Certificate of Need (“CON”) prior to the construction or modification of an
ambulatory care facility or the purchase of certain medical equipment in excess
of a certain amount. We believe that we have obtained the necessary CONs in
states where a CON is required. However, not all of the regulations governing
the need for CONs are clear and there is little guidance regarding certain
interpretive issues. Therefore, it is possible that a state regulatory authority
could determine that we are improperly conducting business operations without a
CON in that state. There can be no assurance that we will be able to acquire a
CON in all states where it is required, or that our failure or inability to
obtain a CON in markets into which we believe we could otherwise be successful
expanding will not have a material adverse effect on our business, financial
condition and results of operations.





Available
Information





Our
websites are www.lasikplus.com and www.lca-vision.com. There, we
make available free of charge, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those
reports as well as any beneficial ownership reports of officers and directors
filed electronically on Forms 3, 4 and 5.  We will make all such
reports available as soon as reasonably practicable after we file them with or
furnish them to the Securities and Exchange Commission (“SEC”).  Our
committee charters, governance guidelines and code of ethics are also available
on our websites.  To obtain a copy of any of these documents by mail,
free of charge, please send a request to Investor Relations at LCA-Vision Inc.,
7840 Montgomery Road, Cincinnati, Ohio 45236.  Information contained
on our websites is not part of this Annual Report on Form 10-K and is not
incorporated by reference in this document. The public may read and copy any
materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
SEC maintains a website (www.sec.gov) that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC.





Item 1A. Risk
Factors





In
evaluating and understanding us and our business, you should carefully consider
(1) all of the information set forth in this Annual Report on Form 10-K,
including the Consolidated Financial Statements and notes thereto and
Management’s Discussion and Analysis, (2) information in our other filings with
the SEC, including any future reports on Forms 10-Q and 8-K and (3) the risks
described below. These are not the only risks we face.  Additional
risks not presently known or which we currently deem immaterial may also impact
our business operations, and the risks identified below may adversely affect our
business in ways we cannot currently anticipate. Our business, financial
condition or results of operations could be materially adversely affected by any
of these risks.





We
incurred losses in 2008 and 2009, and expect to continue to incur losses in
2010.




Our
procedure volume in 2009 decreased substantially from 2008 due in large part to
continued weakening of consumer confidence, a weak overall economy, and high
unemployment.  We sustained losses in all four quarters in
2009.  In 2010, we expect to continue to experience lower procedure
volumes if current economic conditions, including weakness in consumer
confidence and discretionary spending, persist.  We expect this will
result in continuing losses and negative cash flows from
operations.  At December 31, 2009, we had approximately $54.6 million
in cash and investments.  We are uncertain as to how long the negative
economic and industry conditions will continue.  There could be a
number of other effects from these adverse economic conditions on our business,
including reduced consumer demand for our services; insolvency of our customers,
resulting in increased provisions for credit losses; insolvency of our key
equipment suppliers; inability of consumers to obtain credit to finance some or
all of the cost of their procedures; and decreased consumer
confidence.  If macroeconomic conditions do not improve over the
long-term, our business, financial condition, results of operations and cash
flows could be materially adversely affected.





Changes
in general economic conditions may cause fluctuations in our revenues and
profitability.




The cost
of laser vision correction procedures is typically not reimbursed by third-party
payers such as health care insurance companies or government programs.
Accordingly, as we are experiencing and have experienced in prior fiscal
periods, our operating results may vary based upon the impact of changes in the
disposable income of consumers interested in laser vision correction, among
other economic factors.  A significant decrease in consumer disposable
income in a weakening economy results in a decrease in the number of laser
vision procedures performed and a decline in our revenues and profitability. In
addition, weak economic conditions may cause some of our customers to experience
financial distress or declare bankruptcy, which may negatively impact our
accounts receivable collection experience. Weak economic conditions also may
change the risk profile or volume of business our unaffiliated finance company
partner is willing to underwrite, which could adversely affect our results of
operations and cash flow.


10


Our
industry is highly correlated with consumer confidence.




Recessionary
economic conditions, uncertainty in the credit markets, a period of rising
energy costs and depressed housing prices have all contributed to a
deterioration in volume, especially from patients at lower-income
levels.  Deteriorating consumer confidence negatively impacts our
financial performance.  The current market conditions in the credit
markets and rising unemployment are creating uncertainty and causing potential
customers to be more cautious in their purchasing decisions.





Our
quarterly and annual operating results are subject to significant
fluctuations.




Our
revenue and operating results have fluctuated and may continue to fluctuate
significantly from quarter to quarter and from year to year depending on many
factors, including but not limited to:





·
            Market
      acceptance of laser vision correction
services


·
            The
      number of laser vision correction procedures
  performed


·
            The
      timing of advances by our suppliers and the purchase of such advances or
      upgrades of equipment by us or our
competitors


·
            The
      impact of competitors, including those who compete by deeply discounting
      the price of laser vision correction services, in the geographic areas in
      which we operate


·
            Declining
      economic conditions in the geographic areas in which we operate, which can
      result in decreased demand for our laser vision correction
      services


·
            The
      opening, closing or expansion of vision
centers


·
            Our
      ability to manage equipment and operating
costs


·
            Collection
      rates on self-financed procedures


·
            The
      availability of third-party financing for our
  patients


·
            Regulatory
      matters


·
            Litigation


·
            Acquisitions
      and other transactions





In
addition, our revenue and operating results are subject to seasonal factors. In
terms of the number of procedures performed, our strongest quarter historically
has been the first quarter of the year, and our business is generally weaker in
the latter half of the year. We believe these fluctuations are primarily due
to:





·
            The
      availability to potential patients of funds under typical corporate
      medical flexible spending plans


·
            Time
      constraints imposed by the holiday season and a desire by some individuals
      not to schedule procedures at that time of
year





Reductions
in revenues or net income between quarters or our failure to achieve expected
quarterly earnings per share has in the past and could in the future result in a
decrease in the market price of our common stock.





Our
business is very reliant upon direct-to-consumer marketing.




The
effectiveness of our marketing programs and messages to consumers can have a
significant impact on our financial performance. Over the past several quarters,
the effectiveness of marketing has fluctuated, resulting in changes in the cost
of marketing per procedure, and variations in our margins.  Less
effective marketing programs could negatively affect our profitability or
financial condition.





We
derive all of our revenue from laser vision correction services.  A
decrease in the provision of these services could result in a significant
decrease in our revenues and profitability.




We derive
substantially all of our revenues from laser vision correction services. If we
are not able to provide those services or the number of laser vision correction
procedures we perform significantly decreases, our revenues and profitability
will decrease materially. We do not have other diversified revenue sources to
offset a significant decrease in revenues from our provision of laser vision
correction services.





If
we are unable to attract and retain qualified independent ophthalmologists, our
ability to maintain operations at existing vision centers, to attract patients
or to open new vision centers could be negatively affected.




We
generate our revenues through independent ophthalmologists who work with us to
perform surgeries. In certain states where the corporate practice of medicine is
prohibited, we contract with professional corporations for ophthalmologists to
perform surgeries at our vision centers.  The hiring of independent
qualified ophthalmologists is a critical factor in our ability to launch a new
vision center successfully, and the retention of those ophthalmologists is a
critical factor in the success of our existing vision centers. However, it is
sometimes difficult for us to hire or retain qualified ophthalmologists. If we
are unable consistently to attract, hire and retain qualified ophthalmologists,
our ability to open new vision centers, maintain operations at existing vision
centers, or attract patients could be negatively affected.


11





If
technological changes occur which render our equipment or services obsolete, or
increase our cost structure, we may need to make significant capital
expenditures or modify our business model, which could cause our revenues or
profitability to decline.




Industry,
competitive or clinical factors, among others, may require us to introduce
alternate ophthalmic laser technology or other surgical or non-surgical methods
for correcting refractive vision disorders than those that we currently use in
our laser vision correction centers.  Such alternative technologies
could include various intraocular lens technologies or other new
technologies.  Introducing such technology could require significant
capital investment or force us to modify our business model in such a way as to
make our revenues or profits decline.  An increase in costs could
reduce our ability to maintain our profit margin.  An increase in
prices could adversely affect our ability to attract new patients.





If
a better-financed or lower-cost provider of laser vision correction or a
competing vision treatment forces us to lower our laser surgery prices in a
particular geographic area, our revenues and profitability could
decline.




Laser eye
surgery competes with other surgical and non-surgical treatments for refractive
vision disorders, including eyeglasses, contact lenses, other types of
refractive surgery, corneal implants and other technologies currently under
development. Among providers of laser vision correction, competition comes from
firms similar to us and from hospitals, hospital-affiliated group entities,
physician group practices and private ophthalmologists, among others, that, in
order to offer laser vision correction to patients, purchase or rent excimer
lasers. Suppliers of conventional eyeglasses and contact lenses, such as
optometry chains, also may compete with us by purchasing laser systems and
offering laser vision correction to their customers.





Some of
our current competitors or companies that may choose to enter the industry in
the future, including laser manufacturers themselves, may have substantially
greater financial, technical, managerial, marketing or other resources and
experience than we do and may be able to compete more effectively. Competition
in the market for laser vision correction may also increase as excimer laser
surgery becomes more common and the number of ophthalmologists performing the
procedure increases.  Similarly, competition could increase if the
market for laser vision correction does not experience growth, and existing
providers compete for market share. Additional competition may develop,
particularly if the price to purchase or rent excimer laser systems decreases.
Our management, operations, strategy and marketing plans may not be successful
in meeting this competition.





If more
competitors offer laser vision correction or other competitive types of vision
treatments in a given geographic market, we might find it necessary to reduce
the prices we charge, particularly if competitors offer the procedures at lower
prices than we do. If that were to happen or we were not successful in cost
effectively acquiring new patients for our procedures, we may not be able to
make up for the reduced profit margin by increasing the number of procedures we
perform, and our revenues and profitability could decrease, as we have
experienced in prior fiscal periods.





Our
business has been adversely affected in the past by deeply-discounted pricing by
some competitors, and it is possible that such competitive practices may
adversely affect our business in the future.




In the
past, certain competitors have utilized deeply-discounted pricing in an effort
to generate procedure volume. This practice has caused periods of intense price
competition in our industry. As a result, we have lowered our prices in the past
in order to remain competitive. We currently face competitors offering
discounted prices, including several providers of laser vision correction
centers, in some geographic markets where we conduct business.  It is
possible that, in the future, our revenues and profitability could decrease as a
result of the discounting practices of competitors.





We
have significant accounts receivable from internally financed patients that
provide credit risk.




A
significant percentage of our patients finance some or all of the cost of their
procedure.  We provide certain of our patients, including patients who
could not otherwise obtain third-party financing, with the ability to pay for
our procedures with direct financing. The terms of our direct financing
typically require the customer to pay a set fee up-front, with the remaining
balance paid by the customer in up to 36 monthly installments.  As of
December 31, 2009, we had $7.7 million in gross patient receivables, compared to
$15.5 million as of December 31, 2008. We are exposed to significant credit risk
from our direct financing program, particularly given that patients who
participate in the program generally have not been deemed creditworthy by
third-party financing companies with more experience in credit issues than we
have. If the uncollectible amounts exceed the amounts we have reserved, we could
be required to write down our accounts receivable, and our cash flow and results
of operations would be adversely affected.




Extensive
state and federal laws and regulations, some of which may be applicable to our
business operations, regulate the extension of credit to
patients.  Although we believe that our practices are in material
compliance with these laws and regulations, non-compliance could subject us to
litigation, enforcement action, or civil or criminal penalties.  Any
such action could have a material adverse effect on our business, financial
condition and results of operations.


12


If
laser vision correction does not gain broader market acceptance, our
profitability and growth will be severely limited.




We
believe that our profitability and expansion depend to a large extent on the
acceptance of laser vision correction as a safe and effective treatment. There
can be no assurance that laser vision correction will be accepted more widely by
ophthalmologists, optometrists or the general population as an alternative to
existing or future methods of treating refractive vision
disorders.  In terms of procedure volume, the industry was relatively
flat from 2005 through 2007 and declined in 2008 and 2009, largely due to
economic conditions.





Wider
acceptance of laser vision correction may be affected adversely by:





·
            Concerns
      about the safety and effectiveness of laser vision correction procedures,
      including procedures using new
technologies


·
            General
      resistance to surgery of any type, and eye surgery in
      particular


·
            Cost,
      particularly because laser vision correction is not typically covered by
      government or private insurers


·
            The
      effectiveness of alternate methods of correcting refractive vision
      disorders, including but not limited to various intraocular lens
      technologies


·
            Possible
      unknown side effects not yet revealed by long-term follow-up
      data


·
            Regulatory
      developments


·
            Reported
      adverse events or other unfavorable publicity involving patient outcomes
      from laser vision correction


·
            The
      results of the FDA’s LASIK study, expected to be completed in
      2012





Concerns
about potential side effects and long-term results may negatively impact market
acceptance of laser vision correction, result in potential liability for us and
prevent us from growing our business.




Some
people and publications have raised concerns with respect to the predictability
and stability of results and potential complications or side effects of laser
vision correction.  Physicians have provided laser vision correction
in the United States only since 1995. Any long-term complications or side
effects of laser vision correction may call into question its safety and
effectiveness, which in turn may negatively affect market acceptance of laser
vision correction. Complications or side effects of laser vision correction
could lead to professional liability, malpractice, product liability or other
claims against us.  Courts have awarded several significant verdicts
against non-affiliated refractive surgeons in the past.  Consequences
of proceedings could include increased liability to us in connection with
malpractice litigation, increased difficulty in hiring and retaining qualified
independent ophthalmologists who may be wary of the increased liability of laser
eye surgery, and decreased operational and financial yield from pre-operative
examinations, among other effects that would be adverse to our results of
operations and profitability.





Some of
the possible side effects of laser vision correction may include:





·
            Foreign
      body sensation


·
            Pain
      or discomfort


·
            Sensitivity
      to bright lights


·
            Blurred
      vision or haze


·
            Dryness
      or tearing


·
            Fluctuation
      in vision


·
            Night
      glare and halos


·
            Poor
      or reduced visual quality


·
            Overcorrection
      or undercorrection


·
            Regression


·
            Decreased
      corneal integrity


·
            Corneal
      flap or corneal healing
complications


·
            Loss
      of best corrected visual acuity


·
            Inflammation
      or infection of the eye


·
            Need
      for corrective lenses or reading glasses
  post-operatively


·
            Need
      for further treatment




13


We
depend on limited sources for the excimer lasers and diagnostic equipment we use
and for the third-party financing made available to our patients. Shortages of
these items or services could hinder our ability to increase our procedure
volume.




We use
two suppliers, AMO and Alcon, for our lasers.  If either or both of
these companies became unwilling or unable to supply us with excimer lasers and
diagnostic equipment to repair or replace parts or to provide services, our
ability to increase our capacity to perform laser vision correction services at
existing vision centers or to open new vision centers could be
restricted.





We
currently rely primarily on AMO to provide us with patient interface kits, the
devices used to create the corneal flap in the LASIK procedure, and McKesson for
other disposable items required for LASIK.  If we were to require
alternate or additional suppliers, there can be no assurance that such items
would be available in the quantities or within the time frames we require. Any
shortages in our supplies of this equipment could limit our ability to maintain
or increase the volume of procedures that we perform, which could result in a
decrease in our revenues and profitability.





We
currently rely exclusively on one unaffiliated finance company for third-party
financing made available to our patients.  The percentage of our
patients who choose to obtain financing from such unaffiliated finance company
is significant.  There can be no assurance that financing services
will be available in such structures or at such interest rates or costs as we or
our patients may require.  Any reduction in available financing could
limit our ability to maintain or increase the volume of procedures that we
perform, which could result in a decrease in our revenues and
profitability.





Our
business may be impaired due to government regulations which could restrict our
equipment, services and relationships with ophthalmologists, optometrists and
other healthcare providers.




As
described under “Government Regulation” and below, we, excimer laser
manufacturers and our other business partners, including managed care companies
and third-party patient financing companies, among others, are subject to
extensive federal, state and foreign laws, rules and regulations, including all
or some of the following:





·
            Federal
      restrictions on the approval, distribution and use of medical
      devices


·
            Anti-kickback
      statutes in some states


·
            Fee-splitting
      laws in some states


·
            Corporate
      practice of medicine restrictions in some
states


·
            Physician
      self-referral laws in some states


·
            Anti-fraud
      provisions in some states


·
            Facility
      license requirements and certificates of need in some
    states


·
            Conflict
      of interest regulations in some
states


·
            FDA,
      FTC, and state rules and regulations regarding advertising and marketing
      practices


·
            Credit
      and financing regulation





Some of
these laws and regulations are vague or ambiguous, and courts and regulatory
authorities have not always provided clarification. Moreover, state and local
laws, including but not limited to those on sales and use taxes, vary from
jurisdiction to jurisdiction. As a result, some of our activities could be
challenged, the success of which cannot be predicted.





The
failure of our suppliers to obtain regulatory approvals for any additional uses
of excimer lasers or otherwise comply with regulatory requirements could limit
the number of excimer lasers we have available for use and, therefore, limit the
number of procedures we can perform.





Failure
of the laser manufacturers to comply with applicable FDA requirements could
subject us, the independent ophthalmologists who practice in our vision centers
or those manufacturers to enforcement actions, including product seizure,
recalls, withdrawal of approvals and civil and criminal
penalties.  Further, failure to comply with regulatory requirements,
or any adverse regulatory action, could result in limitations or prohibitions on
our use of excimer lasers. Any such actions or proceedings could result in
negative publicity, which in turn could result in decreased demand for our
services and decrease our capacity to perform laser vision correction
services.





Our
business is heavily dependent on advertising, which is subject to regulation by
the Federal Trade Commission (FTC) and various state boards of medicine and
optometry. We are subject to a 2003 FTC Consent Order in which it was agreed,
among other things, that we would not represent in our advertising that our
LASIK surgery services eliminate the need for glasses and contacts for life,
pose significantly less risk to patients’ eye health than wearing glasses or
contacts, or eliminate the risk of glare and haloing, unless, at the time made,
we possess and rely upon competent and reliable scientific evidence that
substantiates the representation. We cannot be certain that this order to which
we agreed, or any future action by the FTC, will not restrict our laser vision
correction services, or otherwise result in negative publicity and damage our
reputation.


14


Our
business may be adversely impacted by pending healthcare reform.




The U.S.
Congress and several states are currently considering healthcare proposals. We
cannot predict what additional action, if any, the federal government or any
state may ultimately take with respect to healthcare reform. Healthcare reform
may bring significant changes in the financing and regulation of the healthcare
industry.  Depending on the nature of such changes, they could have a
material adverse effect on our business, financial condition and results of
operations.





The
FDA is conducting a study to examine LASIK’s impact on quality of life, the
results of which could adversely impact broader market acceptance, and our
profitability and growth.




The FDA
has launched a collaborative study with the National Eye Institute and the U.S.
Department of Defense to examine LASIK’s potential impact on quality of
life.  The goal of the LASIK Quality of Life Collaboration Project is
to determine the percentage of patients with significant quality of life
problems after LASIK surgery and identify predictors of these
problems.  The project is expected to end in 2012.  The
results of the project will help identify factors that can affect quality of
life following LASIK and potentially reduce the risk of adverse effects that can
impact the surgical outcome. If any of these factors are related to the safety
or effectiveness of the lasers used in LASIK surgery, the FDA will evaluate
whether any action is necessary. The project is part of the FDA’s ongoing effort
to better monitor and improve the safety and effectiveness of the lasers used in
LASIK surgery.  The results of this study could adversely impact
broader market acceptance of LASIK, which could have a direct impact on our
profitability and growth.  In addition, any new adverse regulatory
actions by the FDA could result in limitations or prohibitions around LASIK
surgery.





We
are subject to lawsuits for patient injuries, which could subject us to
significant judgments and damage our reputation.




The laser
vision correction procedures performed in our vision centers involve the risk of
injury to patients. Such risk could result in professional liability,
malpractice, product liability, or other claims brought against us or our
independent ophthalmologists and optometrists based upon injuries or alleged
injuries associated with a defect in a product’s performance or malpractice by
an ophthalmologist, optometrist, technician or other healthcare professional.
Some injuries or defects may not become evident for a number of
years.  Significant lawsuits against us could subject us to
significant judgments and damage our reputation.  In addition, a
partially or completely uninsured claim against us could have a material adverse
effect on our business, financial condition and results of operations. We rely
primarily and intend to continue to rely primarily on the independent
ophthalmologists’ professional liability insurance policies and the
manufacturers’ product liability insurance policies, although we have limited
umbrella general and professional liability insurance. We require the
independent ophthalmologists who use our vision centers to maintain certain
levels of professional liability insurance, although an inability of
ophthalmologists to procure insurance could disrupt business while replacement
ophthalmologists are being recruited.





The
availability of professional liability insurance has decreased and its cost has
increased significantly for a variety of reasons, including reasons outside our
control, particularly in certain states. A future increase in cost could result
in the reduced profitability of our business, and a future lack of availability
of coverage for us or our independent ophthalmologists and optometrists could
result in increased exposure to liability and potentially limit our ability to
expand in certain markets.





We
own a captive insurance company and its payment of significant claims could
affect our results of operations and financial condition.




We
maintain a captive insurance company to provide professional liability insurance
coverage for claims brought against us after December 17, 2002. In addition, our
captive insurance company’s charter allows it to provide professional liability
insurance for our doctors.  Our captive insurance company is
capitalized and funded by us based on actuarial studies performed by an
independent insurance consulting and management firm. The Company uses the
captive insurance company for both the primary insurance and the excess
liability coverage.  A number of claims are now pending with our
captive insurance company. The payment of significant claims by our captive
insurance company could negatively affect our profitability and our financial
condition.





We
may be exposed to certain regulatory and financial risks related to climate
change.




Climate
change is receiving ever increasing attention worldwide. Many scientists,
legislators and others attribute global warming to increased levels of
greenhouse gases, including carbon dioxide, which has led to significant
legislative and regulatory efforts to limit greenhouse gas
emissions.  There are a number of pending legislative and regulatory
proposals to address greenhouse gas emissions. For example, in June 2009 the
U.S. House of Representatives passed the American Clean Energy and Security Act
that would phase-in significant reductions in greenhouse gas emissions if
enacted into law. The U.S. Senate is considering a different bill, and it is
uncertain whether, when and in what form a federal mandatory carbon dioxide
emissions reduction program may be adopted. Similarly, certain countries have
adopted the Kyoto Protocol.  These actions could increase costs
associated with our operations, including equipment costs from our third party
suppliers.





Because
we are uncertain what laws will be enacted, we cannot predict the potential
impact of such laws on our future consolidated financial condition, results of
operations or cash flows.


15





Disputes
with respect to intellectual property could result in a decrease in revenues and
profitability.




We have
not registered all of the names we use for our products and services with the
United States Patent and Trademark Office.  Some of our internal
processes and systems do not have intellectual property
protection.  If a competitor were to attempt to use our names,
processes or systems, we may not be able to prevent such use.  The
unauthorized use of our name could cause confusion among our customers, and the
misappropriation of internal processes or systems could reduce our competitive
advantages, either of which could negatively affect our profitability or
financial condition.





The
loss of the services of any members of our senior management team could impair
our ability to execute our business strategy and as a result, reduce our sales
and profitability.




We depend
on the continued services of our senior management team. The loss of key
personnel could have a material adverse effect on our ability to execute our
business strategy and on our financial condition and results of operations. We
do not maintain key-person insurance for members of our senior management
team.





Item 1B. Unresolved Staff
Comments.





None.





Item
2.  Properties.





Our
corporate headquarters and one of our laser vision correction centers are
located in a 32,547 sq. ft. office building that we own in Cincinnati, Ohio. Our
other laser vision correction centers and our Customer Call and Data Centers are
in leased locations.  The typical vision center location is in a
professional office building or retail site and includes a laser surgery room,
private examination rooms and patient waiting areas.  Centers range in
size from approximately 1,500 to 6,931 square feet with lease expiration dates
through July 31, 2018.   The lease for the facility housing our
Customer Call and Data Centers expires on April 30, 2015.





Item 3. Legal
Proceedings.





On
September 13, 2007, and October 1, 2007, Beaver County Retirement Board and
Spencer and Jean Lin, respectively, filed two complaints against us and certain
of our current and former directors and officers in the United States District
Court for the Southern District of Ohio (Western Division) purportedly on behalf
of a class of stockholders who purchased our common stock between February 12,
2007 and July 30, 2007. On November 8, 2007, an additional complaint was filed
by named plaintiff Diane B. Callahan against us and certain of our current and
former directors and officers in the United States District Court for the
Southern District of Ohio (Western Division). This third action was filed
purportedly on behalf of a class of stockholders who purchased our common stock
between February 12, 2007 and November 2, 2007. These actions were consolidated
into one action. A consolidated complaint was filed on April 19, 2008. The
plaintiffs in the consolidated complaint were seeking damages on behalf of a
class of stockholders who purchased our common stock between October 24, 2006
and November 2, 2007, asserting claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. They alleged that certain of our public
disclosures regarding our financial performance and prospects were false or
misleading. On July 10, 2008, we, together with the other defendants, filed a
motion to dismiss the consolidated complaint. On March 25, 2009, the Court
dismissed the consolidated complaint with prejudice and entered final judgment
in favor of all defendants.  Plaintiffs thereafter filed a motion for
reconsideration of the order to dismiss, which the Court denied on November 5,
2009. On December 4, 2009, Plaintiffs filed an appeal with the U.S. Court
of Appeals for the Sixth Circuit, which they voluntarily dismissed on
January 6, 2010.





On
October 5, 2007, a complaint was filed in the Court of Common Pleas, Hamilton
County, Ohio, against certain of our current and former officers and directors,
derivatively on our behalf. The plaintiff, Nicholas Weil, asserted that three of
the defendants breached their fiduciary duties when they allegedly sold
LCA-Vision's securities on the basis of material non-public information in 2007.
The plaintiff also asserted claims for breach of fiduciary duty, abuse of
control, corporate waste, and unjust enrichment in connection with the
disclosures that also were the subject of the securities actions described
above. We were named as a nominal defendant in the complaint, although the
action was derivative in nature. The plaintiff demanded damages and attorney's
fees, and sought other equitable relief. On December 20, 2007, the court
dismissed this action and entered final judgment.





Our
business results in a number of medical malpractice lawsuits.  Claims
reported to us prior to December 18, 2002 were generally covered by external
insurance policies and to date have not had a material financial impact on our
business other than the cost of insurance and our deductibles under those
policies.  In December 2002, we established a captive insurance
company to provide coverage for claims brought against us after December 17,
2002.  We use the captive insurance company for both primary insurance
and excess liability coverage.  A number of claims are now pending
with our captive insurance company.  Since the inception of the
captive insurance company in 2002, it has disbursed total claims and expense
payments of $2.5 million.  At December 31, 2009, we maintained
insurance reserves of $9.2 million.





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


16





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





Not
applicable.





PART
II





Item 5.  Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities.





Our
common stock is traded on the NASDAQ Global Select Market under the symbol
"LCAV." There were approximately 14,000 record holders of our common stock as of
February 24, 2010.





The
following table sets forth the range of high and low sales prices of the common
stock as reported on the NASDAQ Global Select Market for the specific
periods.





2009
                    
                    
                    2008High
                    
                    
                    Low
                    
                    
                    High
                    
                    
                    LowFirst
      Quarter
                    
                    $
                    5.35
                    
                    
                    $
                    1.99
                    
                    
                    $
                    20.26
                    
                    
                    $
                    12.17Second
      Quarter
                    
                    
                    8.02
                    
                    
                    
                    2.72
                    
                    
                    
                    13.37
                    
                    
                    
                    4.54Third
      Quarter
                    
                    
                    7.92
                    
                    
                    
                    3.50
                    
                    
                    
                    7.39
                    
                    
                    
                    4.08Fourth
      Quarter
                    
                    
                    7.01
                    
                    
                    
                    4.23
                    
                    
                    
                    4.70
                    
                    
                    
                    2.16








The Board
of Directors may declare dividends in its discretion.  We paid a
quarterly dividend from the third quarter of 2004 through the second quarter of
2008.  The Board of Directors periodically reviews the decision to pay
a dividend.





The
following table sets forth the quarterly cash dividends paid for
2008.  There were no dividends paid in 2009.





2008First
      Quarter
                    
                    $
                    0.18Second
      Quarter
                    
                    
                    0.06Third
      Quarter
                    
                    
                    -Fourth
      Quarter
                    
                    
                    -$
                    0.24





On August
21, 2007, our Board of Directors authorized a share repurchase plan under which
we are authorized to purchase up to $50.0 million of our common
stock.  During 2007, we repurchased 588,408 shares of our common stock
under this program at an average price of $16.99 per share, for a total cost of
approximately $10.0 million.  We did not purchase any shares during
2008 and 2009 under this program.


17


Item 6. Selected Financial Data.





The data
set forth below should be read in conjunction with the Consolidated Financial
Statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."  All amounts are in
thousands of U.S. Dollars, except procedure volume and per share
data.





Year Ended December 31,Consolidated
      Statements of Operations Data:2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005Revenues:Laser
      refractive surgery
                          
                          $
                          129,213
                          
                          
                          $
                          205,176
                          
                          
                          $
                          292,635
                          
                          
                          $
                          238,925
                          
                          
                          $
                          176,874Operating
      costs and expenses:Medical
      professional and license fees
                          
                          
                          28,746
                          
                          
                          
                          41,797
                          
                          
                          
                          49,312
                          
                          
                          
                          42,954
                          
                          
                          
                          33,499Direct
      costs of services
                          
                          
                          63,579
                          
                          
                          
                          77,474
                          
                          
                          
                          97,423
                          
                          
                          
                          77,612
                          
                          
                          
                          54,952General
      and administrative expenses
                          
                          
                          16,501
                          
                          
                          
                          20,262
                          
                          
                          
                          22,657
                          
                          
                          
                          21,156
                          
                          
                          
                          14,021Marketing
      and advertising
                          
                          
                          33,784
                          
                          
                          
                          52,429
                          
                          
                          
                          66,469
                          
                          
                          
                          47,971
                          
                          
                          
                          31,813Depreciation
                          
                          
                          14,198
                          
                          
                          
                          17,972
                          
                          
                          
                          11,209
                          
                          
                          
                          8,453
                          
                          
                          
                          7,636Consent
      revocation solicitation charges
                          
                          
                          780
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Restructuring
      charges
                          
                          
                          2,696
                          
                          
                          
                          1,804
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Impairment
      charges
                          
                          
                          5,414
                          
                          
                          
                          1,672
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -Total
      expenses
                          
                          
                          165,698
                          
                          
                          
                          213,410
                          
                          
                          
                          247,070
                          
                          
                          
                          198,146
                          
                          
                          
                          141,921Operating
      (loss) income
                          
                          
                          (36,485
                          )
                          
                          
                          (8,234
                          )
                          
                          
                          45,565
                          
                          
                          
                          40,779
                          
                          
                          
                          34,953Equity
      in earnings from unconsolidated businesses
                          
                          
                          122
                          
                          
                          
                          477
                          
                          
                          
                          814
                          
                          
                          
                          746
                          
                          
                          
                          328Net
      investment income (loss)
                          
                          
                          1,785
                          
                          
                          
                          (1,524
                          )
                          
                          
                          5,953
                          
                          
                          
                          6,182
                          
                          
                          
                          3,929Other
      income (loss), net
                          
                          
                          385
                          
                          
                          
                          23
                          
                          
                          
                          (607
                          )
                          
                          
                          (27
                          )
                          
                          
                          (397
                          )(Loss)
      income before taxes on income
                          
                          
                          (34,193
                          )
                          
                          
                          (9,258
                          )
                          
                          
                          51,725
                          
                          
                          
                          47,680
                          
                          
                          
                          38,813Income
      tax (benefit) expense
                          
                          
                          (949
                          )
                          
                          
                          (2,623
                          )
                          
                          
                          19,221
                          
                          
                          
                          19,310
                          
                          
                          
                          15,832Net
      (loss) income
                          
                          $
                          (33,244
                          )
                          
                          $
                          (6,635
                          )
                          
                          $
                          32,504
                          
                          
                          $
                          28,370
                          
                          
                          $
                          22,981Net
      (loss) income per common shareBasic
                          
                          $
                          (1.79
                          )
                          
                          $
                          (0.36
                          )
                          
                          $
                          1.66
                          
                          
                          $
                          1.37
                          
                          
                          $
                          1.12Diluted
                          
                          
                          (1.79
                          )
                          
                          
                          (0.36
                          )
                          
                          
                          1.64
                          
                          
                          
                          1.34
                          
                          
                          
                          1.07Cash
      dividends per common share
                          
                          $
                          -
                          
                          
                          $
                          0.24
                          
                          
                          $
                          0.72
                          
                          
                          $
                          0.54
                          
                          
                          $
                          0.36Weighted
      average shares outstandingBasic
                          
                          
                          18,594
                          
                          
                          
                          18,526
                          
                          
                          
                          19,572
                          
                          
                          
                          20,694
                          
                          
                          
                          20,500Diluted
                          
                          
                          18,594
                          
                          
                          
                          18,526
                          
                          
                          
                          19,858
                          
                          
                          
                          21,235
                          
                          
                          
                          21,492Selected
      Operating DataLaser
      vision correction procedures
                          
                          
                          72,776
                          
                          
                          
                          115,153
                          
                          
                          
                          192,204
                          
                          
                          
                          185,268
                          
                          
                          
                          142,000At December 31,2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006
                          
                          
                          2005Balance
      Sheet DataCash,
      cash equivalents and short-term investments
                          
                          $
                          52,504
                          
                          
                          $
                          56,335
                          
                          
                          $
                          60,148
                          
                          
                          $
                          95,232
                          
                          
                          $
                          108,061Working
      capital
                          
                          
                          50,332
                          
                          
                          
                          55,534
                          
                          
                          
                          48,673
                          
                          
                          
                          95,012
                          
                          
                          
                          112,091Total
      assets
                          
                          
                          112,635
                          
                          
                          
                          157,482
                          
                          
                          
                          179,647
                          
                          
                          
                          190,159
                          
                          
                          
                          181,259Debt
      obligations maturing in one year
                          
                          
                          3,998
                          
                          
                          
                          6,985
                          
                          
                          
                          3,941
                          
                          
                          
                          3,360
                          
                          
                          
                          2,122Long-term
      debt obligations (less current portion)
                          
                          
                          9,145
                          
                          
                          
                          14,120
                          
                          
                          
                          2,012
                          
                          
                          
                          2,431
                          
                          
                          
                          1,434Retained
      (deficit) earnings
                          
                          
                          (9,729
                          )
                          
                          
                          23,515
                          
                          
                          
                          34,597
                          
                          
                          
                          16,320
                          
                          
                          
                          (919
                          )Total
      stockholders' investment
                          
                          
                          51,027
                          
                          
                          
                          82,985
                          
                          
                          
                          93,599
                          
                          
                          
                          109,116
                          
                          
                          
                          126,703




18


Item 7.  Management’s Discussion and Analysis of Financial
Condition and Results of Operations.





You
should read the following discussion and analysis in conjunction with ‘‘Item 6.
Selected Financial Data’’ above and with the financial statements and related
notes included in “Item 8. Financial Statements and Supplemental Data” of this
Form 10-K. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed here. Factors that could contribute to such differences include, but
are not limited to, those discussed in “Item 1A. Risk Factors.”





Results
of Operations





Overview


Key
financial highlights for the year ended December 31, 2009 include (all
comparisons are with 2008):





·
            Revenues
      were $129.2 million compared with $205.2 million; adjusted revenues were
      $120.1 million compared with $186.5
million,


·
            Procedure
      volume was 72,776 compared with
115,153,


·
            Operating
      loss was $36.5 million compared with operating loss of $8.2 million;
      adjusted operating loss was $44.7 million compared with adjusted operating
      loss of $25.1 million.  Operating loss and adjusted operating
      loss for 2009 included $8.1 million in restructuring and impairment
      charges and $0.8 million in consent revocation solicitation charges;
      operating loss and adjusted operating loss for 2008 included $3.5 million
      in restructuring and impairment
charges,


·
            Net
      cash provided by operations was $1.4 million compared with $6.9
      million,


·
            Net
      loss was $33.2 million, or $1.79 per share, compared with net loss of $6.6
      million, or $0.36 per share.  The 2009 net loss included a $12.2
      million, or $0.66 per share, valuation allowance for deferred tax assets,
      and


·
            Cash
      and investments totaled $54.6 million as of December 31, 2009, compared
      with $59.5 million as of December 31,
2008.





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 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 primarily 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 during the last three fiscal years.





2009
                  
                  
                  2008
                  
                  
                  2007First
      Quarter
                  
                  
                  27,859
                  
                  
                  
                  44,159
                  
                  
                  
                  59,101Second
      Quarter
                  
                  
                  17,864
                  
                  
                  
                  30,086
                  
                  
                  
                  48,668Third
      Quarter
                  
                  
                  15,335
                  
                  
                  
                  21,484
                  
                  
                  
                  44,547Fourth
      Quarter
                  
                  
                  11,718
                  
                  
                  
                  19,424
                  
                  
                  
                  39,888Year
                  
                  
                  72,776
                  
                  
                  
                  115,153
                  
                  
                  
                  192,204





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.  We anticipate these conditions will
continue into 2010 and that industry procedure volume is likely to continue to
decline compared to prior years, which we expect will negatively affect our
revenues.  In response, in 2009 we reduced our workforce by
approximately 19% so that our staffing levels would be appropriate for our
anticipated procedure volume.  We also closed 12 vision centers and
converted one vision center into a licensed facility.  We have no
current plans  to open vision centers in new markets or to relocate
existing vision centers 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.


19





We offer
our patients acuity programs.  Prior to June 15, 2007, we priced these
programs separately.  We offered a no-acuity plan, a one-year acuity
plan and a lifetime acuity plan.  We have deferred the revenues from
the sale of these programs and are recognizing them over the period in which the
future costs of performing the enhancement procedures are expected to be
incurred.  For programs that included a one-year and lifetime options
but did not include a no-acuity option, costs associated with the sale of the
lifetime acuity plan began after the expiration of the one-year acuity plan
included in the base price and we are recognizing revenues associated with the
sale of the lifetime acuity plan beginning one year after the initial surgery
date.  For programs that included a no-acuity option in addition to
the one-year and lifetime options, we deferred all revenues from the sale of the
one-year and lifetime acuity plans and recognized them in proportion to the
total costs expected to be incurred, beginning immediately following the initial
surgical procedure.





Effective
June 15, 2007, we changed our pricing model and no longer offer separately
priced acuity options.  For substantially all patients, we include
participation in our acuity programs in the base surgical
price.  Under this pricing model, we have not deferred any
warranty-related revenue for procedures performed after June 15,
2007.  We are recognizing revenue previously deferred from the sale of
the separately priced acuity programs over a seven-year period, our current
estimate of the period over which substantially all of the costs of performing
the enhancement procedures will be incurred.





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.  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 (“GAAP”) is
provided below (dollars in thousands).





Twelve Months Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007RevenuesReported
      U.S. GAAP
                      
                      $
                      129,213
                      
                      
                      $
                      205,176
                      
                      
                      $
                      292,635AdjustmentsRevenues
      deferred
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      20,054Amortization
      of prior deferred revenue
                      
                      
                      (9,107
                      )
                      
                      
                      (18,719
                      )
                      
                      
                      (28,067
                      )Adjusted
      revenues
                      
                      $
                      120,106
                      
                      
                      $
                      186,457
                      
                      
                      $
                      284,622Operating
      (Loss) IncomeReported
      U.S. GAAP
                      
                      $
                      (36,485
                      )
                      
                      $
                      (8,234
                      )
                      
                      $
                      45,565AdjustmentsImpact
      of warranty revenue deferral
                      
                      
                      (9,107
                      )
                      
                      
                      (18,719
                      )
                      
                      
                      (8,013
                      )Amortization
      of prior professional fees
                      
                      
                      911
                      
                      
                      
                      1,872
                      
                      
                      
                      801Adjusted
      operating (loss) income
                      
                      $
                      (44,681
                      )
                      
                      $
                      (25,081
                      )
                      
                      $
                      38,353





Revenues


In 2009,
revenues decreased by $76.0 million, or 37.0%, to $129.2 million, from $205.2
million in 2008.  In 2009, adjusted revenues were $120.1 million
compared with $186.5 million in 2008.  For vision centers open at
least 12 months, procedure volume decreased by approximately 36.9% in 2009 to
67,271, as compared to 106,645 in 2008.  In 2008, revenues decreased
by $87.5 million, or 29.9%, to $205.2 million from $292.6 million in
2007.  Adjusted revenues were $186.5 million in 2008 compared with
$284.6 million in 2007.  The components of the revenue change include
the following (dollars in thousands):





2009
                    
                    
                    2008Decrease
      in revenues from lower procedure volume
                    
                    $
                    (68,617
                    )
                    
                    $
                    (114,100
                    )Impact
      from increase in average selling prices, before revenue
      deferral
                    
                    
                    2,266
                    
                    
                    
                    15,935Change
      in deferred revenues
                    
                    
                    (9,612
                    )
                    
                    
                    10,706Decrease
      in revenues
                    
                    $
                    (75,963
                    )
                    
                    $
                    (87,459
                    )




20


The
average reported revenue per procedure, which includes the impact of deferred
revenue from the sale of separately priced acuity programs, decreased slightly
to $1,775 in 2009 from $1,782 in 2008, primarily due to the change in deferred
revenue.  The average reported revenue per procedure, which includes
the impact of deferred revenue from the sale of separately priced acuity
programs, increased about 17.0% to $1,782 in 2008 from $1,523 in 2007, primarily
as a result of the introduction of IntraLase and secondarily due to the
elimination of separately-priced acuity programs.





We
experienced a slight increase in both candidacy rates and treatment show rates
in 2009 compared to 2008.  However, we have seen a slight decline in
both appointment show rates and conversion rates in 2009 compared to
2008.  Patient inquiries are also down.  We believe that
these trends and the reduction in procedure volumes are due to the current
period of economic uncertainty and other macroeconomic factors, with many
consumers deferring large discretionary spending.  Industry sources
indicate that the entire laser vision correction industry is negatively impacted
by these macroeconomic factors, which include a depressed U.S. housing market,
low consumer confidence and high unemployment.





The
following table summarizes the effect on year-over-year revenues of the change
in deferred revenues for 2009, 2008, and 2007 (dollars in
thousands):





2009
                  
                  
                  2008
                  
                  
                  2007Revenues
      deferred
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  (20,054
                  )Amortization
      of prior deferred revenues
                  
                  
                  9,107
                  
                  
                  
                  18,719
                  
                  
                  
                  28,067Net
      increase in revenues
                  
                  $
                  9,107
                  
                  
                  $
                  18,719
                  
                  
                  $
                  8,013





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 corporate headquarters and call center
      staff expense and other overhead
costs,


·
            Marketing
      and advertising costs, and


·
            Depreciation
      of equipment.





2009 Compared to
2008





Our
operating costs and expenses have some degree of correlation with revenues and
procedure volumes due to the fact that some of our costs are variable and some
are fixed in nature.  The following table shows the
change  in components of operating expenses between 2008 and 2009 in
dollars and as a percent of revenues for each period (dollars in
thousands):





(Decrease)/
                  
                  
                  %
      of Revenues2009
                  
                  
                  2008
                  
                  
                  Increase
                  
                  
                  2009
                  
                  
                  2008Medical
      professional and license fees
                  
                  $
                  28,746
                  
                  
                  $
                  41,797
                  
                  
                  $
                  (13,051
                  )
                  
                  
                  22.2
                  %
                  
                  
                  20.4
                  %Direct
      costs of services
                  
                  
                  63,579
                  
                  
                  
                  77,474
                  
                  
                  
                  (13,895
                  )
                  
                  
                  49.2
                  %
                  
                  
                  37.8
                  %General
      and administrative expenses
                  
                  
                  16,501
                  
                  
                  
                  20,262
                  
                  
                  
                  (3,761
                  )
                  
                  
                  12.8
                  %
                  
                  
                  9.9
                  %Marketing
      and advertising
                  
                  
                  33,784
                  
                  
                  
                  52,429
                  
                  
                  
                  (18,645
                  )
                  
                  
                  26.1
                  %
                  
                  
                  25.6
                  %Depreciation
                  
                  
                  14,198
                  
                  
                  
                  17,972
                  
                  
                  
                  (3,774
                  )
                  
                  
                  11.0
                  %
                  
                  
                  8.8
                  %Consent
      revocation solicitation charges
                  
                  
                  780
                  
                  
                  
                  -
                  
                  
                  
                  780
                  
                  
                  
                  0.6
                  %
                  
                  
                  0.0
                  %Impairment
      charges
                  
                  
                  5,414
                  
                  
                  
                  1,672
                  
                  
                  
                  3,742
                  
                  
                  
                  4.2
                  %
                  
                  
                  0.8
                  %Restructuring
      charges
                  
                  
                  2,696
                  
                  
                  
                  1,804
                  
                  
                  
                  892
                  
                  
                  
                  2.1
                  %
                  
                  
                  0.9
                  %





Medical
professional and license fees


Medical
professional and license fees decreased $13.1 million, or 31.2%, in 2009 from
2008.  Medical professional fees decreased $7.8 million, or 36.5%, due
to lower costs and physician fees associated with lower procedure volumes and
revenues. License fees decreased $5.2 million, or 25.7%, as a result of lower
procedures volumes in 2009 partially offset by lower volume rebates on
purchases. The amortization of the deferred medical professional fees associated
with the sale of separately priced extended acuity programs also impacted
medical professional and license fees. We amortized deferred medical
professional fees attributable to prior years of $911,000 in 2009 compared to
$1.9 million in 2008.


21





Direct
costs of services


Direct
costs of services in 2009 decreased by $13.9 million, or 17.9%, from 2008. Lower
salaries, fringe benefits and travel and entertainment expense as a result of
our workforce reductions primarily drove the decrease in direct costs of
services in 2009 compared to 2008.  This decrease was also the result
of lower procedure volumes which drove lower bad debt, surgical supplies,
equipment expense, insurance, rent, and financing fees.  These
decreases in direct costs of services were offset partially by increased laser
rent, deferred compensation, state and local taxes and professional
services.   Direct costs as a percentage of revenues increased to
49.2% in 2009 from 37.8% in 2008 due to a 37.0% decline in revenues as a result
of lower procedure volume.





General
and administrative


General
and administrative expenses in 2009 decreased $3.8 million, or 18.6%, from 2008,
due primarily to workforce reductions resulting in lower salaries and fringe
benefits.   The decrease was also the result of lower
professional fees, contracted services, and telecommunications in
2009.





Marketing
and advertising expenses


Marketing
and advertising expenses in 2009 decreased $18.6 million, or 35.6%, from 2008.
These expenses were 26.1% of revenues during 2009, up slightly from 25.6% in
2008. Due largely to declining consumer confidence that resulted in
deteriorating returns on some marketing initiatives, we reduced marketing
spending levels significantly in 2009 to align our spending better with
anticipated consumer demand. We are continuing to work to develop more efficient
marketing techniques and expanding local initiatives as a means to attract
customers. Our future operating profitability will depend in large part on the
success of our efforts in this regard.





Consent
Revocation Solicitation Charges


In 2009,
we incurred $780,000 in charges related to our successful defense of a consent
revocation solicitation initiated by a dissident stockholder group.





Impairment
Charges


In 2009,
we recorded impairment charges to reduce the carrying amount of long-lived
assets by $5.4 million.  These impairment charges reflect our decision
in 2009 to close underperforming vision centers by December 31, 2009 in order to
preserve cash.  Based on this evaluation, we determined that leasehold
improvements with a carrying amount of $2.5 million and excimer lasers with a
carrying amount of $3.7 million were no longer recoverable and were in fact
impaired.  The leasehold improvements were written down to their
estimated fair value of zero.  We adjusted the carrying value of the
excimer lasers to their fair value less cost to sell, which we determined based
on discounted cash flows and estimated market prices of similar
assets.  We are actively marketing and selling unused excimer lasers
at December 31, 2009.  Because of deteriorating market conditions, it
is reasonably possible that our estimates may change in the near term resulting
in the need to adjust our determination of fair value.  Included in
the 2009 impairment charges was $487,000 related primarily to the disposal of
microkeratomes.





Restructuring
Charges


Restructuring
charges in 2009 of $2.7 million resulted from the closing of underperforming
vision centers in our effort to reduce costs and increase operational
efficiencies.  The restructuring charges included $2.2 million of
contract termination costs and other center closure costs and $922,000 of
employee separation benefits.  Partially offsetting the charges was a
benefit of $435,000 due to a change in estimate to certain previously recognized
contract termination costs related to our vision centers closed in 2008 after
successful negotiations of certain terms with the lessors in 2009.  We
successfully negotiated rent buy-outs or sublease agreements with respect to all
of the closed vision centers.





Depreciation
expense


Depreciation
expense decreased by $3.8 million, or 21.0%, in 2009 compared to 2008 as a
result of $5.4 million in impairment of assets for the closed vision centers and
the microkeratomes, as well as the disposal of our Bausch & Lomb
lasers.  In addition, the 2008 impairment charges of $1.7 million did
not occur until the end of the year and capital expenditures were minimal in
2009 compared with $14.9 million in 2008.





Non-operating
income and expenses


We
recorded net investment income of $1.8 million in 2009 compared to a net
investment loss of $1.5 million in 2008.  The $3.3 million increase is
due primarily to $3.1 million in other-than-temporary impairments on our auction
rate security and equity investments occurring in 2008, a $2.4 million increase
in deferred compensation asset values resulting from changing market conditions
in 2009 compared with 2008, offset by decreases in patient financing income of
$1.1 million and investment income of $788,000.  The reduction in
patient financing income is due to reduced procedure volume and a lower amount
of financing per patient as a result of increases in down payment requirements
and other more stringent lending prequalifications.  The reduction in
investment income resulted from a shifting of our investment portfolio from
taxable and tax exempt bond instruments to higher quality U.S. Treasury money
market accounts that earn a lower rate of return.


22


Income
taxes


Our
effective income tax rate decreased from 28.3% of pre-tax loss during 2008 to
2.8% of pre-tax loss during 2009.  Our effective tax rate was
significantly impacted by the recognition of a $12.2 million valuation allowance
against all of our net  deferred tax assets during 2009.  We
established a full valuation allowance on our net deferred tax assets in 2009
due to increased uncertainty with respect to our ability to realize the net
deferred tax assets in future periods.  We established a valuation
allowance of $1.2 million in 2008 for the tax benefit generated from the loss on
investments because we did not have capital gains to offset this capital
loss.  The impact of the valuation allowance on our 2009 and 2008
effective tax rate was 35.6%  and 12.5%, respectively.





2008
Compared to 2007





The
following table shows the change in components of operating expenses between
2007 and 2008 in dollars and as a percent of revenues for each period (dollars
in thousands):





(Decrease)/
                  
                  
                  % of Revenues2008
                  
                  
                  2007
                  
                  
                  Increase
                  
                  
                  2008
                  
                  
                  2007Medical
      professional and license fees
                  
                  $
                  41,797
                  
                  
                  $
                  49,312
                  
                  
                  $
                  (7,515
                  )
                  
                  
                  20.4
                  %
                  
                  
                  16.9
                  %Direct
      costs of services
                  
                  
                  77,474
                  
                  
                  
                  97,423
                  
                  
                  
                  (19,949
                  )
                  
                  
                  37.8
                  %
                  
                  
                  33.3
                  %General
      and administrative expenses
                  
                  
                  20,262
                  
                  
                  
                  22,657
                  
                  
                  
                  (2,395
                  )
                  
                  
                  9.9
                  %
                  
                  
                  7.7
                  %Marketing
      and advertising
                  
                  
                  52,429
                  
                  
                  
                  66,469
                  
                  
                  
                  (14,040
                  )
                  
                  
                  25.6
                  %
                  
                  
                  22.7
                  %Depreciation
                  
                  
                  17,972
                  
                  
                  
                  11,209
                  
                  
                  
                  6,763
                  
                  
                  
                  8.8
                  %
                  
                  
                  3.8
                  %Restructuring
      expense
                  
                  
                  1,804
                  
                  
                  
                  -
                  
                  
                  
                  1,804
                  
                  
                  
                  0.8
                  %
                  
                  
                  0.0
                  %Impairment
      of fixed assets
                  
                  
                  1,672
                  
                  
                  
                  -
                  
                  
                  
                  1,672
                  
                  
                  
                  0.9
                  %
                  
                  
                  0.0
                  %





Medical
professional and license fees


Medical
professional and license fees decreased by $7.5 million, or 15.2%, in 2008 when
compared to 2007. This decrease was due primarily to lower costs and physician
fees associated with lower revenues and procedure volumes, partially offset by
higher costs associated with IntraLase license fees.  Medical
professional fees decreased $9.2 million, or 30.1%, on lower revenues offset by
the effects of deferred medical fees. License fees increased by $1.6 million, or
8.7%.  This is the result of increased procedure fees of $8.6 million
associated with the IntraLase femtosecond lasers that were added to our service
offering in 2007, partially offset by lower procedures fees on the excimer laser
due to lower procedure volumes.  The amortization of prepaid medical
professional fees also impacted medical professional and license fees. Prior to
implementing our revised pricing structure implemented on June 15, 2007, we
deferred $2.0 million of medical professional fees in 2007 as a result of
deferring revenue associated with separately priced extended acuity programs. We
amortized deferred medical professional fees attributable to prior years of $1.9
million in 2008 and $2.8 million in 2007.





Direct
costs of services


Direct
costs of services decreased in 2008 by $19.9 million, or 20.5%, over 2007. This
decrease was primarily the result of lower expense for new center openings,
surgical supplies, employee incentives, laser rent, deferred compensation
expense, bad debt and financing fees due to lower procedure volumes and,
secondarily, to workforce reductions which reduced salary and stock-based
compensation expense.  New center costs in 2008 were $8.4 million as
compared to $14.3 million in 2007.  These decreases in direct costs of
services were offset partially by increased rent and utilities costs, state and
local taxes and professional services.





General
and administrative


General
and administrative expenses in 2008 decreased by $2.4 million, or 10.6%,
compared to 2007.  As a result of workforce reductions and lower
procedure volume in 2008, expenses decreased for stock-based compensation,
incentives, salaries and fringe benefits.  In addition, expenses in
2007 included $1.0 million in costs associated with a sales and use tax
assessment, which did not recur in 2008.





Marketing
and advertising expenses


Marketing
and advertising expenses decreased by $14.0 million, or 21.1%, in 2008 when
compared to 2007. These expenses were 25.6% of revenue during 2008, compared
with 22.7% during 2007. Due largely to declining consumer confidence that
resulted in deteriorating returns on some marketing initiatives, we reduced
marketing spending levels significantly in 2008.  We made this
decrease to align our spending better with anticipated consumer
demand.





Restructuring
Expense


During
2008, we reduced our workforce throughout the United States by approximately 35%
so that our staffing levels would be appropriate for our reduced procedure
volume levels. Severance costs associated with these workforce reductions were
$1.5 million in 2008.





In 2008,
we closed three vision centers.  We closed these centers due to a
number of factors that included current financial performance, an evaluation of
the anticipated timing of improvement in procedure volume and the extent of the
expected improvement, as well as the costs associated with closing the
center.  These closures resulted in a charge of $308,000, principally
related to contract terminations.


23





Impairment
of Fixed Assets


In 2008,
we recognized a $1.7 million impairment charge for certain assets held for use
in a laser vision correction center and closure of three vision
centers.  We wrote down these assets to an approximate fair value
based on a discounted cash flow analysis as a result of the decline in the
overall U.S. economy and weakening consumer confidence levels, which have
adversely impacted procedure volume levels.





Depreciation
expense


Depreciation
expense increased by $6.8 million, or 60.3%, in 2008 compared to 2007 as a
result of capital investments in new centers over the past two years,
expenditures at our National Call Center and Data Center, the purchase of
IntraLase lasers and capital improvements made to our Bausch & Lomb laser
platforms.





Non-operating
income and expenses


We
recorded a net investment loss of $1.5 million in 2008 as compared to net
investment income of $6.0 million in 2007.  The $7.5 million decline
is due to $3.1 million in other-than-temporary impairments on our auction rate
security and equity investments, a decrease in deferred compensation asset
values resulting from changing marketing conditions of $2.0 million and a
decrease of $3.1 million in investment income.  The reduction in
investment income resulted from a decline in investment holdings that were used
for our share buyback program in 2007 and declining deferred compensation plan
asset values as a result of deteriorating market conditions.  In
addition, we have shifted our remaining investment portfolio from taxable and
tax exempt bond instruments to higher quality U.S. Treasury money market
accounts that earn a lower rate of return.  A $783,000 increase in
income from patient financing charges partially offset these
decreases.





Income
taxes


Income
tax expense decreased from 37.2% of pre-tax income during 2007 to 28.3% of
pre-tax loss during the 2008. The decrease resulted primarily from the pre-tax
loss for 2008 compared to pre-tax earnings in 2007, and the corresponding effect
of favorable permanent differences constituting a larger percentage of our
overall tax provision, as well as the non-deductibility of the loss on
investments recorded in 2008.  During 2008, we established a valuation
allowance of $1.2 million for the tax benefit generated from the loss on
investments because we did not have capital gains to offset this capital loss,
which resulted in a 28.3% effective tax rate.





Liquidity
and Capital Resources





Our cash
flows from operating, investing and financing activities, as reflected in the
Consolidated Statements of Cash Flows, are summarized as follows (dollars in
thousands).





2009
                  
                  
                  2008
                  
                  
                  2007Cash
      provided (used) by:Operating
      activities
                  
                  $
                  1,401
                  
                  
                  $
                  6,931
                  
                  
                  $
                  54,979Investing
      activities
                  
                  
                  6,396
                  
                  
                  
                  (8,448
                  )
                  
                  
                  (2,976
                  )Financing
      activities
                  
                  
                  (7,980
                  )
                  
                  
                  8,315
                  
                  
                  
                  (59,258
                  )Net
      effect of exchange rate changes on cash and cash
    equivalents
                  
                  
                  584
                  
                  
                  
                  (764
                  )
                  
                  
                  438Net
      increase (decrease) in cash and cash equivalents
                  
                  $
                  401
                  
                  
                  $
                  6,034
                  
                  
                  $
                  (6,817
                  )





Cash
flows generated from operating activities, a major source of our liquidity,
amounted to $1.4 million in 2009, $6.9 million in 2008 and $55.0 million in
2007.  The decrease in cash flow generated from operating activities
during 2009 primarily reflects lower earnings on reduced procedure
volumes.  Our cost control and cash conservation measures are having
the desired results as we continue to take actions that we believe are prudent
given the current economic environment. Among these, we closed under-performing
vision centers and reduced headcount in the vision centers, national call center
and corporate offices during 2009 and 2008, reduced marketing expense
significantly, and are reducing costs in all other discretionary
areas.  We are also closely managing working capital with particular
focus on ensuring timely collection of outstanding patient receivables and the
management of our trade payable obligations.  Gross patient
receivables declined $7.7 million in 2009.  At December 31, 2009,
working capital (excluding debt due within one year) amounted to $54.3 million
compared to $62.5 million at the end of 2008.  Liquid assets (cash and
cash equivalents, short-term investments, and accounts receivable) amounted to
199.3% of current liabilities at December 31, 2009, compared to 200.8% at
December 31, 2008.


24


We
continue to offer our own sponsored patient financing.  As of December
31, 2009, we had $5.4 million in patient receivables, net of allowance for
doubtful accounts, which was a decrease of $6.9 million, or 56.0%, from December
31, 2008 due to decreased procedure volume.  During 2009, we continued
to take steps to improve collection results from internally financed patients,
including the use of credit scores to qualify patients for appropriate financing
options and higher down payments depending upon those credit
scores.  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
collect successfully patient accounts is dependent, in part, on overall economic
conditions.  Bad debt expense was 2.6% of revenue in 2009, 2008 and
2007.





Our cash
conservation measures also impacted cash flows from investing and financing
activities.  Capital expenditures were lower in 2009 as we curtailed
new vision center openings and vision center
relocations.   During 2008 and 2009, we did not repurchase any
shares of our common stock under the $50.0 million share repurchase program
authorized by our Board of Directors on August 21, 2007. During 2007, we
repurchased 588,408 shares of our common stock under this program at an average
price of $16.99 per share, for a total cost of approximately $10.0
million.  In addition, during the third quarter of 2008 our Board of
Directors suspended payment of a quarterly dividend.  The Board of
Directors will periodically review the decision to pay a
dividend.   We paid a quarterly dividend from the third quarter
of 2004 through the second quarter of 2008.





On April
24, 2008, we entered into a loan agreement with PNC Equipment Finance, LLC to
finance the majority of the IntraLase units that we purchased.  At
closing, we drew $19.2 million on the loan facility, which requires monthly
payments over a five-year period at a fixed interest rate of 4.96%. We typically
have financed our laser purchases with operating lease or capital lease
obligations provided by the vendors. The IntraLase purchases were made with cash
at the time of purchase. The loan transaction freed up that capital to be used
in the business for other corporate purposes. The remaining unpaid balance on
the bank loan was $12.8 million at December 31, 2009. The loan agreement
contains no financial covenants and, as with our capital lease obligations, is
secured by certain medical equipment.





Effective
March 1 and April 1, 2009, we entered into five-year lease agreements with Alcon
and AMO, respectively, for new excimer lasers which allowed us to standardize
our excimer treatment platforms and reduce the number of platforms at each of
our vision centers from three to two.  The standardization of our
excimer laser platforms reduces equipment and maintenance costs, while allowing
us to continue to offer the same broad spectrum of treatment options that
includes a standard treatment, a custom wavefront guided treatment, an optimized
treatment and IntraLase femtosecond technology.  As part of the
transactions, we disposed of our Bausch & Lomb lasers and retired $1.9
million in related capital lease obligations.  We received cash
payments totaling $6.8 million from the lessors that may be partially refundable
if we do not perform a minimum number of procedures over the term of the
agreements.  We have deferred these amounts and are recognizing them
ratably over the lease term.  The unrecognized portion is included in
“Accrued liabilities and other” for the current portion and in “Deferred license
fees” for the long-term portion in our Condensed Consolidated Balance Sheet at
December 31, 2009.  The AMO laser lease qualifies as a capital lease,
and the Alcon laser lease qualifies as an operating lease.





We did
not open any new vision centers in 2009.  During 2008, we opened six
vision centers.  Capital expenditures for 2009 and 2008 were $240,000
and $14.9 million, respectively.  Our costs associated with the
opening of a new vision center generally consist of capital expenditures such as
the purchase or lease of lasers, diagnostic equipment, office equipment and
leasehold improvements.  In addition, we typically incur other startup
expenses and pre-opening advertising expenses.  Generally, we estimate
the costs associated with opening a new vision center to be between $1.2 million
and $1.5 million.  Actual costs vary from vision center to vision
center based upon the location of the vision center, the number of lasers
purchased or leased for the vision center, the site of the vision center, the
cost of grand opening marketing and the level of leasehold improvements
required.


25


The
following is a list of the vision centers we opened or (closed) in the last two
fiscal years:





2009
                  
                  2008(Alpharetta,
      GA)
                  
                  Savannah,
      GA(Charlotte,
      NC)
                  
                  Des
      Moines, IA(Las
      Vegas, NV)
                  
                  Tulsa,
      OK(Scarsdale,
      NY)
                  
                  Woodbridge,
      NJ(Nashville,
      TN)
                  
                  Nashville,
      TN(Colorado
      Springs, CO)
                  
                  Arlington,
      TX(New
      Haven, CT)
                  
                  (Boise,
      ID)(Fresno,
      CA)
                  
                  (Little
      Rock, AR)(Grand
      Rapids, MI)
                  
                  (Tulsa,
      OK)(Sacramento,
      CA)(Concord,
      CA)(San
      Mateo, CA)





In
January 2010, we closed our San Jose, CA vision center.





At
December 31, 2009 and 2008, we held at par value $2.4 million and $5.6 million,
respectively, of various auction rate securities.  The assets
underlying the auction rate instruments were primarily municipal bonds,
preferred closed end funds, and credit default swaps.  Historically,
these securities provided liquidity through a Dutch auction process that resets
the applicable interest rate at pre-determined intervals every 7 to 28 days.
However, these auctions began to fail in the first quarter of 2008. Because
these auctions have failed, we have realized higher interest rates for many of
these auction rate securities than we would have otherwise. Although we have
been receiving interest payments at these rates, the related principal amounts
will not be accessible until a successful auction occurs, a buyer is found
outside of the auction process, the issuer calls the security, or the security
matures according to contractual terms. Maturity dates for our auction rate
securities range from 2016 to 2036. Since these auctions first failed in early
2008, $16.4 million of the related securities have been called at par by their
issuers, of which $1.0 million were redeemed in 2009.  We settled
an additional $2.3 million in auction rate securities in 2009 at 46% of original
par value.





The
following table aggregates our obligations and commitments to make future
payments under existing contracts at December 31, 2009 (dollars in
thousands).  We have excluded contractual obligations for which the
ultimate settlement of quantities or prices are not fixed and determinable. Also
excluded from the table is $555,000 in unrecognized tax benefits due to the
uncertainty regarding the timing of future cash flows.





Contractual Obligations
                  
                  Total
                  
                  
                  Less than
                    1year
                  
                  
                  1 - 3 years
                  
                  
                  3 - 5 years
                  
                  
                  More than
                    5 yearsCapital
      lease obligations
                  
                  $
                  393
                  
                  
                  $
                  393
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Long-term
      debt obligations (a)
                  
                  
                  13,863
                  
                  
                  
                  4,159
                  
                  
                  
                  8,318
                  
                  
                  
                  1,386
                  
                  
                  
                  -Operating
      lease obligations
                  
                  
                  35,371
                  
                  
                  
                  10,165
                  
                  
                  
                  15,955
                  
                  
                  
                  6,964
                  
                  
                  
                  2,287Deferred
      compensation
                  
                  
                  400
                  
                  
                  
                  400
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  $
                  50,027
                  
                  
                  $
                  15,117
                  
                  
                  $
                  24,273
                  
                  
                  $
                  8,350
                  
                  
                  $
                  2,287








Gross
property and equipment decreased $41.7 million from $121.7 million at December
31, 2008, to $80.0 million at December 31, 2009.  As a result of the
new laser agreements, Bausch & Lomb assets with a gross cost basis of $25.1
million were disposed of in the second quarter of 2009.  In 2009, we
recorded asset impairment charges of $10.3 million as a result of closing vision
centers.  We reclassified gross assets of $4.0 million, with a net
book value of $1.0 million, consisting primarily of lasers from closed vision
centers, to assets held for sale.





We believe that cash flowfrom 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.  Our
combined cash conservation and expense reduction measures last year included
closing 12 underperforming vision centers, reducing marketing expense by
approximately $18.6 million, reducing our headcount by 19%, and renegotiating
our equipment contracts.  The payroll and equipment cost reductions
resulted in an annual savings of approximately $11.0 million.  We
ended 2009 with $54.6 million in cash and investments.  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, 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.  Procedure volume for 2009 was 72,776.  There can
be no assurance as to the number of procedures we will perform in
2010.


26





Critical
Accounting Estimates





Our
accounting policies are more fully described in Note 1 to the Consolidated
Financial Statements.  As disclosed in Note 1, the preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions about future events that
affect the amounts reported in the financial statements and accompanying
notes.  Actual results could differ significantly from those
estimates.  We believe that the following discussion addresses our
most critical accounting policies, which are those that are most important to
the portrayal of our financial position and results of operations and require
management’s most difficult, subjective and complex judgments.





Revenue
Recognition, Patient Receivables and Allowance for Doubtful
Accounts


We
recognize revenues as services are performed and pervasive evidence of an
arrangement for payment exists.  Additionally, revenue is recognized
when the price is fixed and determinable and collectability is reasonably
assured.  We deferred revenues associated with separately priced
acuity programs and recognize them over the period in which future costs of
performing post-surgical enhancement procedures are expected to be incurred
because we have sufficient experience to support that costs associated with
future enhancements will be incurred on other than a straight-line
basis.  Effective June 15, 2007, we changed our pricing model and no
longer offer separately priced acuity options.  We report all revenues
net of tax assessed by qualifying governmental authorities.





A
significant percentage of our patients finance some or all of the cost of their
procedure.  We provide certain of our patients, including patients who
could not otherwise obtain third-party financing, with the ability to pay for
our procedures with direct financing.  We derive approximately 6% of
our revenues from patients to whom we have provided direct
financing.  The terms of our direct financing typically require the
customer to pay a set fee up-front, with the remaining balance paid by the
patient in up to 36 monthly installments.  Our direct financing
program exposes us to significant credit risks, particularly given that patients
who participate in the program generally have not been deemed creditworthy by
third-party financing companies.  To ensure that collectability is
reasonably assured at the time of the service offering, we actively monitor our
bad debt experience and adjust underwriting standards as necessary. In addition
to increasing underwriting standards in 2009 and 2008, which included an
increase in the minimum deposits required, we took steps to continue to improve
collection results from internally financed patients through the use of credit
scores to qualify patients for appropriate financing options.





Based
upon our own experience with patient financing, we have established an allowance
for doubtful accounts as of December 31, 2009 of $2.3 million against patient
receivables of $7.7 million, compared to an allowance of $3.1 million against
patient receivables of $15.5 million at December 31, 2008.  Our policy
is to reserve for all patient receivables that remain open past the financial
maturity date and to provide reserves for patient receivables prior to the
maturity date to reduce patient receivables net of reserves to the estimated net
realizable value based on historical collectibility rates and recent default
activity. Any excess in our actual allowance for doubtful account write-offs
over our estimated bad debt reserve, would adversely impact our results of
operations and cash flows.  To the extent that our actual allowance
for doubtful account write-offs are less than our estimated bad debt reserve, it
would favorably impact our results of operations and cash flows.





For
patients whom we finance with an initial term over 12 months, we charge interest
at market rates and we recognize revenues based upon the present values of the
expected payments.  Finance and interest charges on patient
receivables were $1.5 million in 2009, $2.6 million in 2008 and $1.8 million in
2007. We included these amounts in “Net investment income (loss)” within the
Consolidated Statements of Operation.





Insurance
Reserves


We
maintain a captive insurance company to provide professional liability insurance
coverage for claims brought against us after December 17, 2002. In addition, our
captive insurance company’s charter allows it to provide professional liability
insurance for our doctors, none of whom are currently insured by the captive. We
use the captive insurance company for both primary insurance and excess
liability coverage.  Our captive insurance company has a number of
pending claims. We consolidate the financial statements of the captive insurance
company with our financial statements because it is a wholly-owned enterprise.
As of December 31, 2009, we maintained insurance reserves of $9.2 million, which
represent primarily an actuarially determined estimate of future costs
associated with claims filed as well as claims incurred but not yet
reported.  This represents a decrease in the reserve, driven
principally by lower procedure volumes in 2009 and favorable claim experience,
of $335,000 from $9.5 million at December 31, 2008. Our actuaries determine
our loss reserves by comparing our historical claim experience to comparable
insurance industry experience.  Since the inception of the captive
insurance company in 2002, it has disbursed total claims and legal expense
payments of $2.5 million.


27


Accrued
Enhancement Expense


Effective
June 15, 2007, we include participation in our Satisfaction Program (“acuity
program”) in the base surgical price for substantially all of our
patients.  Under the acuity program, we provide post-surgical
enhancements free of charge should the patient not achieve the desired visual
correction during the initial procedure.  Under the revised pricing
structure, we account for the acuity program as a warranty
obligation.  Accordingly, we accrue as a liability the costs we expect
to incur to satisfy the obligation and direct cost of service at the point of
sale given our ability to reasonably estimate such costs based on historical
trends and the satisfaction of all other revenue recognition
criteria.





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





Deferred
Revenues


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





Effective
June 15, 2007, we changed our pricing model and no longer offer separately
priced acuity options.  For substantially all patients, we now include
participation in the acuity program in the base surgical price.  We
have not deferred any warranty-related revenue for procedures performed since
that date, and we will not make any additions in the deferral account in the
future.  We are recognizing revenue previously deferred from the sale
of the separately priced acuity programs over a seven-year period, our current
estimate of the period over which costs to provide the enhancement services will
be incurred.





The
balances in deferred revenue at December 31, 2009 and 2008 totaled $14.0 million
and $23.1 million, respectively.  We will amortize the December 31,
2009 balance into income as follows (dollars in thousands):





2010
                      
                      $
                      6,1512011
                      
                      
                      4,3762012
                      
                      
                      2,5162013
                      
                      
                      8702014
                      
                      
                      90$
                      14,003





In
addition to the deferral of revenues, we also have deferred a portion of our
costs of service related to professional fees paid to the attending surgeon when
a procedure is performed.  These costs total 10% of the
revenue.  The physician receives no incremental fee for an enhancement
procedure.  Accordingly, a portion of the professional fee paid to the
physician relates to the future enhancement procedures to be performed and
qualifies for deferral as a direct and incremental cost of the warranty
contract.  We use the same historical experience to amortize deferred
professional fees that we use to amortize deferred revenue.





Property
and Equipment, and Depreciation and Amortization


We record
our property and equipment at its original cost, net of accumulated
depreciation. At the time property or equipment is retired, sold, or otherwise
disposed of, we deduct the related cost and accumulated depreciation from the
amounts reported in the Consolidated Balance Sheets and recognize any gains or
losses on disposition in the Consolidated Statements of Operations. We expense
repair and maintenance costs as incurred.  We include assets recorded
under capitalized leases within property and equipment.


28


We
compute depreciation using the straight-line method, which recognizes the cost
of the asset over its estimated useful life. We use the following estimated
useful lives for computing the annual depreciation expense:





Fixed Asset Group
                      
                      Depreciable LivesBuilding
      and building improvements
                      
                      5 -
      39 yearsFurniture
      and fixtures
                      
                      3 -
      7 yearsMedical
      equipment
                      
                      3 -
      5 yearsOther
      equipment
                      
                      3 -
      5
years





We record
amortization of leasehold improvements in the Consolidated Statements of
Operations as a component of depreciation expense using the straight-line method
based on the lesser of the useful life of the improvement or the lease term,
which is typically five years or less.





We assess
the impairment of property and equipment whenever events or circumstances
indicate that the carrying value might not be recoverable.  We write
down recorded values of property and equipment that are not expected to be
recovered through undiscounted future net cash flows to fair value, which is
generally determined from estimated discounted cash flows for assets held for
use.  In evaluating the recoverability of our recorded values and
property and equipment, we analyzed the future undiscounted net cash flows for
each of our laser vision correction centers, the lowest level for which there
are identifiable cash flows.  The key assumption we used to determine
the cash flow forecasts included a cash flow period of five years, which is
reflective of the remaining useful life of the primary assets within the laser
vision correction centers.





During
2009, we recognized $5.4 million in impairment charges due primarily to reducing
the carrying amount of long-lived assets.  These impairment charges
recognized during 2009 reflect our decision to close underperforming vision
centers in order to preserve cash and increase operational
effectiveness.  Based on our evaluation of the ongoing value of
property and equipment, we determined that leasehold improvements with a
carrying amount of $2.5 million and excimer lasers with a carrying amount of
$3.7 million were no longer recoverable and were in fact
impaired.   We wrote the leasehold improvements down to their
estimated fair value of zero.  We adjusted the carrying value of the
excimer lasers to their fair value, which we determined based on estimated
market prices of similar assets.  We are actively marketing and
selling our unused excimer lasers at December 31, 2009, which is reflected by
$1.0 million in assets held for sale at that date.  Based on current
estimates, the carrying amount for remaining property and equipment was
recoverable through future undiscounted cash flows.  Because of
deteriorating market conditions, it is reasonably possible that our estimate of
discounted cash flows may change in the near term resulting in the need to
adjust our determination of fair value or recoverability.  The fair
value measurement utilized in our internal discounted cash flow analysis
represent Level 3 inputs under ASC 820.





Deferred
tax valuation allowance


U.S. GAAP
requires a company to establish a valuation allowance for deferred tax assets
when it is more-likely-than-not that the deferred tax asset will not be
realized.  Deferred tax assets may be realized through future
reversals of existing taxable temporary differences, future taxable income,
taxable income in prior carryback year(s) if carryback is permitted, and tax
planning strategies.





We
considered all positive and negative evidence in weighing whether or not the
deferred tax assets are more-likely-than-not to be realized, including the
current economic conditions and our 2010 operating projections completed during
2009.  After considering all of the evidence, we believe that reliance
on future projections of income is no longer sufficient to support realization
of our deferred tax assets.  Accordingly, in 2009 we established a
valuation allowance against all of our net deferred tax assets in the amount of
$12.2 million as we believe it is not more-likely-than-not that our net deferred
tax assets will be utilized.  We established a valuation allowance of
$1.2 million in 2008 for the tax benefit generated from the other-than-temporary
impairments recognized in 2008 with respect to certain of our investment
holdings because we did not have capital gains to offset these capital
losses.





Consolidation


We use
the consolidation method to report our investment in majority-owned subsidiaries
and other companies that are not considered variable interest entities (“VIEs”).
We have no investments in any VIEs.  In addition, we consolidate the
results of operations of professional corporations with which we contract to
provide the services of ophthalmologists or optometrists at our vision
centers.   We account for investments in joint ventures and 20%
to 50% owned affiliates where we have the ability to exert significant influence
by the equity method.


29


Item 7A.Quantitative and Qualitative
Disclosures About Market Risk.





The
carrying values of financial instruments including cash and cash equivalents,
patient and other accounts receivable, and accounts payable approximate fair
value because of the short maturity of these instruments.  We record
investments at fair value.





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





Long-term
investments include auction rate securities that are currently failing
auction.  We record these investments at fair value using a trinomial
discounted cash flow 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.  The
recent disruptions in the credit and financial markets are having a significant
adverse impact to the fair market value of these instruments.  At
December 31, 2009, the par value of our auction rate securities held by us was
$2.4 million and the fair value was $2.1 million.  Continuing
uncertainty in the credit markets, lack of liquidity and rising risk of defaults
may adversely impact the fair value of these investments in future
periods.





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.  In addition, because our capital leases and secured
indebtedness are at fixed rates, we have limited interest-rate
risk.


30


Item 8. Financial Statements
and Supplementary Data.





Index
to Financial Statements





PageReport
      of Management on Internal Control over Financial Reporting
                            32Reports
      of Independent Registered Public Accounting Firm
                            33Consolidated
      Balance Sheets as of December 31, 2009 and 2008
                            35Consolidated
      Statements of Operations for the years ended December 31, 2009, 2008 and
      2007
                            36Consolidated
      Statements of Cash Flows for the years ended December 31, 2009, 2008 and
      2007
                            37Consolidated
      Statements of Stockholders' Investment as of and for the years ended
      December 31, 2009, 2008 and 2007
                            38Notes
      to Consolidated Financial Statements
                            39




31


REPORT
OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING





We, the
management of LCA-Vision Inc., are responsible for establishing and maintaining
adequate internal control over financial reporting, as such term is defined in
the Securities Exchange Act Rules 13a-15(f) and 15d-15(f), and for the
preparation and integrity of the consolidated financial statements and the
information contained in this Annual Report.  We prepared the
accompanying consolidated financial statements in accordance with U.S. generally
accepted accounting principles. In addition to selecting appropriate accounting
principles, we are responsible for the way information is presented and its
reliability. To report financial results we must often make estimates based on
currently available information and judgments of current conditions and
circumstances.





We
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2009.  In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control – Integrated Framework.  As a
result of this assessment, management believes that, as of December 31, 2009,
our internal control over financial reporting is effective based on the criteria
described above.





Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements and, even when determined to be effective, can
only provide reasonable assurance with respect to financial statement
preparation and presentation.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risks that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





Ernst
& Young LLP, our independent registered public accounting firm, has audited
and reported on our consolidated financial statements and the effectiveness of
our internal control over financial reporting.  The reports of the
independent auditors are included herein.





/s/ David L. Thomas
              
              /s/ Michael J.
CelebrezzeDavid
      L. Thomas
              
              Michael
      J. CelebrezzeChief
      Operating Officer
              
              Senior
      Vice President of Finance, Chief Financial(Co-Principal
      Executive Officer)
              
              Officer
      and Treasurer(Co-Principal
      Executive Officer, Principal Financial and
                Accounting
      Officer)





February
26, 2010


32


Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders of LCA-Vision Inc.





We have
audited the accompanying consolidated balance sheets of LCA-Vision Inc. as of
December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders' investment, and cash flows for each of the three years
in the period ended December 31, 2009.  Our audits also included the
financial statement schedule listed in the Index at Item 15.(a)(2). These
financial statements and schedule are the responsibility of LCA-Vision Inc.’s
management.  Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of LCA-Vision Inc. at
December 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2009, in conformity with U.S. generally accepted accounting principles.
 Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.





As
described in Note 1 to the consolidated financial statements, effective January
1, 2007 LCA-Vision Inc. adopted new Financial Accounting Standards Board
authoritative guidance on accounting for uncertainty in income
taxes.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), LCA-Vision Inc.'s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 26, 2010
expressed an unqualified opinion thereon.





/s/
      Ernst & Young LLP





Cincinnati,
Ohio


February
26, 2010




33




Report
of Independent Registered Public Accounting Firm





The Board
of Directors and Stockholders of LCA-Vision Inc.





We have
audited LCA-Vision Inc.’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). LCA-Vision Inc.’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Report of Management on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





In our
opinion, LCA-Vision Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based onthe COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of LCA-Vision
Inc. as of December 31, 2009 and 2008, and the related consolidated statements
of operations, stockholders’ investment, and cash flows for each of the three
years in the period ended December 31, 2009 of LCA-Vision Inc., and our report
dated February 26, 2010 expressed an unqualified opinion thereon.





/s/
      Ernst & Young LLP





Cincinnati,
Ohio


February
26, 2010


34





LCA-VISION INC.CONSOLIDATED
      BALANCE SHEETS(Dollars
      in thousands)





At December 31,2009
                
                
                2008AssetsCurrent
      assetsCash
      and cash equivalents
                
                $
                24,049
                
                
                $
                23,648Short-term
      investments
                
                
                28,455
                
                
                
                32,687Patient
      receivables, net of allowance for doubtful accounts of $1,645 and
      $1,465
                
                
                4,562
                
                
                
                9,678Other
      accounts receivable
                
                
                2,002
                
                
                
                2,515Assets
      held for sale
                
                
                1,031
                
                
                
                -Prepaid
      professional fees
                
                
                615
                
                
                
                911Prepaid
      income taxes
                
                
                12,270
                
                
                
                8,957Deferred
      tax assets
                
                
                -
                
                
                
                4,708Deferred
      compensation plan assets
                
                
                400
                
                
                
                -Prepaid
      expenses and other
                
                
                5,582
                
                
                
                5,299Total
      current assets
                
                
                78,966
                
                
                
                88,403Property
      and equipment
                
                
                79,993
                
                
                
                121,734Accumulated
      depreciation and amortization
                
                
                (53,995
                )
                
                
                (70,235
                )Property
      and equipment, net
                
                
                25,998
                
                
                
                51,499Long-term
      investments
                
                
                2,090
                
                
                
                3,126Patient
      receivables, net of allowance for doubtful accounts of $674 and
      $1,662
                
                
                854
                
                
                
                2,645Deferred
      compensation plan assets
                
                
                -
                
                
                
                2,196Investment
      in unconsolidated businesses
                
                
                137
                
                
                
                377Deferred
      tax assets
                
                
                -
                
                
                
                7,027Other
      assets
                
                
                4,590
                
                
                
                2,209Total
      assets
                
                $
                112,635
                
                
                $
                157,482Liabilities
      and Stockholders' InvestmentCurrent
      liabilitiesAccounts
      payable
                
                $
                6,504
                
                
                $
                8,169Accrued
      liabilities and other
                
                
                11,581
                
                
                
                8,608Deferred
      revenue
                
                
                6,151
                
                
                
                9,107Deferred
      compensation liability
                
                
                400
                
                
                
                -Debt
      obligations maturing in one year
                
                
                3,998
                
                
                
                6,985Total
      current liabilities
                
                
                28,634
                
                
                
                32,869Long-term
      rent obligations and other
                
                
                2,395
                
                
                
                1,820Long-term
      debt obligations (less current portion)
                
                
                9,145
                
                
                
                14,120Deferred
      compensation liability
                
                
                -
                
                
                
                2,196Insurance
      reserve
                
                
                9,154
                
                
                
                9,489Deferred
      license fee
                
                
                4,428
                
                
                
                -Deferred
      revenue
                
                
                7,852
                
                
                
                14,003Stockholders'
      InvestmentCommon
      stock ($.001 par value; 25,287,387 and 25,199,374 shares and 18,619,185
      and 18,552,985 shares issued and outstanding,
respectively)
                
                
                25
                
                
                
                25Contributed
      capital
                
                
                174,325
                
                
                
                174,206Common
      stock in treasury, at cost (6,668,202 shares and 6,646,749
      shares)
                
                
                (114,668
                )
                
                
                (114,632
                )Retained
      (deficit) earnings
                
                
                (9,729
                )
                
                
                23,515Accumulated
      other comprehensive income (loss)
                
                
                1,074
                
                
                
                (129
                )Total
      stockholders' investment
                
                
                51,027
                
                
                
                82,985Total
      liabilities and stockholders' investment
                
                $
                112,635
                
                
                $
                157,482





See Notes
to Consolidated Financial Statements


35





LCA-VISION
      INC.CONSOLIDATED
      STATEMENTS OF OPERATIONS(Dollars
      in thousands, except per share amounts)





Year Ended December 31,2009
                      
                      
                      2008
                      
                      
                      2007Revenues
      -  Laser refractive surgery
                      
                      $
                      129,213
                      
                      
                      $
                      205,176
                      
                      
                      $
                      292,635Operating
      costs and expensesMedical
      professional and license fees
                      
                      
                      28,746
                      
                      
                      
                      41,797
                      
                      
                      
                      49,312Direct
      costs of services
                      
                      
                      63,579
                      
                      
                      
                      77,474
                      
                      
                      
                      97,423General
      and administrative expenses
                      
                      
                      16,501
                      
                      
                      
                      20,262
                      
                      
                      
                      22,657Marketing
      and advertising
                      
                      
                      33,784
                      
                      
                      
                      52,429
                      
                      
                      
                      66,469Depreciation
                      
                      
                      14,198
                      
                      
                      
                      17,972
                      
                      
                      
                      11,209Consent
      revocation solicitation charges
                      
                      
                      780
                      
                      
                      
                      -
                      
                      
                      
                      -Impairment
      charges
                      
                      
                      5,414
                      
                      
                      
                      1,672
                      
                      
                      
                      -Restructuring
      charges
                      
                      
                      2,696
                      
                      
                      
                      1,804
                      
                      
                      
                      -Operating
      (loss) income
                      
                      
                      (36,485
                      )
                      
                      
                      (8,234
                      )
                      
                      
                      45,565Equity
      in earnings from unconsolidated businesses
                      
                      
                      122
                      
                      
                      
                      477
                      
                      
                      
                      814Net
      investment income (loss)
                      
                      
                      1,785
                      
                      
                      
                      (1,524
                      )
                      
                      
                      5,953Other
      income (loss), net
                      
                      
                      385
                      
                      
                      
                      23
                      
                      
                      
                      (607
                      )(Loss)
      income before taxes on income
                      
                      
                      (34,193
                      )
                      
                      
                      (9,258
                      )
                      
                      
                      51,725Income
      tax (benefit) expense
                      
                      
                      (949
                      )
                      
                      
                      (2,623
                      )
                      
                      
                      19,221Net
      (loss) income
                      
                      $
                      (33,244
                      )
                      
                      $
                      (6,635
                      )
                      
                      $
                      32,504Net
      (loss) income per common shareBasic
                      
                      $
                      (1.79
                      )
                      
                      $
                      (0.36
                      )
                      
                      $
                      1.66Diluted
                      
                      $
                      (1.79
                      )
                      
                      $
                      (0.36
                      )
                      
                      $
                      1.64Dividends
      declared per share
                      
                      $
                      -
                      
                      
                      $
                      0.24
                      
                      
                      $
                      0.72Weighted
      average shares outstandingBasic
                      
                      
                      18,594
                      
                      
                      
                      18,526
                      
                      
                      
                      19,572Diluted
                      
                      
                      18,594
                      
                      
                      
                      18,526
                      
                      
                      
                      19,858





See Notes
to Consolidated Financial Statements


36




LCA-VISION INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(dollars
      in thousands)





Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Cash
      flow from operating activities:Net
      (loss) income
                  
                  $
                  (33,244
                  )
                  
                  $
                  (6,635
                  )
                  
                  $
                  32,504Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                  
                  
                  14,198
                  
                  
                  
                  17,972
                  
                  
                  
                  11,209Provision
      for loss on doubtful accounts
                  
                  
                  3,320
                  
                  
                  
                  5,355
                  
                  
                  
                  7,675(Gain)
      loss on investments
                  
                  
                  (48
                  )
                  
                  
                  3,115
                  
                  
                  
                  (111
                  )Impairment
      charges
                  
                  
                  5,414
                  
                  
                  
                  1,672
                  
                  
                  
                  -(Gain)
      loss on sale of property and equipment
                  
                  
                  (385
                  )
                  
                  
                  2
                  
                  
                  
                  596Deferred
      income taxes
                  
                  
                  10,943
                  
                  
                  
                  4,965
                  
                  
                  
                  5,369Stock-based
      compensation
                  
                  
                  790
                  
                  
                  
                  1,878
                  
                  
                  
                  5,024Insurance
      reserve
                  
                  
                  (335
                  )
                  
                  
                  996
                  
                  
                  
                  2,330Equity
      in earnings from unconsolidated affiliates
                  
                  
                  (122
                  )
                  
                  
                  (477
                  )
                  
                  
                  (814
                  )Distributions
      from unconsolidated affiliates
                  
                  
                  362
                  
                  
                  
                  690
                  
                  
                  
                  1,128Changes
      in operating assets and liabilities:Patient
      receivable
                  
                  
                  3,587
                  
                  
                  
                  (410
                  )
                  
                  
                  (11,500
                  )Other
      accounts receivable
                  
                  
                  513
                  
                  
                  
                  3,426
                  
                  
                  
                  1,080Prepaid
      income taxes
                  
                  
                  (3,313
                  )
                  
                  
                  (2,566
                  )
                  
                  
                  (4,035
                  )Prepaid
      expenses and other
                  
                  
                  773
                  
                  
                  
                  (223
                  )
                  
                  
                  1,338Accounts
      payable
                  
                  
                  (1,665
                  )
                  
                  
                  (2,227
                  )
                  
                  
                  5,132Deferred
      revenue, net of professional fees
                  
                  
                  (8,196
                  )
                  
                  
                  (16,847
                  )
                  
                  
                  (7,212
                  )Accrued
      liabilities and other
                  
                  
                  8,809
                  
                  
                  
                  (3,755
                  )
                  
                  
                  5,266Net
      cash provided by operations
                  
                  
                  1,401
                  
                  
                  
                  6,931
                  
                  
                  
                  54,979Cash
      flows from investing activities:Purchases
      of property and equipment
                  
                  
                  (240
                  )
                  
                  
                  (14,869
                  )
                  
                  
                  (28,864
                  )Proceeds
      from sale of property and equipment
                  
                  
                  466
                  
                  
                  
                  18
                  
                  
                  
                  -Purchases
      of investment securities
                  
                  
                  (327,367
                  )
                  
                  
                  (391,026
                  )
                  
                  
                  (330,826
                  )Proceeds
      from sale of investment securities
                  
                  
                  333,438
                  
                  
                  
                  396,674
                  
                  
                  
                  356,874Other,
      net
                  
                  
                  99
                  
                  
                  
                  755
                  
                  
                  
                  (160
                  )Net
      cash provided by (used in) investing activities
                  
                  
                  6,396
                  
                  
                  
                  (8,448
                  )
                  
                  
                  (2,976
                  )Cash
      flows from financing activities:Principal
      payments of capital lease obligations and loan
                  
                  
                  (7,962
                  )
                  
                  
                  (6,410
                  )
                  
                  
                  (5,782
                  )Proceeds
      from loan
                  
                  
                  -
                  
                  
                  
                  19,184
                  
                  
                  
                  -Shares
      repurchased for treasury stock
                  
                  
                  (36
                  )
                  
                  
                  (205
                  )
                  
                  
                  (44,940
                  )Tax
      benefits related to stock-based compensation
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,949Exercise
      of stock options
                  
                  
                  18
                  
                  
                  
                  193
                  
                  
                  
                  3,499Dividends
      paid to stockholders
                  
                  
                  -
                  
                  
                  
                  (4,447
                  )
                  
                  
                  (13,984
                  )Net
      cash (used in) provided by financing activities
                  
                  
                  (7,980
                  )
                  
                  
                  8,315
                  
                  
                  
                  (59,258
                  )Net
      effect of exchange rate changes on cash and cash
    equivalents
                  
                  
                  584
                  
                  
                  
                  (764
                  )
                  
                  
                  438Increase
      (decrease) in cash and cash equivalents
                  
                  
                  401
                  
                  
                  
                  6,034
                  
                  
                  
                  (6,817
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  23,648
                  
                  
                  
                  17,614
                  
                  
                  
                  24,431Cash
      and cash equivalents at end of year
                  
                  $
                  24,049
                  
                  
                  $
                  23,648
                  
                  
                  $
                  17,614





See Notes
to Consolidated Financial Statements


37





LCA-VISION INC.CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS' INVESTMENT(Dollars
      in thousands)





Year Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    Amount
                    
                    
                    Shares
                    
                    
                    AmountCommon
      StockBalance
      at beginning of year
                    
                    
                    25,199,734
                    
                    
                    $
                    25
                    
                    
                    
                    25,114,244
                    
                    
                    $
                    25
                    
                    
                    
                    24,814,542
                    
                    
                    $
                    25Employee
      stock plans
                    
                    
                    87,653
                    
                    
                    
                    -
                    
                    
                    
                    85,490
                    
                    
                    
                    -
                    
                    
                    
                    299,702
                    
                    
                    
                    -Balance
      at end of year
                    
                    
                    25,287,387
                    
                    
                    $
                    25
                    
                    
                    
                    25,199,734
                    
                    
                    $
                    25
                    
                    
                    
                    25,114,244
                    
                    
                    $
                    25Common
      Stock in TreasuryBalance
      at beginning of year
                    
                    
                    (6,646,749
                    )
                    
                    $
                    (114,632
                    )
                    
                    
                    (6,631,586
                    )
                    
                    $
                    (114,427
                    )
                    
                    
                    (4,993,194
                    )
                    
                    $
                    (69,487
                    )Shares
      repurchased
                    
                    
                    (21,453
                    )
                    
                    
                    (36
                    )
                    
                    
                    (15,163
                    )
                    
                    
                    (205
                    )
                    
                    
                    (1,638,392
                    )
                    
                    
                    (44,940
                    )Balance
      at end of year
                    
                    
                    (6,668,202
                    )
                    
                    $
                    (114,668
                    )
                    
                    
                    (6,646,749
                    )
                    
                    $
                    (114,632
                    )
                    
                    
                    (6,631,586
                    )
                    
                    $
                    (114,427
                    )Contributed
      CapitalBalance
      at beginning of year
                    
                    
                    
                    
                    
                    $
                    174,206
                    
                    
                    
                    
                    
                    
                    $
                    172,965
                    
                    
                    
                    
                    
                    
                    $
                    162,245Employee
      stock plans
                    
                    
                    
                    
                    
                    
                    18
                    
                    
                    
                    
                    
                    
                    
                    193
                    
                    
                    
                    
                    
                    
                    
                    3,499Stock
      based compensation
                    
                    
                    
                    
                    
                    
                    790
                    
                    
                    
                    
                    
                    
                    
                    1,878
                    
                    
                    
                    
                    
                    
                    
                    5,024Deferred
      tax (expense) benefit of disqualified stock options
                    
                    
                    
                    
                    
                    
                    (689
                    )
                    
                    
                    
                    
                    
                    
                    (830
                    )
                    
                    
                    
                    
                    
                    
                    2,197Balance
      at end of year
                    
                    
                    
                    
                    
                    $
                    174,325
                    
                    
                    
                    
                    
                    
                    $
                    174,206
                    
                    
                    
                    
                    
                    
                    $
                    172,965Retained
      Earnings (Deficit)Balance
      at beginning of year
                    
                    
                    
                    
                    
                    $
                    23,515
                    
                    
                    
                    
                    
                    
                    $
                    34,597
                    
                    
                    
                    
                    
                    
                    $
                    16,320Cumulative
      effect of change in accounting principle
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    (243
                    )Net
      (loss) income
                    
                    
                    
                    
                    
                    
                    (33,244
                    )
                    
                    
                    
                    
                    
                    
                    (6,635
                    )
                    
                    
                    
                    
                    
                    
                    32,504Dividends
      paid, $0.24 and $0.72 per common share in 2008 and 2007
      respectively
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    
                    
                    
                    
                    (4,447
                    )
                    
                    
                    
                    
                    
                    
                    (13,984
                    )Balance
      at end of year
                    
                    
                    
                    
                    
                    $
                    (9,729
                    )
                    
                    
                    
                    
                    
                    $
                    23,515
                    
                    
                    
                    
                    
                    
                    $
                    34,597Accumulated
      Other Comprehensive Income (Loss)Balance
      at beginning of year
                    
                    
                    
                    
                    
                    $
                    (129
                    )
                    
                    
                    
                    
                    
                    $
                    439
                    
                    
                    
                    
                    
                    
                    $
                    13Foreign
      currency translation adjustments
                    
                    
                    
                    
                    
                    
                    631
                    
                    
                    
                    
                    
                    
                    
                    (533
                    )
                    
                    
                    
                    
                    
                    
                    367Unrealized
      investment gain (loss), net of tax of ($381), $16, and
    ($39)
                    
                    
                    
                    
                    
                    
                    572
                    
                    
                    
                    
                    
                    
                    
                    (35
                    )
                    
                    
                    
                    
                    
                    
                    59Balance
      at end of year
                    
                    
                    
                    
                    
                    $
                    1,074
                    
                    
                    
                    
                    
                    
                    $
                    (129
                    )
                    
                    
                    
                    
                    
                    $
                    439Total
      Stockholders' Investment
                    
                    
                    
                    
                    
                    $
                    51,027
                    
                    
                    
                    
                    
                    
                    $
                    82,985
                    
                    
                    
                    
                    
                    
                    $
                    93,599





See Notes
to Consolidated Financial Statements


38


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





1.
              Description
      of Business and Summary of Significant Accounting
  Policies





Business


We are a
provider of fixed-site laser vision correction services at our LasikPlus®vision
centers. Our vision centers provide the staff, facilities, equipment and
support services for performing laser vision correction 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”).  Ourvision
centers are supported by independent board-certified ophthalmologists and
credentialed optometrists, as well as other healthcare
professionals.  The ophthalmologists perform the laser vision
correction procedures in our vision centers, and either ophthalmologists or
optometrists conduct pre-procedure evaluations and post-operative follow-ups
in-center.   Most of our patients receive a procedure called
LASIK, which we began performing in the United States in 1997.





As of
December 31, 2009, we operated 63 LasikPlus®
fixed-site laser vision correction centers in the United States and a joint
venture in Canada.  Included in the 63 centers is one vision center
licensed to an ophthalmologist to operate using our
trademarks.  Due to the nature of our operations and organization, we
operate in only one business segment.





Consolidation
and Basis of Presentation


We use
the consolidation method to report our investment in majority-owned subsidiaries
and other companies that are not considered variable interest entities
(“VIEs”).  We have no investments in any VIEs.   In
addition, we consolidate the results of operations of professional corporations
with which we contract to provide the services of ophthalmologists or
optometrists at our vision centers.  Investments in joint ventures and
20% to 50% owned affiliates where we have the ability to exert significant
influence are accounted for by the equity method.  Intercompany
transactions and balances have been eliminated upon consolidation.





Use
of Estimates


The
preparation of our Consolidated Financial Statements in conformity with U.S.
generally accepted accounting principles (“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 Consolidated Financial
Statements to conform to current period presentation.  The
reclassifications were not material to the Consolidated Financial
Statements.





Cash
and Cash Equivalents


We
consider highly liquid investments with an original maturity of 90 days or less
when purchased to be cash equivalents.





Investments


Management
determines the appropriate classification of securities at the time of purchase
and re-evaluates 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 (loss), a component of stockholders’
investment.  The amortized cost of debt securities in this category
reflects amortization of premiums and accretion of discounts to maturity
computed under the effective interest method.  We include this
amortization in the caption “Net investment income (loss)” within the
Consolidated Statements of Operations.  We also include in net
investment income realized gains and losses and declines in value judged to be
other-than-temporary.  We base the cost of securities sold upon the
specific identification method.  We include interest and dividends on
securities classified as available-for-sale in net investment income
(loss).





39




Patient
Receivables and Allowance for Doubtful Accounts


We
provide patient financing to some of our customers, including those who could
not otherwise obtain third-party financing. The terms of the financing require
the patient to pay an up-front fee which is intended to cover some or all of our
variable costs, and then generally we deduct the remainder automatically from
the patient’s checking account over a period of 12 to 36 months.  We
have recorded an allowance for doubtful accounts as a best estimate of the
amount of probable credit losses from our patient financing
program.  Each month, we review the allowance and adjust the allowance
based upon our own experience with patient financing. We charge off receivables
against the allowance for doubtful accounts when it is probable a receivable
will not be recovered.  Our policy is to reserve for all receivables
that remain open past their financial maturity date and to provide reserves for
receivables prior to the maturity date so as to bring receivables net of
reserves down to the estimated net realizable value based on historical
collectibility rates, recent default activity and the current credit
environment.  Bad debt expense was $3.3 million, $5.4 million,
and $7.7 million, or 2.6% of revenues, for 2009, 2008, and
2007, respectively.





For
patients whom we finance with an initial term over 12 months, we charge interest
at market rates, and we recognize revenues based upon the present values of the
expected payments.  Finance and interest charges on patient
receivables were $1.5 million in 2009, $2.6 million in 2008 and $1.8 million in
2007. We include these amounts in net investment income (loss) within the
Consolidated Statements of Operation.





Property
and Equipment, and Depreciation and Amortization


We record
our property and equipment at its original cost, net of accumulated
depreciation. At the time property or equipment is retired, sold, or otherwise
disposed of, we deduct the related cost and accumulated depreciation from the
amounts reported in the Consolidated Balance Sheets and recognize any gains or
losses on disposition in the Consolidated Statements of Operations. We expense
repair and maintenance costs as incurred.  We include assets recorded
under capitalized leases within property and equipment.





We
compute depreciation using the straight-line method, which recognizes the cost
of the asset over its estimated useful life. We use the following estimated
useful lives for computing the annual depreciation expense:





FixedAssetGroup
                  
                  DepreciableLivesBuilding
      and building improvements
                  
                  5 -
      39 yearsFurniture
      and fixtures
                  
                  3 -
      7 yearsMedical
      equipment
                  
                  3 -
      5 yearsOther
      equipment
                  
                  3 -
      5 years





We record
amortization of leasehold improvements in the Consolidated Statements of
Operations as a component of depreciation expense using the straight-line method
based on the lesser of the useful life of the improvement or the lease term,
which is typically five years or less.





We assess
the impairment of property and equipment whenever events or circumstances
indicate that the carrying value might not be recoverable.  We write
down to fair value, which is generally determined from estimated discounted cash
flows for assets held for use, recorded values of property and equipment that we
do not expect to recover through undiscounted future net cash
flows.  During 2008, we recognized fixed asset impairment charges of
$553,000 for certain assets held for use in a laser vision correction
center.  We also incurred impairment charges of $5.4 million and $1.1
million in 2009 and 2008, respectively, primarily as a result of our decision to
close under-performing vision centers. The
closures of the vision centers do not qualify for classification as a
discontinued operation due to continuing cash flows. We will continue to incur
cash expenditures related to these vision centers in the form of future
facility lease payments, excimer laser lease payments and costs associated with
post-operative and post-surgical enhancements. For vision centers where we will
license an ophthalmologist to operate using our trademarks, we will generate
future cash in-flows in the form of license fees.  In
2009, we did not record any impairments on remaining vision center assets held
for use.





Deferred
Compensation Plan Assets


We
maintain a self-directed non-qualified deferred compensation plan structured as
a rabbi trust for certain highly compensated individuals.  We invest
the deferred compensation plan assets in a variety of mutual funds including a
money market fund, a bond fund and several equity funds.  We report
these assets at fair value.  In 2009, the Compensation Committee of
our Board of Directors approved the termination of our deferred compensation
plan.  We distributed approximately $2.4 million to participants in
December 2009.  There was $400,000 remaining at December 31, 2009,
that was distributed to participants in January 2010.





Accrued
Enhancement Expense


Effective
June 15, 2007, we included participation in our Satisfaction Program (acuity
program) in the base surgical price for substantially all of our
patients.  Under the acuity program, we provide post-surgical
enhancements free of charge should the patient not achieve the desired visual
correction during the initial procedure.  Under this pricing
structure, we account for the acuity program as a warranty obligation.
Accordingly, we accrue the costs expected to be incurred to satisfy the
obligation as a liability and direct cost of service at the point of sale given
our ability to reasonably estimate such costs based on historical trends and the
satisfaction of all other revenue recognition criteria.


40





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





Deferred
Revenues


Prior to
June 15, 2007, we separately priced our acuity programs, which included a
no-acuity plan, a one-year acuity plan, and a lifetime acuity plan. U.S. GAAP
requires 100% of revenues from the sale of extended acuity programs to be
deferred and recognized over the life of the contract on a straight-line basis
unless sufficient experience exists to indicate that the costs to provide the
service will be incurred other than on a straight-line basis.  We have
sufficient experience to support recognition on other than a straight-line
basis.  Accordingly, we have deferred these revenues and are
recognizing them over the period in which the future costs of performing the
enhancement procedures are expected to be incurred.  For programs that
included one-year and lifetime options but did not include a no-acuity option,
costs associated with the sale of the lifetime acuity plan begin after the
expiration of the one-year acuity plan included in the base
price.  Accordingly, we deferred 100% of all revenues associated with
the sale of the lifetime acuity plan and are recognizing them beginning one year
after the initial surgery date.  For programs that included a
no-acuity option in addition to the one-year and lifetime options, we deferred
all revenues from the sale of the one-year and lifetime acuity plans and
recognized them in proportion to the total costs expected to be incurred,
beginning immediately following the initial surgical procedure.





Effective
June 15, 2007, we changed our pricing model and no longer offer separately
priced acuity options.  For substantially all patients, we now include
participation in the acuity program in the base surgical price.  We
have not recorded any warranty-related revenue deferrals for procedures
performed since that date and there will be no additions in the deferral account
in the future.  We are recognizing revenue previously deferred from
the sale of the separately priced acuity programs over a seven-year period, our
current estimate of the period over which costs to provide the enhancement
services will be incurred.





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





Insurance
Reserves


We
maintain a captive insurance company to provide professional liability insurance
coverage for claims brought against us after December 17, 2002. In addition, our
captive insurance company’s charter allows it to provide professional liability
insurance for our doctors, none of whom are currently insured by the
captive.  We use the captive insurance company for both primary
insurance and excess liability coverage.  A number of claims are now
pending with our captive insurance company.  We consolidate the
financial statements of the captive insurance company with our financial
statements because it is a wholly-owned enterprise. As of December 31, 2009
and 2008, we maintained insurance reserves of $9.2 million and $9.5 million,
respectively, which primarily represent an actuarially determined estimate of
future costs associated with claims filed as well as claims incurred but not yet
reported.   Our actuaries determine loss reserves by comparing
our historical claim experience to comparable insurance industry
experience.  Since the inception of the captive insurance company in
2002, it has disbursed total claims and legal expenses of $2.5
million.





Income
Taxes


We are
subject to income taxes in the United States and Canada.  Significant
judgment is required in determining our provision for income taxes and the
related assets and liabilities.  The provision for income taxes includes
income taxes paid, currently payable or receivable, and those
deferred.  We determine deferred tax assets and liabilities based on
differences between the financial reporting and tax basis of assets and
liabilities, and we measure them using enacted tax rates and laws that are
expected to be in effect when the differences reverse.  We recognize
the effect on deferred taxes of changes in tax rates in the period in which the
enactment date changes.  We establish valuation allowances when
necessary on a jurisdictional basis to reduce deferred tax assets to the amounts
expected to be realized.





In the
ordinary course of business, there are certain transactions and calculations
where the ultimate tax determination is uncertain.   The evaluation of
a tax position in accordance with U.S. GAAP is a two-step
process.  The first step is a recognition process to determine whether
it is more-likely-than-not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position.  The second
step is a measurement process whereby a tax position that meets the
more-likely-than-not recognition threshold is assessed to determine the cost or
benefit to be recognized in the financial statements.  We adopted the
provisions of FASB Accounting Standards Codification (“ASC”) 740, Income Taxes
(formerly referenced as FASB Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109), on
January 1, 2007 as further discussed in Note 7.  The cumulative effect
of adoption of ASC 740 resulted in a reduction to the January 1, 2007 opening
retained earnings balance of $243,000.


41


Per
Share Data


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





The
following is a reconciliation of basic and diluted (loss) earnings per share (in
thousands, except per share data).





For
      the Year Ended December 31,2009
                              
                              
                              2008
                              
                              
                              2007Basic
      (Loss) EarningsNet
      (loss) income
                              
                              $
                              (33,244
                              )
                              
                              $
                              (6,635
                              )
                              
                              $
                              32,504Weighted
      average shares outstanding
                              
                              
                              18,594
                              
                              
                              
                              18,526
                              
                              
                              
                              19,572Basic
      (loss) earnings per share
                              
                              $
                              (1.79
                              )
                              
                              $
                              (0.36
                              )
                              
                              $
                              1.66Diluted
      (Loss) EarningsNet
      (loss) income
                              
                              $
                              (33,244
                              )
                              
                              $
                              (6,635
                              )
                              
                              $
                              32,504Weighted
      average shares outstanding
                              
                              
                              18,594
                              
                              
                              
                              18,526
                              
                              
                              
                              19,572Effect
      of dilutive securitiesStock
      options
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              251Restricted
      stock
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              35Weighted
      average common shares and potential dilutive shares
                              
                              
                              18,594
                              
                              
                              
                              18,526
                              
                              
                              
                              19,858Diluted
      (loss) earnings per share
                              
                              $
                              (1.79
                              )
                              
                              $
                              (0.36
                              )
                              
                              $
                              1.64





For 2007,
we did not include outstanding stock options and restricted stock awards having
a grant price greater than the average market price of the common shares for the
year in the computation of diluted earnings per share because the effect of
these share-based awards would be antidilutive.  The total number of
these shares in 2007 was 42,970.  For 2009 and 2008, 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.





Revenue
Recognition


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





Marketing
and Advertising Expenditures


We
expense marketing and advertising costs as incurred, except for the costs
associated with direct mail.  Direct mail costs include printing
mailers for future use, purchasing mailing lists of potential customers and
postage cost.  We expense printing and postage costs as the items are
mailed.  Prepaid advertising expense (principally direct mail cost)
was $772,000 at December 31, 2009, and $1.5 million at December 31,
2008.





Stock-Based
Compensation


We
account for stock-based payment transactions in which we receive employee
services in exchange for (a) our stock or (b) liabilities that are
based on the fair value of our stock or that may be settled by the issuance of
our stock. Stock-based compensation cost for restricted stock units (“RSUs”) is
measured based on the closing fair market value of our common stock on the date
of grant. Stock-based compensation cost for stock options is estimated at the
grant date based on each option’s fair-value as calculated by the Black-Scholes
option-pricing model. We recognize stock-based compensation cost as expense
ratably on a straight-line basis over the requisite service period. We will
recognize a benefit from stock-based compensation in equity if an incremental
tax benefit is realized by following the ordering provisions of the tax law.
Further information regarding stock-based compensation can be found in Note 9,
“Employee Benefits.”


42


Geographic
Information


We have
no operations or assets in any countries other than the U.S. and
Canada.  No single customer represented more than 10% of revenues in
2009, 2008, or 2007.  Information about our domestic and international
operations is as follows:





RevenuesfromExternalCustomers
                  
                  
                  NetAssets
                  
                  
                  PropertyandEquipment(in
      thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009
                  
                  
                  2008United
      States
                  
                  $
                  129,213
                  
                  
                  $
                  205,176
                  
                  
                  $
                  292,635
                  
                  
                  $
                  46,689
                  
                  
                  $
                  79,252
                  
                  
                  $
                  25,998
                  
                  
                  $
                  51,499Canada
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,338
                  
                  
                  
                  3,733
                  
                  
                  
                  -
                  
                  
                  
                  -$
                  129,213
                  
                  
                  $
                  205,176
                  
                  
                  $
                  292,635
                  
                  
                  $
                  51,027
                  
                  
                  $
                  82,985
                  
                  
                  $
                  25,998
                  
                  
                  $
                  51,499





Fair
Value Measurements


During
the first quarter of 2008, we adopted FASB ASC 820 (“ASC 820”), Fair Value Measurements and
Disclosures(formerly referenced as FASB Statement of Financial
Accounting Standard  No. 157, Fair Value Measurements),
which defines fair value, establishes guidelines for measuring fair value and
expands disclosures regarding fair value measurements with respect to our
financial assets and liabilities.  During the first quarter of 2009,
we adopted ASC 820 with respect to our nonfinancial assets and liabilities. This
new accounting standard does not require any new fair value measurements. We
apply fair value accounting for all financial assets and liabilities and
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements. Fair value is defined as the price that would
be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities, we consider
the principal or most advantageous market in which we would transact and the
market-based risk measurements or assumptions that market participants would use
in pricing the asset or liability, such as inherent risk, transfer restrictions
and credit risk (including our own non-performance risk).





New
Accounting Pronouncements


In June
2009, the FASB confirmed the “FASB Accounting Standards of Codification” (“ASC”)
as the single source of authoritative nongovernmental U.S. GAAP.  The
ASC does not change current U.S. GAAP, but instead simplifies user access to all
authoritative U.S. GAAP by providing all the authoritative literature related to
a particular topic in one place.  All existing accounting standard
documents have been superseded and all other accounting literature not included
in the ASC is considered nonauthoritative.  We adopted the ASC as of
July 1, 2009, which did not have any impact on our financial position, results
of operations, or cash flows at December 31, 2009.





Subsequent
Events


We
evaluated all events or transactions that occurred after December 31, 2009
through the date we issued these Consolidated Financial
Statements.





2.
            Stockholders'
      Investment





Capital
Stock


We have
27.5 million authorized shares of common stock with $0.001 per share par value
and 5.0 million authorized shares of preferred stock. The holders of the common
stock may cast one vote for each share held of record on all matters submitted
to a vote of stockholders. Subject to preferences that may be applicable to any
outstanding preferred stock, holders of common stock are entitled to receive
ratably such dividends as may be declared from time to time by the Board of
Directors out of funds legally available for that purpose. In the event of
liquidation, dissolution or winding up, the holders of common stock share
ratably in all assets remaining after payment of liabilities, subject to prior
distribution rights of preferred stock, if any, then outstanding.




Rights
Agreement


On
November 24, 2008, our Board of Directors adopted a Stockholder Rights Plan
(the “Rights Plan”) and declared a dividend distribution of one preferred share
purchase right (a “Right”) on each outstanding share of common
stock.  The Rights Plan expired on November 29, 2009 because the
Rights Plan was not approved by stockholders.  The adoption and
expiration of the Rights Plan had no impact on our financial position or results
of operations.





Share
Repurchase Programs


On
November 22, 2006, we announced that the Board of Directors authorized a share
repurchase plan under which we were authorized to purchase up to $50.0 million
of our common stock.  Through August 13, 2007, we repurchased 1.5
million shares of our common stock under this program at an average price of
$33.75 per share, for a total cost of approximately $50.0 million.  On
August 21, 2007, our Board of Directors authorized a new share repurchase plan
under which we are authorized to purchase up to an additional $50.0 million of
our common stock.  Through December 31, 2008, we repurchased 588,408
shares of our common stock under this new program at an average price of $16.99
per share, for a total cost of approximately $10.0 million.  We did
not purchase any shares of our common stock in 2009 under this
program.   At December 31, 2009, we held 6.7 million shares of
our common stock in treasury.


43





Dividend


We paid a
quarterly dividend from the third quarter of 2004 through the second quarter of
2008.  Our Board of Directors reviews the decision to pay a dividend
quarterly.   In the third quarter of 2008, the Board of Directors
decided to suspend payment of dividends and periodically reassess its
decision.





3.
            Investment
      in Unconsolidated Businesses





Our
investments in unconsolidated businesses were $137,000 and $377,000 at December
31, 2009 and 2008, respectively.   These balances represent our
equity investment in Eyemed/LCA-Vision, LLC (50% ownership at December 31,
2009).  We account for this investment using the equity method of
accounting.





4.
            Investments




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





As of December 31,2009
                    
                    
                    2008Short-term
      investments:Corporate
      obligations
                    
                    $
                    13,818
                    
                    
                    $
                    20,971U.S.
      governmental notes and agencies
                    
                    
                    3,728
                    
                    
                    
                    1,400Municipal
      securities
                    
                    
                    8,544
                    
                    
                    
                    7,982Equities
                    
                    
                    2,365
                    
                    
                    
                    1,784Auction
      rate municipal debt
                    
                    
                    -
                    
                    
                    
                    550Total
      short-term investments
                    
                    
                    28,455
                    
                    
                    
                    32,687Long-term
      investments:Auction
      rate municipal debt
                    
                    
                    1,062
                    
                    
                    
                    1,357Auction
      rate preferred securities
                    
                    
                    1,028
                    
                    
                    
                    1,093Auction
      rate securities - credit default swaps
                    
                    
                    -
                    
                    
                    
                    676Total
      long-term investments
                    
                    
                    2,090
                    
                    
                    
                    3,126Total
      investments
                    
                    $
                    30,545
                    
                    
                    $
                    35,813




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


As of December 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




44




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





We
recognized gross realized gains of $413,000 and $10,000 on the sale of our
marketable securities during the year ended December 31, 2009 and 2008,
respectively.  With the exception of other-than-temporary impairments,
we had no gross realized losses during the years ended December 31, 2009 and
2008, respectively. We recognized $29,000 and $336,000 in other-than-temporary
impairments to certain of our auction rate securities and equities,
respectively, during 2009.  We recognized $2.0 million and $1.2
million in other-than-temporary impairments to certain of our auction rate
securities and equities, respectively, during 2008. We did not recognize any
other-than-temporary impairments in 2007.  We include realized gains,
losses and other-than-temporary impairments in “Net investment income (loss)” in
our accompanying Consolidated Statements of Operations.  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 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.  The impairments recognized in 2009 on our auction rate and
equity securities occurred in the first quarter.  Subsequent to the
first quarter, the fair value of our investments exceeded the respective
adjusted cost basis.




The net
carrying value and estimated fair value of debt and equity securities available
for sale at December 31, 2009, by contractual maturity, are shown below (dollars
in thousands).  Expected maturities may differ from contractual
maturities because the issuers of the securities may have the right or
obligation to prepay obligations without prepayment penalties.





Amortized
                    Cost
                  
                  
                  Estimated
                    Fair ValueDue
      in one year or less
                  
                  $
                  17,546
                  
                  
                  $
                  17,546Due
      after one year through three years
                  
                  
                  8,459
                  
                  
                  
                  8,544Due
      after three years
                  
                  
                  2,009
                  
                  
                  
                  2,090Total
      debt securities
                  
                  
                  28,014
                  
                  
                  
                  28,180Equities
                  
                  
                  1,487
                  
                  
                  
                  2,365Total
      investments
                  
                  $
                  29,501
                  
                  
                  $
                  30,545





Auction
Rate Securities


At
December 31, 2009 and 2008, we held various auction rate securities with par
values of $2.4 million and $5.6 million, respectively.  The assets
underlying the auction rate instruments were primarily municipal bonds,
preferred closed end funds, and credit default swaps.  Historically,
these securities have provided liquidity through a Dutch auction process that
resets the applicable interest rate at pre-determined intervals every 7 to 28
days. However, these auctions began to fail in the first quarter of 2008. Since
these auctions have failed, we have realized higher interest rates for many of
these auction rate securities than we would have otherwise. Although we have
been receiving interest payments at these rates, the related principal amounts
will not be accessible until a successful auction occurs, a buyer is found
outside of the auction process, the issuer calls the security, or the security
matures according to contractual terms. Maturity dates for our auction rate
securities range from 2016 to 2036. Since these auctions have failed, $16.4
million of the related securities were called at par by their issuers, including
$1.0 million in 2009.  We redeemed an additional $2.3 million in
auction rate securities in 2009 at 46% of original par value.





At
December 31, 2009, there was insufficient observable auction rate market
information available to determine the fair value of most of our auction rate
security investments. Therefore, we estimated fair value using a trinomial
discount model employing assumptions that market participants would use in their
estimates of fair value. Certain of these assumptions included financial
standing of the issuer, final stated maturities, estimates of the probability of
the issue being called prior to final maturity, estimates of the probability of
defaults and recoveries, expected changes in interest rates paid on the
securities, interest rates paid on similar instruments, and an estimated
illiquidity discount due to extended redemption periods.


45


As a
result of the failed auctions, our auction rate instruments are not currently
liquid. Due to the continuation of the unstable credit environment, we believe
the recovery period for our auction rate instruments will exceed 12 months.
Accordingly, we have classified the fair value of the auction rate instruments
that have not been redeemed subsequent to December 31, 2009, as
long-term.





5.
Debt





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





Amount OutstandingDecember 31, 2009
                  
                  
                  December 31, 2008Capitalized
      lease obligations
                  
                  $
                  390
                  
                  
                  $
                  4,213Bank
      loan
                  
                  
                  12,753
                  
                  
                  
                  16,892Total
      debt obligations
                  
                  
                  13,143
                  
                  
                  
                  21,105Debt
      obligations maturing in one year
                  
                  
                  3,998
                  
                  
                  
                  6,985Long-term
      obligations (less current portion)
                  
                  $
                  9,145
                  
                  
                  $
                  14,120





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





On April
24, 2008, we entered into a bank loan agreement for $19.2 million to finance
medical equipment. The loan agreement provides for repayment in equal monthly
installments over a five-year period at a fixed interest rate of 4.96%. The loan
agreement contains no financial covenants.





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





Aggregate
maturities of long-term debt and capital lease obligations are (dollars in
thousands):





2010
                  
                  $
                  3,9982011
                  
                  
                  3,7902012
                  
                  
                  3,9832013
                  
                  
                  1,3722014
                  
                  
                  -





The
estimated fair value of our long-term debt and capital lease obligations is
$12.5 million based on the present values of the underlying cash
flows.





6.
Fair Value Measurements




ASC 820
defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset and liability in an orderly transaction
between market participants at the measurement date.  ASC 820
establishes a three-tier 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 also requires an entity to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value.


46


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





Fair Value Measurements as of December 31, 2009 UsingDescription
                
                Quoted Prices in
                  ActiveMarkets for
                  IdenticalAssets
                  (Level 1)
                
                
                Significant Other
                  Observable Inputs
                  (Level 2)
                
                
                Significant
                  UnobservableInputs
                  (Level 3)
                
                
                TotalAssets:Cash
      and cash equivalents
                
                $
                24,049
                
                
                $
                -
                
                
                $
                -
                
                
                $
                24,049Available-for-sale
      securities
                
                
                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





The
following table summarizes fair value measurements by level at December 31,
2008 for assets and liabilities measured at fair value on a recurring basis
(dollars in thousands):





Fair Value Measurements as of December 31, 2008 UsingDescription
                  
                  Quoted Prices in
                    ActiveMarkets for
                    IdenticalAssets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable Inputs
                    (Level 2)
                  
                  
                  Significant
                    UnobservableInputs
                    (Level 3)
                  
                  
                  TotalAssets:Cash
      and cash equivalents
                  
                  $
                  23,648
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  23,648Available-for-sale
      securities
                  
                  
                  1,784
                  
                  
                  
                  30,903
                  
                  
                  
                  3,126
                  
                  
                  
                  35,813Deferred
      compensation assets
                  
                  
                  2,196
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  2,196Total
                  
                  $
                  27,628
                  
                  
                  $
                  30,903
                  
                  
                  $
                  3,126
                  
                  
                  $
                  61,657Liabilities:Deferred
      compensation liabilities
                  
                  $
                  2,196
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  2,196





Cash and
cash equivalents are comprised of either bank deposits or amounts invested in
money market funds, the fair value of which is based on quoted market prices.
The fair values of some investment securities included within our investment
portfolio are based on quoted market prices from various stock and bond
exchanges. Certain of our debt securities are classified at fair value utilizing
Level 2 inputs. For these securities, fair value is measured using observable
market data that includes dealer quotes, live trading levels, trade execution
data, credit information and the bond’s terms and conditions. The fair values of
our auction rate investment instruments are classified in Level 3 because they
are valued using a trinomial discounted cash flow model (see Note
4).  We maintain a self-directed non-qualified deferred compensation
plan structured as a rabbi trust for certain highly compensated individuals. The
investment assets of the rabbi trust are valued using quoted market prices. The
related deferred compensation liability represents the fair value of the
participants’ investment elections, determined using quoted market prices. We
consider our credit risk, taking into consideration the legal rights of
participants to receive deferred amounts, in the fair value determination of the
deferred compensation liability.  In 2009, our Compensation Committee
approved terminating the deferred compensation plan as of  December
31, 2009.  We made distributions of approximately $2.4 million to
participants in December 2009.  We distributed the remaining $400,000
to participants in January 2010.





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) during 2009 and 2008 (dollars in
thousands).





Description
                  
                  2009
                  
                  
                  2008Balance
      as of January 1
                  
                  $
                  3,126
                  
                  
                  $
                  -Assets
      acquired
                  
                  
                  -
                  
                  
                  
                  2,726Assets
      sold or redeemed
                  
                  
                  (829
                  )
                  
                  
                  (15,400
                  )Transfers
      (out of) into Level 3
                  
                  
                  (258
                  )
                  
                  
                  17,750Losses
      included in earnings
                  
                  
                  (29
                  )
                  
                  
                  (1,950
                  )Gains
      included in other comprehensive income
                  
                  
                  80
                  
                  
                  
                  -Balance
      as of December 31
                  
                  $
                  2,090
                  
                  
                  $
                  3,126





47


During
2009, we recognized $5.4 million in impairment charges to reduce the carrying
amount of long-lived assets.  These impairment charges recognized
during 2009 primarily reflect our decision to close underperforming vision
centers.  Based on our evaluation of the ongoing value of property and
equipment, we determined that leasehold improvements with a carrying amount of
$2.5 million and excimer lasers with a carrying amount of $3.7 million were no
longer recoverable and were in fact impaired.   The leasehold
improvements were written down to their estimated fair value of
zero.  We adjusted the carrying value of the excimer lasers to their
fair value less cost to sell, which we determined based on estimated market
prices of similar assets.  We are actively marketing and selling our
unused excimer lasers at December 31, 2009, which is reflected by $1.0 million
in assets held for sale at that date.  Because of deteriorating market
conditions, it is reasonably possible that our estimate of discounted cash flows
may change in the near term resulting in the need to adjust our determination of
fair value or recoverability.  The fair value measurement utilized in
our internal discounted cash flow analysis represent Level 3 inputs under ASC
820.





7.
            Income
      Taxes





The
following table presents the components of income tax (benefit) expense for the
three years ended December 31, 2009 (dollars in thousands):





2009
                    
                    
                    2008
                    
                    
                    2007Current:Federal
                    
                    $
                    (11,679
                    )
                    
                    $
                    (7,981
                    )
                    
                    $
                    11,990State
      and local
                    
                    
                    (213
                    )
                    
                    
                    393
                    
                    
                    
                    1,862Total
      current
                    
                    
                    (11,892
                    )
                    
                    
                    (7,588
                    )
                    
                    
                    13,852Deferred:Federal
                    
                    $
                    9,356
                    
                    
                    $
                    5,314
                    
                    
                    $
                    4,865State
      and local
                    
                    
                    1,587
                    
                    
                    
                    (349
                    )
                    
                    
                    504Total
      deferred
                    
                    
                    10,943
                    
                    
                    
                    4,965
                    
                    
                    
                    5,369Income
      tax (benefit) expense
                    
                    $
                    (949
                    )
                    
                    $
                    (2,623
                    )
                    
                    $
                    19,221





The
following table presents (loss) income before income taxes for the three years
ended December 31, 2009 (dollars in thousands):





2009
                  
                  
                  2008
                  
                  
                  2007United
      States
                  
                  $
                  (34,184
                  )
                  
                  $
                  (9,723
                  )
                  
                  $
                  50,880Canada
                  
                  
                  (9
                  )
                  
                  
                  465
                  
                  
                  
                  845Total
                  
                  $
                  (34,193
                  )
                  
                  $
                  (9,258
                  )
                  
                  $
                  51,725





The
following table reconciles the U.S. statutory federal income tax rate and the
tax (benefit) expense shown in our Consolidated Statements of Operations
(dollars in thousands):





2009
                  
                  
                  2008
                  
                  
                  2007Tax
      at statutory federal rate
                  
                  $
                  (11,968
                  )
                  
                  $
                  (3,240
                  )
                  
                  $
                  18,104State
      and local income taxes, net of federal benefit
                  
                  
                  (1,286
                  )
                  
                  
                  (94
                  )
                  
                  
                  1,714Permanent
      differences
                  
                  
                  69
                  
                  
                  
                  (220
                  )
                  
                  
                  (194
                  )Other
                  
                  
                  52
                  
                  
                  
                  (229
                  )
                  
                  
                  (403
                  )Valuation
      allowance
                  
                  
                  12,184
                  
                  
                  
                  1,160
                  
                  
                  
                  -Income
      tax (benefit) provision
                  
                  $
                  (949
                  )
                  
                  $
                  (2,623
                  )
                  
                  $
                  19,221





We have
made no provision for U.S. income taxes on undistributed earnings of
approximately $4.3 million from our international business because it is our
intention to reinvest those earnings in that operation.  If those
earnings are distributed in the form of dividends, we may be subject to both
foreign withholding taxes and U.S. income taxes net of allowable foreign tax
credits.  The amount of additional tax that might be payable upon
reparation of these foreign earnings is approximately $356,000.





U.S. GAAP
requires a company to establish a valuation allowance for deferred tax assets
when it is more-likely-than-not that the deferred tax asset will not be
realized.  Deferred tax assets may be realized through future
reversals of existing taxable temporary differences, future taxable income,
taxable income in prior carryback year(s) if carryback is permitted, and tax
planning strategies.


48


We
considered all positive and negative evidence in weighing whether or not the net
deferred tax assets are more-likely-than-not to be realized, including the
current economic conditions and our 2010 operating projections completed during
2009.  After considering all of the evidence, we believe that reliance
on future projections of income is no longer sufficient to support realization
of our deferred tax assets.  Accordingly, in 2009 we established a
valuation allowance against all of our net deferred tax assets in the amount of
$12.2 million as we believe it is not more-likely-than-not that our net deferred
tax assets will be utilized.  A valuation allowance of $1.2 million
was established in 2008 for the tax benefit generated from the
other-than-temporary impairments recognized in 2008 with respect to certain of
our investment holdings since we do not have capital gains to offset these
capital losses.





As of
December 31, 2009, we had net operating loss carryforwards for state income
taxes of approximately $31.2 million, which will be available to offset future
taxable income. Approximately $8.7 million of state net operating loss is
subject to an annual IRC Section 382 limitation of $5.3 million.  If
not used, these carryforwards will expire between 2013 and 2029. To the extent
net operating loss carryforwards, when realized, relate to non-qualified stock
option deductions, the resulting benefits will be credited to stockholders'
equity.





Deferred
taxes arise because of temporary differences in the book and tax bases of
certain assets and liabilities.  The following table shows the
significant components of our deferred taxes (dollars in
thousands):





December 31,2009
                    
                    
                    2008Deferred
      tax assets:Deferred
      revenue
                    
                    $
                    4,902
                    
                    
                    $
                    8,090Allowance
      for doubtful accounts
                    
                    
                    902
                    
                    
                    
                    1,216Accrued
      enhancement expense
                    
                    
                    715
                    
                    
                    
                    394Deferred
      compensation
                    
                    
                    156
                    
                    
                    
                    854Insurance
      reserves
                    
                    
                    1,447
                    
                    
                    
                    1,601Deferred
      lease credits
                    
                    
                    714
                    
                    
                    
                    495Share-based
      compensation
                    
                    
                    643
                    
                    
                    
                    1,135Vendor
      rebates
                    
                    
                    2,252
                    
                    
                    
                    -Investments
                    
                    
                    1,288
                    
                    
                    
                    1,160Net
      operating loss carryforward
                    
                    
                    1,399
                    
                    
                    
                    548Other
                    
                    
                    688
                    
                    
                    
                    281Valuation
      allowance
                    
                    
                    (13,344
                    )
                    
                    
                    (1,160
                    )Total
      deferred tax assets
                    
                    $
                    1,762
                    
                    
                    $
                    14,614Deferred
      tax liabilities:Property
      and equipment
                    
                    $
                    1,153
                    
                    
                    $
                    2,404Pre-paid
      postage
                    
                    
                    270
                    
                    
                    
                    388Deferred
      lease incentives
                    
                    
                    213
                    
                    
                    
                    87Prepaid
      service
                    
                    
                    126
                    
                    
                    
                    -Total
      deferred tax liabilities
                    
                    $
                    1,762
                    
                    
                    $
                    2,879Net
      deferred tax assets
                    
                    $
                    -
                    
                    
                    $
                    11,735




49


Changes
in unrecognized tax benefits were as follows (dollars in
thousands):





Balance
      at December 31, 2007
                  
                  $
                  574Additions
      based on tax positions related to the current year
                  
                  
                  2Additions
      for tax positions of prior years
                  
                  
                  77Reductions
      for tax positions of prior years
                  
                  
                  (47
                  )Reductions
      due to statute expiration
                  
                  
                  (19
                  )Settlements
                  
                  
                  (146
                  )Balance
      at December 31, 2008
                  
                  $
                  441Additions
      based on tax positions related to the current year
                  
                  $
                  196Additions
      for tax positions of prior years
                  
                  
                  102Reductions
      for tax positions of prior years
                  
                  
                  (124
                  )Reductions
      due to statute expiration
                  
                  
                  (27
                  )Settlements
                  
                  
                  (33
                  )Balance
      at December 31, 2009
                  
                  $
                  555





The total
amount of unrecognized tax benefits that, if recognized, would affect the
effective tax rate is $555,000.  It is reasonably possible that the
amount of the unrecognized tax benefits may increase or decrease within the next
12 months.  However, we do not presently anticipate that any increase
or decrease in unrecognized tax benefits will be material to the Consolidated
Financial Statements.





We
recognize interest and penalties related to unrecognized tax benefits as a
component of income tax expense in the Consolidated Statements of
Operations.  During the year ended December 31, 2009, we recognized
tax expense of approximately $21,000 in interest and penalties.  We
have approximately $122,000 in interest and penalties related to unrecognized
tax benefits accrued as of December 31, 2009.





We file
income tax returns in the U.S. federal jurisdiction, various U.S. state
jurisdictions and Canada. With few exceptions, we are subject to audit by taxing
authorities for fiscal years ending after 2007. Our federal and state income tax
return filings generally are subject to a three-year statute of limitations from
date of filing; however the statute of limitations also remains open for prior
tax years because, in 2007, we utilized net operating losses that were generated
in prior years.  The net operating loss carryforwards from those prior
tax years are subject to adjustments for three years after the filing of the
income tax return for the year in which the net operating losses are
utilized.  During the June 2008 quarter, the Internal Revenue Service
completed its examination of our 2006 tax returns with no significant effect to
the financial statements.  In the fourth quarter of 2009, the Internal
Revenue Service initiated an examination of the tax year 2008.  We
cannot predict the timing of the conclusion of this audit.  Based on
the early status of the audit and the protocol of finalizing audits by the
relevant tax authorities, we cannot estimate the impact of such changes, if any,
to previously recorded unrecognized tax benefits.





8.
            Leasing
      Arrangements





We lease
office space for our vision centers under lease arrangements that qualify as
operating leases.  For leases that contain pre-determined fixed
escalations of the minimum rentals and/or rent abatements subsequent to taking
possession of the leased property, we recognize the related rent expense on a
straight–line basis and record the difference between the recognized rental
expense and amounts payable under the leases as deferred lease
credits.  We use capitalized leases to finance certain excimer lasers
used in the laser vision correction procedures.  We include capital
lease assets in property and equipment.





50


The
following table displays our aggregate minimal rental commitments under
noncancellable leases for the periods shown (dollars in thousands):




December 31, 2009Capital
                      Leases
                    
                    
                    Operating
                      LeasesYear2010
                    
                    $
                    393
                    
                    
                    $
                    10,1652011
                    
                    
                    -
                    
                    
                    
                    8,6412012
                    
                    
                    -
                    
                    
                    
                    7,3142013
                    
                    
                    -
                    
                    
                    
                    4,9692014
                    
                    
                    -
                    
                    
                    
                    1,995Beyond
      2014
                    
                    
                    -
                    
                    
                    
                    2,287Total
      minimum rental commitment
                    
                    $
                    393
                    
                    
                    $
                    35,371Less
      interest
                    
                    
                    3Present
      value of minimum lease payments
                    
                    $
                    390Less
      current installments
                    
                    
                    390Long-term
      obligations at December 31, 2009
                    
                    $
                    -




Total
rent expense under operating leases amounted to $11.5 million in 2009, $11.8
million in 2008 and $11.5 million in 2007.





Effective
March 1 and April 1, 2009, we entered into five-year lease agreements with Alcon
and AMO, respectively, for new excimer lasers which allowed us to standardize
our excimer treatment platforms and reduce the number of platforms at each of
our vision centers from three to two.  The standardization of our
excimer laser platforms will reduce equipment and maintenance costs, while
allowing us to continue to offer the same broad spectrum of treatment options
that include a standard treatment, a custom wavefront treatment, an optimized
treatment and IntraLase femtosecond technology.  As part of the
transactions, we disposed of our Bausch & Lomb lasers and retired $1.9
million in related capital lease obligations.  We received cash
payments totaling $6.8 million from the lessors that may be partially refundable
if we do not perform a minimum number of procedures over the term of the
agreements.  We have deferred these amounts and will recognize them
ratably over the lease term.  We included the unrecognized portion in
“Deferred license fee” in our Consolidated Balance Sheet at December 31,
2009.





The AMO
laser lease qualifies as a capital lease and the Alcon laser lease qualifies as
an operating lease.





9.
            Employee
      Benefits





Savings
Plan


We
sponsor a savings plan under Internal Revenue Code Section 401(k) to provide an
opportunity for eligible employees to save for retirement on a tax-deferred
basis. Under this plan, we may make discretionary contributions to the
participants' accounts. We made contributions of $531,000 in 2008 and $80,882 in
2007.  There was no contribution in 2009 as we have suspended
contributions to the plan.





Stock
Incentive Plans


We have
four stock incentive plans, the 1995 Long-Term Stock Incentive Plan (“1995
Plan”), the 1998 Long-Term Stock Incentive Plan (“1998 Plan”), the 2001
Long-Term Stock Incentive Plan (“2001 Plan”), and the 2006 Stock Incentive Plan
(“2006 Plan”).  With the adoption of the 2006 Plan, all prior plans
were frozen and no new grants will be made from the 1995 Plan, the 1998 Plan or
the 2001 Plan.  Under the stock incentive plans, at December 31, 2009,
approximately 576,000 shares of our common stock were reserved for issuance upon
the exercise of outstanding stock options and the vesting of outstanding
restricted stock units, including 39,000 shares under the 1995 Plan, 160,000
shares under the 1998 Plan, 100,000 shares under the 2001 Plan, and 277,000
shares under the 2006 Plan.  At December 31, 2009, a total of 1.3
million shares were available for future awards under the 2006
Plan.  The Compensation Committee of the Board of Directors
administers all of our stock incentive plans.





The 2006
Plan permits us to issue incentive or non-qualified stock options to purchase
shares of common stock, stock appreciation rights, restricted and unrestricted
stock awards, performance awards, and cash awards to employees and non-employee
directors.


51


The
components of our pre-tax stock-based compensation expense (net of forfeitures)
and associated income tax benefits are as follows (in thousands of
dollars):





2009
                  
                  
                  2008
                  
                  
                  2007Stock
      Options
                  
                  $
                  18
                  
                  
                  $
                  267
                  
                  
                  $
                  2,179Restricted
      Stock
                  
                  
                  772
                  
                  
                  
                  1,611
                  
                  
                  
                  2,845$
                  790
                  
                  
                  $
                  1,878
                  
                  
                  $
                  5,024Income
      Tax Benefit
                  
                  $
                  325
                  
                  
                  $
                  767
                  
                  
                  $
                  1,294





Stock
Options


Our stock
incentive plans permit certain employees to receive grants of fixed-price stock
options.  The option price is equal to the fair value of a share of
the underlying stock at the date of grant.  Option terms are generally
10 years, with options generally becoming exercisable between one and five years
from the date of grant.





We
estimate the fair value of each stock option on the date of the grant using a
Black-Scholes option pricing model that uses assumptions noted
below.  We base expected volatility on a blend of implied and
historical volatility of our common stock.  We use historical data on
exercises of stock options and other factors to estimate the expected term of
the share-based payments granted.  We base the risk-free rate on the
U.S. Treasury yield curve in effect at the date of grant.  We base the
expected life of the options on historical data and it is not necessarily
indicative of exercise patterns that may occur.  The dividend yield
reflects the assumption that the current dividend payout in effect at the time
of grant.





We
granted stock options with respect to 14,704, 152,955 and 3,000 shares of our
common stock for 2009, 2008 and 2007, respectively.  We estimated the
fair value of each common stock option granted during 2009, 2008 and 2007 using
the following weighted-average assumptions:





2009
                  
                  
                  2008
                  
                  
                  2007Dividend
      yield
                  
                  
                  0
                  %
                  
                  
                  5.04
      - 7.11
                  %
                  
                  
                  3.69
                  %Expected
      volatility
                  
                  
                  92
                  %
                  
                  
                  361%
      - 362
                  %
                  
                  
                  417
                  %Risk-free
      interest rate
                  
                  
                  0.97
                  %
                  
                  
                  3.04
      - 3.10
                  %
                  
                  
                  3.54
                  %Expected
      lives (in years)
                  
                  
                  0
                  
                  
                  
                  5
                  
                  
                  
                  3




The total
intrinsic value (market value on date of exercise less exercise price) of
options exercised during 2009, 2008 and 2007 was approximately $9,000, $60,000
and $7.5 million, respectively.  As of December 31, 2009, the
aggregate intrinsic value of outstanding stock options, options vested and
expected to vest, and options exercisable were all $24,000.  The
aggregate intrinsic values represent the total pretax intrinsic value (the
difference between the closing stock price of our stock on the last trading day
of 2009 and the exercise price, multiplied by the number of in-the-money
options) that would have been received by the holders of those options had all
option holders exercised their options on December 31, 2009.  These
amounts will change based on the fair market value of our stock.





We
received approximately $18,000 for 2009, $193,000 for 2008 and $3.5 million for
2007 in cash from option exercises under all share-based payment
arrangements.  We recognized actual tax (expense) benefits for the tax
deductions from option exercises under all share-based payment arrangements for
2009, 2008 and 2007 of approximately ($592,000), ($638,000) and $1.9 million,
respectively.  U.S. GAAP requires the cash flows resulting from income
tax deductions in excess of compensation costs to be classified as financing
cash flows.





At
December 31, 2009, there was $212,000 of total unrecognized, pre-tax
compensation cost related to non-vested stock options. We expect to recognize
this cost over a weighted-average period of approximately 3.05
years.





52


The
following table summarizes the status of options granted under the stock
incentive plans:





Stock Options
                        
                        
                        Weighted Average
                          Exercise PriceOutstanding
      at January 1, 2007
                        
                        
                        957,242
                        
                        
                        $
                        18.27Granted
                        
                        
                        3,000
                        
                        
                        
                        18.43Exercised
                        
                        
                        (259,017
                        )
                        
                        
                        13.51Cancelled/forfeited
                        
                        
                        (61,627
                        )
                        
                        
                        20.39Outstanding
      at December 31, 2007
                        
                        
                        639,598
                        
                        
                        
                        19.73Granted
                        
                        
                        152,955
                        
                        
                        
                        14.09Exercised
                        
                        
                        (22,156
                        )
                        
                        
                        8.69Cancelled/forfeited
                        
                        
                        (292,203
                        )
                        
                        
                        18.61Outstanding
      at December 31, 2008
                        
                        
                        478,194
                        
                        
                        
                        19.13Granted
                        
                        
                        14,704
                        
                        
                        
                        6.43Exercised
                        
                        
                        (3,187
                        )
                        
                        
                        3.55Cancelled/forfeited
                        
                        
                        (139,985
                        )
                        
                        
                        16.87Outstanding
      at December 31, 2009
                        
                        
                        349,726
                        
                        
                        
                        19.64Options
      exercisable, December 31, 2009
                        
                        
                        316,092
                        
                        
                        
                        20.25Options
      expected to vest, December 31, 2009
                        
                        
                        346,992
                        
                        
                        
                        19.69




The
following table summarizes information about the stock options granted under the
stock incentive plans that were outstanding at December 31, 2009:





Stock Options Outstanding
                                              
                                              
                                              StockOptionsExercisableRangeofexercise
                                                prices
                                              
                                              
                                              Number
                                                outstandingasof
                                                December31,
                                                2009
                                              
                                              
                                              Weighted-
                                                average
                                                remaining
                                                contractual
                                                term
                                              
                                              
                                              Weighted-
                                                average
                                                exerciseprice
                                              
                                              
                                              Number
                                                exercisableas
                                                ofDecember
                                                31,2009
                                              
                                              
                                              Weighted-
                                                average
                                                exerciseprice$
                                              3.33
                                              
                                              
                                              $
                                              5.92
                                              
                                              
                                              
                                              38,970
                                              
                                              
                                              
                                              3.05
                                              
                                              
                                              $
                                              5.02
                                              
                                              
                                              
                                              38,970
                                              
                                              
                                              $
                                              5.027.33
                                              
                                              
                                              
                                              11.84
                                              
                                              
                                              
                                              27,780
                                              
                                              
                                              
                                              3.70
                                              
                                              
                                              
                                              11.36
                                              
                                              
                                              
                                              27,780
                                              
                                              
                                              
                                              11.3612.19
                                              
                                              
                                              
                                              12.19
                                              
                                              
                                              
                                              36,901
                                              
                                              
                                              
                                              3.92
                                              
                                              
                                              
                                              12.19
                                              
                                              
                                              
                                              36,901
                                              
                                              
                                              
                                              12.1912.50
                                              
                                              
                                              
                                              12.94
                                              
                                              
                                              
                                              40,413
                                              
                                              
                                              
                                              4.43
                                              
                                              
                                              
                                              12.74
                                              
                                              
                                              
                                              23,083
                                              
                                              
                                              
                                              12.5814.28
                                              
                                              
                                              
                                              17.27
                                              
                                              
                                              
                                              36,984
                                              
                                              
                                              
                                              5.47
                                              
                                              
                                              
                                              14.59
                                              
                                              
                                              
                                              22,280
                                              
                                              
                                              
                                              14.7917.29
                                              
                                              
                                              
                                              22.81
                                              
                                              
                                              
                                              31,001
                                              
                                              
                                              
                                              3.98
                                              
                                              
                                              
                                              20.89
                                              
                                              
                                              
                                              30,001
                                              
                                              
                                              
                                              20.9727.05
                                              
                                              
                                              
                                              27.05
                                              
                                              
                                              
                                              73,266
                                              
                                              
                                              
                                              5.12
                                              
                                              
                                              
                                              27.05
                                              
                                              
                                              
                                              72,666
                                              
                                              
                                              
                                              27.0528.59
                                              
                                              
                                              
                                              33.45
                                              
                                              
                                              
                                              36,459
                                              
                                              
                                              
                                              1.36
                                              
                                              
                                              
                                              30.80
                                              
                                              
                                              
                                              36,459
                                              
                                              
                                              
                                              30.8037.25
                                              
                                              
                                              
                                              42.56
                                              
                                              
                                              
                                              22,952
                                              
                                              
                                              
                                              2.82
                                              
                                              
                                              
                                              38.25
                                              
                                              
                                              
                                              22,952
                                              
                                              
                                              
                                              38.2544.60
                                              
                                              
                                              
                                              44.60
                                              
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              5.56
                                              
                                              
                                              
                                              44.60
                                              
                                              
                                              
                                              5,000
                                              
                                              
                                              
                                              44.60Cumulative
                                              
                                              $
                                              3.33
                                              
                                              
                                              $
                                              44.60
                                              
                                              
                                              
                                              349,726
                                              
                                              
                                              
                                              3.97
                                              
                                              
                                              $
                                              19.64
                                              
                                              
                                              
                                              316,092
                                              
                                              
                                              $
                                              20.25




The
weighted-average fair value of options granted was $6.43 per share during 2009
and $14.09 per share during 2008.





Restricted
Stock


Our stock
incentive plans permit certain employees and non-employee directors to be
granted restricted share unit awards in common stock.  We value awards
of restricted share units by reference to shares of common
stock.  Awards entitle a participant to receive, upon the settlement
of the unit, one share of common stock for each unit.  The awards vest
annually, over either a two or three year period from the date of the award, and
do not have voting rights.





We
granted restricted stock awards to employees and non-employee directors during
2009 with respect to a total of 253,319 shares.  We did not grant any
restricted stock awards prior to January 1, 2006.  We expense the fair
value of the awards at the grant date over the applicable vesting
periods.





As of
December 31, 2009, there was $578,000 of total unrecognized pre-tax compensation
cost related to non-vested restricted stock. We expect this cost to be
recognized over a weighted-average period of approximately 1.77
years.


53


The
following table summarizes the restricted stock activity for 2009, 2008 and
2007:





Number of
                    ShareUnit
                    Awards
                  
                  
                  Weighted
                    Average Grant
                    Date Fair ValueOutstanding
      at January 1, 2007
                  
                  
                  119,247
                  
                  
                  $
                  42.43Granted
                  
                  
                  95,507
                  
                  
                  
                  39.73Released
                  
                  
                  (40,685
                  )
                  
                  
                  40.86Forfeited
                  
                  
                  (32,845
                  )
                  
                  
                  42.28Outstanding
      at December 31, 2007
                  
                  
                  141,224
                  
                  
                  
                  41.10Granted
                  
                  
                  63,890
                  
                  
                  
                  9.99Released
                  
                  
                  (63,334
                  )
                  
                  
                  31.43Forfeited
                  
                  
                  (43,385
                  )
                  
                  
                  37.17Outstanding
      at December 31, 2008
                  
                  
                  98,395
                  
                  
                  
                  27.86Granted
                  
                  
                  253,319
                  
                  
                  
                  3.47Released
                  
                  
                  (75,901
                  )
                  
                  
                  22.87Forfeited
                  
                  
                  (49,110
                  )
                  
                  
                  8.81Outstanding
      at December 31, 2009
                  
                  
                  226,703
                  
                  
                  
                  6.40




10.
            Restructuring
      Charges





In 2009,
we announced a restructuring plan to reduce costs and increase operational
efficiencies.  As a result, we incurred restructuring charges totaling
$2.7 million for 2009, which included $2.2 million of contract termination costs
and vision center closing costs and $922,000 of employee separation
benefits.  Partially offsetting the contract termination costs was a
benefit of $435,000 due to a change in estimate of certain previously recognized
contract termination costs related to our vision centers closed in 2008 after
successful renegotiations with the lessors.  The fair value
measurements utilized internal discounted cash flow analysis in terminating fair
value, which is a Level 3 input under ASC 820.





The
following table summarizes the restructuring liability activities (dollars in
thousands):


Employee Separation
                      
                      
                      Contract TerminationEmployees
                      
                      
                      Dollars
                      
                      
                      Costs
                      
                      
                      TotalBalance
      at January 1, 2007
                      
                      
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Liabilities
      recognized
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Utilized
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Balance
      at December 31, 2007
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Liabilities
      recognized
                      
                      
                      123
                      
                      
                      
                      1,496
                      
                      
                      
                      308
                      
                      
                      
                      1,804Utilized
                      
                      
                      
                      
                      
                      
                      (1,496
                      )
                      
                      
                      166
                      
                      
                      
                      (1,330
                      )Balance
      at December 31, 2008
                      
                      
                      
                      
                      
                      
                      -
                      
                      
                      
                      474
                      
                      
                      
                      474Liabilities
      recognized
                      
                      
                      108
                      
                      
                      
                      922
                      
                      
                      
                      1,774
                      
                      
                      
                      2,696Utilized
                      
                      
                      
                      
                      
                      
                      (685
                      )
                      
                      
                      (1,156
                      )
                      
                      
                      (1,841
                      )Balance
      at December 31, 2009
                      
                      
                      
                      
                      
                      
                      237
                      
                      
                      
                      1,092
                      
                      
                      
                      1,329





At
December 31, 2009 and 2008, we included current restructuring reserves of $1.1
million and $168,000, respectively, in “Accrued liabilities and other” in the
Consolidated Balance Sheets.  Long-term restructuring reserves were
$268,000 and $306,000 at December 31, 2009 and 2008, respectively, and were
included in “Long-term rent obligations and other.”





11.
Commitments and Contingencies





On
September 13, 2007, and October 1, 2007, Beaver County Retirement Board and
Spencer and Jean Lin, respectively, filed two complaints against us and certain
of our current and former directors and officers in the United States District
Court for the Southern District of Ohio (Western Division) purportedly on behalf
of a class of stockholders who purchased our common stock between February 12,
2007 and July 30, 2007. On November 8, 2007, an additional complaint was filed
by named plaintiff Diane B. Callahan against us and certain of our current and
former directors and officers in the United States District Court for the
Southern District of Ohio (Western Division). This third action was filed
purportedly on behalf of a class of stockholders who purchased our common stock
between February 12, 2007 and November 2, 2007. These actions were consolidated
into one action. A consolidated complaint was filed on April 19, 2008. The
plaintiffs in the consolidated complaint were seeking damages on behalf of a
class of stockholders who purchased our common stock between October 24, 2006
and November 2, 2007, asserting claims under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934. They alleged that certain of our public
disclosures regarding our financial performance and prospects were false or
misleading. On July 10, 2008, we, together with the other defendants, filed a
motion to dismiss the consolidated complaint. On March 25, 2009, the Court
dismissed the consolidated complaint with prejudice, and entered final judgment
in favor of all defendants.  Plaintiffs thereafter filed a motion for
reconsideration of the order to dismiss, which the Court denied on November 5,
2009. On December 4, 2009, Plaintiffs filed an appeal with the U.S. Court
of Appeals for the Sixth Circuit, which they voluntarily dismissed on
January 6, 2010.


54





On
October 5, 2007, a complaint was filed in the Court of Common Pleas, Hamilton
County, Ohio, against certain of our current and former officers and directors,
derivatively on our behalf. The plaintiff, Nicholas Weil, asserted that three of
the defendants breached their fiduciary duties when they allegedly sold
LCA-Vision's securities on the basis of material non-public information in 2007.
The plaintiff also asserted claims for breach of fiduciary duty, abuse of
control, corporate waste, and unjust enrichment in connection with the
disclosures that also were the subject of the securities actions described
above. We were named as a nominal defendant in the complaint, although the
action was derivative in nature. The plaintiff demanded damages and attorney's
fees, and sought other equitable relief. On December 20, 2007, the court
dismissed this action and entered final judgment.





Our
business results in a number of medical malpractice lawsuits.  Claims
reported to us prior to December 18, 2002 were generally covered by external
insurance policies and to date have not had a material financial impact on our
business other than the cost of insurance and our deductibles under those
policies.  Effective in December 2002, we established a captive
insurance company to provide coverage for claims brought against us after
December 17, 2002.  We use the captive insurance company for both
primary insurance and excess liability coverage.  A number of claims
are now pending with our captive insurance company.  Since the
inception of the captive insurance company in 2002, total claims and expense
payments of $2.5 million have been disbursed.





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


55


12.     Additional
Financial Information





The
tables below provide additional financial information related to our
consolidated financial statements (all dollars in thousands):





Balance
Sheet Information





Property
and Equipment is comprised of the following:


At December 31,2009
                  
                  
                  2008Land
                  
                  $
                  354
                  
                  
                  $
                  354Building
      and improvements
                  
                  
                  5,815
                  
                  
                  
                  5,815Leasehold
      improvements
                  
                  
                  21,015
                  
                  
                  
                  26,219Furniture
      and fixtures
                  
                  
                  6,057
                  
                  
                  
                  7,058Equipment
                  
                  
                  46,750
                  
                  
                  
                  82,19379,991
                  
                  
                  
                  121,639Accumulated
      depreciation
                  
                  
                  (53,995
                  )
                  
                  
                  (70,235
                  )Construction
      in progress
                  
                  
                  2
                  
                  
                  
                  95$
                  25,998
                  
                  
                  $
                  51,499





Accrued
Liabilities and Other is comprised of the following:


At
      December 31,2009
                        
                        
                        2008Accrued
      payroll and related benefits
                        
                        $
                        1,422
                        
                        
                        $
                        1,801Accrued
      taxes
                        
                        
                        1,093
                        
                        
                        
                        1,093Professional
      fees
                        
                        
                        895
                        
                        
                        
                        881Accrued
      financing fees
                        
                        
                        314
                        
                        
                        
                        447Marketing
      accrual
                        
                        
                        1,567
                        
                        
                        
                        1,219Accrued
      enhancement expense
                        
                        
                        2,167
                        
                        
                        
                        1,671Deferred
      license fee
                        
                        
                        1,362
                        
                        
                        
                        -Restructuring
      reserve
                        
                        
                        1,061
                        
                        
                        
                        168Miscellaneous
      and other expenses accrued
                        
                        
                        1,700
                        
                        
                        
                        1,328$
                        11,581
                        
                        
                        $
                        8,608





Accumulated
other compenhensive income (loss) consisted of the following:


December
      31,2009
                  
                  
                  2008Unrealized
      invesment gain, net of tax at $417 and $43
                  
                  $
                  626
                  
                  
                  $
                  54Foreign
      currency translation adjustment
                  
                  
                  448
                  
                  
                  
                  (183
                  )Accumulated
      other compenhensive income (loss)
                  
                  $
                  1,074
                  
                  
                  $
                  (129
                  )





Income
Statement Information:





The
components of net investment income (loss) were as follows:





For the Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Interest
      income
                  
                  $
                  2,610
                  
                  
                  $
                  2,588
                  
                  
                  $
                  6,349Interest
      expense
                  
                  
                  (873
                  )
                  
                  
                  (997
                  )
                  
                  
                  (507
                  )Other-than-temporary
      impairment on securities
                  
                  
                  (365
                  )
                  
                  
                  (3,125
                  )
                  
                  
                  -Realized
      gains on investments
                  
                  
                  413
                  
                  
                  
                  10
                  
                  
                  
                  133Realized
      losses on investments
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (22
                  )Net
      investment income (loss)
                  
                  $
                  1,785
                  
                  
                  $
                  (1,524
                  )
                  
                  $
                  5,953





Cash
Flow Information


For the Year Ended December 31,2009
                  
                  
                  2008
                  
                  
                  2007Cash
      paid during the year for:Interest
                  
                  $
                  873
                  
                  
                  $
                  997
                  
                  
                  $
                  507Income
      taxes (refunded) paid
                  
                  
                  (8,313
                  )
                  
                  
                  (4,460
                  )
                  
                  
                  15,928Non-cash
      investing activities:Capital
      leases
                  
                  $
                  -
                  
                  
                  $
                  2,378
                  
                  
                  $
                  5,944





Other
Comprehensive (Loss) Income Information


For the Year Ended December 31,2009
                    
                    
                    2008
                    
                    
                    2007Comprehensive
      (loss) incomeNet
      (loss) income
                    
                    $
                    (33,244
                    )
                    
                    $
                    (6,635
                    )
                    
                    $
                    32,504Unrealized
      investment gain (loss), net of tax of $($381) $16 and
($39)
                    
                    
                    572
                    
                    
                    
                    (35
                    )
                    
                    
                    59Foreign
      currency translation adjustments
                    
                    
                    631
                    
                    
                    
                    (533
                    )
                    
                    
                    367Total
      comprehensive (loss) income
                    
                    $
                    (32,041
                    )
                    
                    $
                    (7,203
                    )
                    
                    $
                    32,930




56




13. Quarterly Financial Data
(unaudited)





Financial
results for interim periods do not necessarily indicate trends for any 12-month
period. Quarterly results can be affected by the number of procedures performed
and the timing of certain expense items (dollars in thousands, except per share
amounts):





2009 Quarters
                
                
                2008 QuartersFirst
                
                
                Second
                
                
                Third
                
                
                Fourth
                
                
                First
                
                
                Second
                
                
                Third
                
                
                FourthRevenues
                
                $
                47,921
                
                
                $
                31,681
                
                
                $
                27,646
                
                
                $
                21,965
                
                
                $
                79,568
                
                
                $
                54,181
                
                
                $
                37,397
                
                
                $
                34,030Operating
      income (loss)
                
                
                (4,179
                )
                
                
                (11,834
                )
                
                
                (10,367
                )
                
                
                (10,105
                )
                
                
                10,471
                
                
                
                (2,950
                )
                
                
                (6,161
                )
                
                
                (9,594
                )Income
      (loss) before taxes
                
                
                (4,327
                )
                
                
                (11,133
                )
                
                
                (9,652
                )
                
                
                (9,081
                )
                
                
                11,281
                
                
                
                (1,854
                )
                
                
                (6,753
                )
                
                
                (11,932
                )Net
      income (loss)
                
                
                (2,844
                )
                
                
                (6,887
                )
                
                
                (19,903
                )
                
                
                (3,610
                )
                
                
                6,876
                
                
                
                (573
                )
                
                
                (4,717
                )
                
                
                (8,221
                )Earnings
      (loss) per shareBasic
                
                $
                (0.15
                )
                
                $
                (0.37
                )
                
                $
                (1.07
                )
                
                $
                (0.19
                )
                
                $
                0.37
                
                
                $
                (0.03
                )
                
                $
                (0.25
                )
                
                $
                (0.44
                )Diluted
                
                $
                (0.15
                )
                
                $
                (0.37
                )
                
                $
                (1.07
                )
                
                $
                (0.19
                )
                
                $
                0.37
                
                
                $
                (0.03
                )
                
                $
                (0.25
                )
                
                $
                (0.44
                )





Item 9.  Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.





None.





Item 9A.  Controls
and Procedures.





Disclosure
controls and procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its periodic filings with the SEC is (a)
accumulated and communicated by our management in a timely manner and (b)
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms. As of December 31, 2009, our management, with the
participation of our Chief Operating Officer and Chief Financial Officer,
carried out an evaluation of the effectiveness of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e). Based upon that
evaluation, our  Chief Operating Officer and Chief Financial Officer
concluded that these disclosure controls and procedures were effective as of
that date.





Changes
in internal control over financial reporting





In
addition, our Chief Operating Officer and Chief Financial Officer concluded
that, during the quarter ended December 31, 2009, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.





Management’s
report on internal control over financial reporting





Information
on our internal control over financial reporting is contained in “Item 8.
Financial Statements and Supplementary Data – Report of Management on Internal
Control over Financial Reporting and Reports of Independent Registered Public
Accounting Firm.”





Item 9B.  Other
Information.





Not
applicable.


57


PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance.





The
information required by this Item 10 is incorporated by reference from
“Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,”
“Election of Directors,” and “Information about the Board of Directors and its
Committees” to be included in our definitive Proxy Statement which will be filed
with the SEC in connection with the 2010 Annual Meeting of
Stockholders.





The
complete mailing address of each director is c/o LCA-Vision Inc., 7840
Montgomery Road, Cincinnati, OH 45236.





Item
11.   Executive Compensation.





The
information required by this Item 11 is incorporated by reference from
“Compensation Committee Report on Executive Compensation,” “Compensation
Discussion and Analysis” and “Executive Compensation” to be included in our
definitive Proxy Statement which will be filed with the SEC in connection with
the 2010 Annual Meeting of Stockholders.





Item 12.  Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.





The
information called for by Item 403 of Regulation S-K and required by this Item
12 is incorporated by reference from “Security Ownership of Certain Beneficial
Owners and Management” to be included in our definitive Proxy Statement to be
filed with the SEC in connection with the 2010 Annual Meeting of
Stockholders.





The
information called for by Item 201(d) of Regulation S-K is presented below as of
December 31, 2009.





Equity Compensation Plan InformationPlan Category
                  
                  Number of securities to
                    beissued upon exercise
                    ofoutstanding awards,
                    options,warrants and
                    rights
                    A
                  
                  Weighted-average
                    exerciseprice of
                    outstanding options,
                    warrants and rights
                    B
                  
                  Number of securities
                    remaining for future
                    issuance under equity
                    compensation plans
                    (excluding securities
                    reflected in column A)
                    CEquity
      compensation plans approved by security holders
                  
                  
                  576,429
                  
                  
                  $
                  19.64
                  
                  
                  
                  1,270,328Equity
      compensation plans not approved by security holders
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Total
                  
                  
                  576,429
                  
                  
                  $
                  19.64
                  
                  
                  
                  1,270,328





Item 13.  Certain
Relationships and Related Transactions, and Director
Independence.





The
information required by this Item 13 is incorporated by reference, if any, from
“Information about the Board of Directors and its Committees” and “Certain
Transactions” to be included in our definitive Proxy Statement which will be
filed with the SEC in connection with the 2010 Annual Meeting of
Stockholders.





Item
14.  Principal Accountant Fees and Services.





The
information required by this Item 14 is incorporated from “Ratification of
Appointment of Independent Auditors” to be included in our definitive Proxy
Statement which will be filed with the SEC in connection with our 2010 Annual
Meeting of Stockholders.


58


PART
IV





Item
15.  Exhibits, Financial Statements Schedules.





(a)(1)
            List
      of Financial Statements





The
following are the consolidated financial statements of LCA-Vision Inc. and its
subsidiaries appearing elsewhere herein:





Report of Management on Internal
Control over Financial Reporting


Reports of Independent Registered
Public Accounting Firm


Consolidated Balance Sheets as of
December 31, 2009 and 2008


Consolidated Statements of Operations
for the years ended December 31, 2009, 2008, and 2007


Consolidated Statements of Cash Flows
for the years ended December 31, 2009, 2008, and 2007


Consolidated Statements of
Stockholders' Investment for years ended December 31, 2009, 2008, and
2007


Notes to Consolidated Financial
Statements





(a)(2)
            List
      of Schedules





Schedule
IIValuation and Qualifying Accounts and
Reserves





All other
financial statement schedules have been omitted because the required information
is either inapplicable or presented in the consolidated financial
statements.





LCA-Vision
Inc.


For
the years ended December 31, 2009, 2008 and 2007


(in
thousands)





Description
                  
                  Balanceat
                    Beginningof
                    Period
                  
                  
                  Chargesto
                    Costand
                    Expenses
                  
                  
                  Deductions
                  
                  
                  Balanceat
                    EndofPeriodYear
      ended December 31, 2009Allowance
      for doubtful accounts
                  
                  $
                  3,127
                  
                  
                  $
                  3,320
                  
                  
                  $
                  4,128
                  
                  
                  $
                  2,319Insurance
      reserve
                  
                  
                  9,489
                  
                  
                  
                  863
                  
                  
                  
                  1,198
                  
                  
                  
                  9,154Valuation
      allowance deferred tax assets
                  
                  
                  1,160
                  
                  
                  
                  12,184
                  
                  
                  
                  -
                  
                  
                  
                  13,344Year
      ended December 31, 2008:Allowance
      for doubtful accounts
                  
                  $
                  5,117
                  
                  
                  $
                  5,355
                  
                  
                  $
                  7,345
                  
                  
                  $
                  3,127Insurance
      reserves
                  
                  
                  8,493
                  
                  
                  
                  1,432
                  
                  
                  
                  436
                  
                  
                  
                  9,489Valuation
      allowance deferred tax assets
                  
                  
                  -
                  
                  
                  
                  1,160
                  
                  
                  
                  -
                  
                  
                  
                  1,160Year
      ended December 31, 2007Allowance
      for doubtful accounts
                  
                  $
                  2,842
                  
                  
                  $
                  7,675
                  
                  
                  $
                  5,400
                  
                  
                  $
                  5,117Insurance
      reserves
                  
                  
                  6,163
                  
                  
                  
                  2,662
                  
                  
                  
                  332
                  
                  
                  
                  8,493Valuation
      allowance deferred tax assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -




59


(a)(3)
            List
      of Exhibits





Exhibit#
              
              Description of Exhibit*3(a)
              
              Restated
      Certificate of Incorporation, as amended, of Registrant (Exhibit 3(a) to
      Annual Report on Form 10-K for the year ended December 31,
      2003)*3(b)
              
              Amended
      Bylaws of Registrant (Exhibit 3 (b) to Current Report on Form 8-K filed
      June 15, 2007)*3(c)
              
              Certificate
      of designation of Series A Participating Preferred Stock, as filed with
      the Department of State of the State of Delaware on November 24, 2008
      (Exhibit 3.1 to Current Report on Form 8-K filed November 24,
      2008)*10(a)
              
              Loan
      and Security Agreement between the Registrant and PNC Equipment Finance,
      LLC dated April 24, 2008 (Exhibit 10.1 to Current Report on Form 8-K filed
      April 30, 2008)Executive
      Compensation Plans and Arrangements*10(b)
              
              LCA-Vision
      Inc. 1995 Long-Term Stock Incentive Plan (Exhibit to Annual Report on Form
      10-KSB for the year ended December 31, 1995)*10(c)
              
              LCA-Vision
      Inc. 1998 Long-Term Stock Incentive Plan (Exhibit A to definitive Proxy
      Statement for Special Meeting of Stockholders, filed September 22,
      1998)*10(d)
              
              LCA-Vision
      Inc. 2001 Long-Term Stock Incentive Plan (Exhibit B to definitive Proxy
      Statement for 2001 Annual Meeting of Stockholders, filed on April 9,
      2001)*10(e)
              
              Executive
      Cash Bonus Plan (as amended February 21, 2006) (Exhibit 10.1 to Current
      Report on Form 8-K filed February 24, 2006)*10(f)
              
              Form
      of Restricted Stock Award Agreement with all employees, including named
      executive officers (Exhibit 10.2 to Current Report on Form 8-K filed
      February 24, 2006)*10(g)
              
              Form
      of Stock Option Agreement with outside directors (Exhibit 10.3 to Current
      Report on Form 8-K filed February 24, 2006)*10(h)
              
              Form
      of Stock Option Agreement with all employees, including named executive
      officers (Exhibit 10.4 to Current Report on Form 8-K filed February 24,
      2006)*10(i)
              
              LCA-Vision
      Inc. 2006 Stock Incentive Plan (definitive Proxy Statement for 2006 Annual
      Meeting of Stockholders, filed April 28, 2006)*10(j)
              
              Form
      of Notice of Grant of Award and Award Agreement for Restricted Stock Units
      (Exhibit 10.2 to Current Report on Form 8-K filed June 16,
      2006)*10(k)
              
              Employment
      Agreement of Steven C. Straus (Exhibit 99.1 to Current Report on Form 8-K
      filed November 6, 2006)*10(l)
              
              Letter
      Agreement between the Registrant and David L. Thomas (Exhibit 99.2 to
      Current Report on Form 8-K filed March 24, 2008)*10(m)
              
              Amendment
      to Employment Agreement of Steven C. Straus (Exhibit 99.1 to Current
      Report on Form 8-K filed May 2, 2008)*10(n)
              
              Form
      of Indemnification Agreement between the Registrant and its directors
      (Exhibit 10.1 to Current Report on Form 10-K filed July 24,
      2008)*10(o)
              
              Form
      of Agreement between the Registrant and certain of its executive officers
      (Exhibit 10.1 to Current Report on Form 8-K filed July 1,
    2008*10(p)
              
              Letter
      Agreement with Rhonda Sebastian dated June 1, 2009 (Exhibit 10.1 to
      Quarterly Report on Form 10-Q filed July 28, 2009)*10(q)
              
              Employment
      Agreement between LCA-Vision Inc. and Rhonda Sebastian dated September 8,
      2009 (Exhibit 10.1 to Quarterly Report on Form 10-Q filed October 27,
      2009)21
              
              Subsidiaries
      of the Registrant23
              
              Consent
      of Ernst & Young LLP24
              
              Powers
      of Attorney (contained on signature page)31.1
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Operating
    Officer31.2
              
              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32
              
              Section
      1350 Certifications





*
Incorporated by reference.


60


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) 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, as of the 26th day of February,
2010.





LCA-Vision
      Inc.By:
                    /s/ David L. ThomasDavid
      L. Thomas, Chief Operating OfficerBy:
                    /s/ Michael J.
CelebrezzeSenior
      Vice President of Finance,Chief
      Financial Officer and
Treasurer





POWER
OF ATTORNEY





KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints each of David L. Thomas and Michael J. Celebrezze his
true and lawful attorney-in-fact and agent, with full power of substitution and
with power to act alone, to sign and execute on behalf of the undersigned any
amendment or amendments to this annual report on Form 10-K for the fiscal year
ended December 31, 2009, and to perform any acts necessary to be done in order
to file such amendment or amendments, with exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission and each of
the undersigned does hereby ratify and confirm all that said attorney-in-fact
and agent, or his substitutes, shall do or cause to be done by virtue
hereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated below as of the 26th day of February, 2010.





/s/ David L. Thomas
                      
                      Chief
      Operating OfficerDavid
      L. Thomas
                      
                      (Co-Principal
      Executive Officer)/s/ Michael J. Celebrezze
                      
                      Senior
      Vice President of Finance, Chief Financial Officer and
      TreasurerMichael
      J. Celebrezze
                      
                      (Co-Principal
      Executive Officer, Principal Financial and Accounting
    Officer)/s/ E. Anthony Woods
                      
                      Chairman
      of the BoardE.
      Anthony Woods/s/ William F. Bahl
                      
                      DirectorWilliam
      F. Bahl/s/ John H. Gutfreund
                      
                      DirectorJohn
      H. Gutfreund/s/ John C. Hassan
                      
                      DirectorJohn
      C. Hassan/s/ Edgar F. Heizer III
                      
                      DirectorEdgar
      F. Heizer III




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