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,
2008





 ̈
              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 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. o


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


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, 2008, the last business day of the registrant’s most
recently completed second quarter, was approximately $88,394,000 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 March 6,
2009 was 18,552,985.





DOCUMENTS
INCORPORATED BY REFERENCE





None.








LCA-VISION
INC.





FISCAL
YEAR 2008 FORM 10-K ANNUAL REPORT





TABLE
OF CONTENTS





PagePart
      I.Item
      1.
                                                          Business
                                                          3Item
      1A.
                                                          Risk
      Factors
                                                          9Item
      1B.
                                                          Unresolved
      Staff Comments
                                                          15Item
      2.
                                                          Properties
                                                          15Item
      3.
                                                          Legal
      Proceedings
                                                          151tem
      4.
                                                          Submission
      of Matters to a Vote of Security Holders
                                                          16Part
      II.Item
      5.
                                                          Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                                                          16Item
      6.
                                                          Selected
      Financial Data
                                                          17Item
      7.
                                                          Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                          18Item
      7A.
                                                          Quantitative
      and Qualitative Disclosures About Market Risk
                                                          27Item
      8.
                                                          Financial
      Statements and Supplementary Data
                                                          28Item
      9.
                                                          Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
                                                          53Item
      9A.
                                                          Controls
      and Procedures
                                                          53Item
      9B.
                                                          Other
      Information
                                                          53Part
      III.Item
      10.
                                                          Directors,
      Executive Officers and Corporate Governance
                                                          54Item
      11.
                                                          Executive
      Compensation
                                                          58Item
      12.
                                                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                                                          72Item
      13.
                                                          Certain
      Relationships and Related Transactions, and Director
      Independence
                                                          76Item
      14.
                                                          Principal
      Accountant Fees and Services
                                                          77Part
      IV.Item
      15.
                                                          Exhibits
      and Financial Statement Schedules
                                                          78Signatures
                                                          80


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
LasikPlusvision
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.  Independent, board-certified ophthalmologists and
credentialed optometrists, as well as other health care professionals, support
the operation of our vision centers.  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. We have performed over 1,040,000 laser
vision correction procedures in our vision centers in the United States and
Canada since 1991.   We provide most of our patients with a
procedure called LASIK, which we began performing in the United States in 1997.





As of
December 31, 2008, we operated 75 LasikPlus fixed-site laser vision
correction centers generally located in larger metropolitan markets in the
United States.  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.





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. Prior to the laser vision correction procedure, our
professionals make an assessment of the patient’s candidacy for the treatment
and the correction required to program the excimer laser. 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.





We
currently use three suppliers for fixed-site excimer lasers: Bausch &
Lomb, Abbott Medical Optics and Alcon.  We also utilize the
IntraLase femtosecond laser supplied by Abbott Medical Optics in our vision
centers. We plan to reduce our excimer laser suppliers to two during
2009.





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





PRK
and Surface Ablation.The U.S. Food and Drug Administration (FDA) has approved PRK for
commercial use in the United States since 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.


3





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, the surgeon
typically uses an automated microsurgical instrument called a microkeratome or 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.  In
2007, we adopted IntraLase technology, a femtosecond laser that can be used in
place of a microkeratome.





The
Laser Vision Correction Market




More than
175 million Americans, or approximately 57% 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 6.5
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 1,016,300 million laser vision correction
procedures performed in 2008.Industry reports on the
U.S. refractive market estimate that the potential market for laser vision
correction procedures in the United States is approximately 113 million
procedures.  Laser vision correction is typically a private pay
procedure performed on an outpatient basis.




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











Source:  Market
Scope, December 2008


(f) =
2009 data forecasted




4




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, expansion 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”


·
            Opening
      and operating new laser vision correction
  centers


·
            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





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.”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 getting
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 2009 and beyond to include other medical and surgical eye services and
procedures.  These services and procedures may include eye exams and
intraocular lens replacements.  We are planning this service expansion
now and will assess portions of it in test markets.  We believe that
continued contact with our satisfied patient base will provide more word of
mouth referrals and repeat business with some patients.





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 which 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 effectively manage patient flow and physician
and staff productivity.





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. We work
closely with an unaffiliated 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
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.





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. 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 managed care providers.


5





Developing
and implementing innovative direct marketing campaigns.Our marketing
programs seek to reinforce the LasikPlusbrand 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 web site 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.





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 ourselves, are a specialized type of provider,
operating multi-site eye care centers that primarily provide laser vision
correction.





In most
of our markets, we 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.





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, including large chains of laser vision correction centers, 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
February 9, 2009, we had approximately 568 employees, 476 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 and Financing Services





We are
not directly involved in the research, development or manufacture of ophthalmic
laser systems, diagnostic equipment, microkeratomes or microkeratome blades.
Several companies - including Bausch & Lomb, Abbott Medical Optics and
Alcon, the three suppliers we currently use - offer excimer laser systems which
have been approved by the FDA for commercial sale in the United States. We
plan to reduce our excimer laser suppliers to two during
2009. We currently rely primarily on Bausch & Lomb, Abbott Medical
Optics, and McKesson to provide us with patient interface kits, microkeratomes,
microkeratome blades and other disposable items required in LASIK
procedures.





A
significant percentage of our patients finance some or all of the cost of their
procedure.  We work closely with an unaffiliated finance company that
offers multiple payment plans to qualifying customers.  We bear no
credit risk for loans made under this program.  We also currently
offer our own direct financing to certain of our customers who do not qualify
for the third-party financing.  We bear the credit risk of our
financing program.


6





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 Abbott Medical
Optics, Bausch & Lomb 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,
microkeratomes and certain other equipment we use in laser vision correction
surgery.





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.





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.


7





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) are currently applicable 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.





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
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.


8





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 little 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. While 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.





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.





Healthcare
reform





Many in
the United States consider healthcare reform to be a national priority. Several
states are also 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.





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 Form 10-K 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




We
incurred losses in 2008 and may continue to incur losses in 2009.
 
 Our
procedure volume in 2008 decreased substantially from 2007 due to accelerating
weakening of consumer confidence.  We sustained losses in three of the
four quarters in 2008 and for the full year.  In 2009, 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 flow.  At December 31, 2008, we had approximately $59.5 million
in cash and investments.  We are uncertain as to how long the negative
global economic and industry conditions will continue.  If these
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.





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 can negatively impact 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.


9





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 new advancements by our suppliers and the purchase of such
      advancements 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 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
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 open new vision centers, to maintain operations at existing vision
centers or to attract patients 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 may 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 successfully
launch a new vision center, 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.





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.


10





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, among
others.  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 large chains 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
provides 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, 2008, we had $15,450,000 in gross patient receivables, compared to
$22,385,000 as of December 31, 2007. 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.Bad debt
expense decreased in 2008 to $5.4 million, from $7.7 million in
2007.





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 has been
relatively flat to down since 2005.





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


11





·
            Cost,
      particularly since 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





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 U.S. 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





We
depend on limited sources for the excimer lasers, diagnostic equipment,
microkeratomes and disposable blades 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
currently use three suppliers - Bausch & Lomb, Abbott Medical Optics and
Alcon -  for our lasers.  If any or all 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 open
new vision centers or increase our capacity to perform laser vision correction
services at existing vision centers could be restricted. We plan to reduce our
excimer laser suppliers to two during 2009.





We
currently rely primarily on Bausch & Lomb, Abbott Medical Optics and
McKesson to provide us with microkeratomes and patient interface kits,
the devices used to create the corneal flap in the LASIK procedure, as well as
with microkeratome blades and other disposable items required for LASIK. There
are a limited number of manufacturers of patient interface kits, microkeratomes
and microkeratome blades, and, 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.


12





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


·
            Rules
      and regulations regarding advertising and marketing practices in some
      states





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 in a decrease in 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.





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 health care 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 there can be no guarantee
that the ophthalmologists will be successful in obtaining or maintaining such
insurance coverage, particularly in the current insurance market.




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, if it pays significant claims, it could
affect our results of operations and financial condition.


13





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.





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.





A
group headed by our former Chairman is seeking a change in control of our
Company, which could have a material adverse effect on our results of operations
and financial condition.





In
February 2009, a group led by Steven N. Joffe, Craig P.R. Joffe and Alan H.
Buckey (the “Joffe Group”) began to solicit written consents from our
stockholders to remove our current Board of Directors without cause and to
replace them with Steven N. Joffe and four other individuals designated by the
Joffe Group.  The Joffe Group has stated that if successful in
obtaining control of our Board of Directors, it will propose that the new Board
remove our existing senior executives and replace them with Messrs. Joffe, Joffe
and Buckey as Chairman, Chief Operating Officer and Chief Financial Officer,
respectively.   Our Board of Directors has determined unanimously
that the Joffe Group’s proposals are not in the best interests of our
stockholders and is opposing their consent solicitation.





If the
Joffe Group were to be successful in obtaining sufficient stockholder consents
to obtain control of our Board of Directors, the resultant change of control
would constitute an event of default under our Loan and Security Agreement dated
as of April 24, 2008 with PNC Equipment Finance, LLC, which would permit the
lender to accelerate the maturity of all of the debt outstanding under that
agreement (approximately $16.6 million at February 9, 2009).  In
addition, the change of control would also permit GE Money Bank to terminate the
open-ended patient financing program that financed approximately 54% of our
revenues in 2008.  Furthermore, termination of our four current senior
executive officers would require us to pay them an aggregate of approximately
$1.5 million in severance payments and benefit
continuations.  Finally, the Joffe Group has stated that, if
successful, it intends to ask our new Board to reimburse its expenses in
connection with the consent solicitation, which it estimates at
$200,000.





In
addition to the foregoing direct costs, our Board believes that, if the Joffe
Group were successful, the new Board and management team proposed by the Joffe
Group would abandon or reverse many of the initiatives taken by our current
management team which we believe have positioned us for future
success.





The Joffe
Group has advised us that if they are unsuccessful in their consent solicitation
they intend to nominate the same five individuals for election as directors at
our 2009 Annual Meeting of Stockholders, which may have the same material
adverse effects as discussed above.





We
are defendants in litigation which, if adversely determined, may have a material
adverse effect on our results of operations and financial
condition.





On
September 13, 2007, and October 1, 2007, two complaints were filed against us
and certain of our current and former directors and officers by Beaver County
Retirement Board and Spencer and Jean Lin, respectively, in the United States
District Court for the Southern District of Ohio (Western Division) purportedly
on behalf of a class of 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 have been consolidated into one action.  A consolidated
complaint was filed on April 19, 2008.  The plaintiffs in the
consolidated complaint are seeking damages on behalf of a class of 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 allege 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 September 5, 2008, plaintiffs filed
their memorandum in opposition to the motion to dismiss.  We strongly
believe that these claims lack merit, and we intend to defend against the claims
vigorously.  Due to the inherent uncertainties of litigation, we
cannot predict the outcome of the act at this time, and can give no assurance
that these claims will not have a material adverse effect on our financial
position or results of operations.


14





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





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 Center 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 2,700 to 6,900 square feet with lease expiration dates
ranging from April 30, 2009 to July 31, 2018.





Item 3. Legal
Proceedings.





On
September 13, 2007, and October 1, 2007, two complaints were filed against us
and certain of our current and former directors and officers by Beaver County
Retirement Board and Spencer and Jean Lin, respectively, in the United States
District Court for the Southern District of Ohio (Western Division) purportedly
on behalf of a class of 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 have been consolidated into one action.  A consolidated
complaint was filed on April 19, 2008.  The plaintiffs in the
consolidated complaint are seeking damages on behalf of a class of 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 allege 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 September 5, 2008, plaintiffs filed
their memorandum in opposition to the motion to dismiss.  We strongly
believe that these claims lack merit, and we intend to defend against the claims
vigorously.  Due to the inherent uncertainties of litigation, we
cannot predict the outcome of the action at this time, and can give no assurance
that these claims will not have a material adverse effect on our financial
position or results of operations.





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





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 $1,308,000.  At December 31, 2008, we maintained insurance
reserves of $9,489,000.


15





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





Item
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 17,000 beneficial holders of our common stock
as of February 6, 2009.





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.





2008
                                      
                                      
                                      2007High
                                      
                                      
                                      Low
                                      
                                      
                                      High
                                      
                                      
                                      LowFirst
      Quarter
                                      
                                      $
                                      20.26
                                      
                                      
                                      $
                                      12.17
                                      
                                      
                                      $
                                      47.54
                                      
                                      
                                      $
                                      33.27Second
      Quarter
                                      
                                      
                                      13.37
                                      
                                      
                                      
                                      4.54
                                      
                                      
                                      
                                      49.32
                                      
                                      
                                      
                                      40.74Third
      Quarter
                                      
                                      
                                      7.39
                                      
                                      
                                      
                                      4.08
                                      
                                      
                                      
                                      50.69
                                      
                                      
                                      
                                      28.91Fourth
      Quarter
                                      
                                      
                                      4.70
                                      
                                      
                                      
                                      2.16
                                      
                                      
                                      
                                      30.76
                                      
                                      
                                      
                                      15.31





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 reviews the decision to pay a dividend
quarterly.





The
following table sets forth the quarterly cash dividends paid for 2008 and
2007.





2008
                        
                        
                        2007First
      Quarter
                        
                        $
                        0.18
                        
                        
                        $
                        0.18Second
      Quarter
                        
                        
                        0.06
                        
                        
                        
                        0.18Third
      Quarter
                        
                        
                        -
                        
                        
                        
                        0.18Fourth
      Quarter
                        
                        
                        -
                        
                        
                        
                        0.18$
                        0.24
                        
                        
                        $
                        0.72





There
were no sales of unregistered securities required to be reported under Item 701
of Regulation S-K.


16


On August
21, 2007, our Board of Directors authorized a share repurchase plan under which
we are authorized to purchase up to $50,000,000 of our common
stock.  During 2007, we repurchased 588,408 shares of our common stock
under this program at an average price of $16.99 per share, for a total cost of
approximately $10,000,000.  We did not purchase any shares during 2008
under this program.





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:2008
                                
                                
                                2007
                                
                                
                                2006
                                
                                
                                2005
                                
                                
                                2004Revenues:Laser
      refractive surgery
                                
                                $
                                205,176
                                
                                
                                $
                                292,635
                                
                                
                                $
                                238,925
                                
                                
                                $
                                176,874
                                
                                
                                $
                                120,364Operating
      costs and expenses:Medical
      professional and license fees
                                
                                
                                41,797
                                
                                
                                
                                49,312
                                
                                
                                
                                42,954
                                
                                
                                
                                33,499
                                
                                
                                
                                23,599Direct
      costs of services
                                
                                
                                77,474
                                
                                
                                
                                97,423
                                
                                
                                
                                77,612
                                
                                
                                
                                54,952
                                
                                
                                
                                40,842General
      and administrative expenses
                                
                                
                                20,262
                                
                                
                                
                                22,657
                                
                                
                                
                                21,156
                                
                                
                                
                                14,021
                                
                                
                                
                                10,292Marketing
      and advertising
                                
                                
                                52,429
                                
                                
                                
                                66,469
                                
                                
                                
                                47,971
                                
                                
                                
                                31,813
                                
                                
                                
                                20,468Depreciation
                                
                                
                                17,972
                                
                                
                                
                                11,209
                                
                                
                                
                                8,453
                                
                                
                                
                                7,636
                                
                                
                                
                                7,045Restructuring
      expense
                                
                                
                                2,923
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Impairment
      of fixed assets
                                
                                
                                553
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -Total
      expenses
                                
                                
                                213,410
                                
                                
                                
                                247,070
                                
                                
                                
                                198,146
                                
                                
                                
                                141,921
                                
                                
                                
                                102,246Operating
      (loss) income
                                
                                
                                (8,234
                                )
                                
                                
                                45,565
                                
                                
                                
                                40,779
                                
                                
                                
                                34,953
                                
                                
                                
                                18,118Equity
      in earnings from unconsolidated businesses
                                
                                
                                477
                                
                                
                                
                                814
                                
                                
                                
                                746
                                
                                
                                
                                328
                                
                                
                                
                                369Net
      investment (loss) income
                                
                                
                                (1,524
                                )
                                
                                
                                5,953
                                
                                
                                
                                6,182
                                
                                
                                
                                3,929
                                
                                
                                
                                2,137Other
      income (loss), net
                                
                                
                                23
                                
                                
                                
                                (607
                                )
                                
                                
                                (27
                                )
                                
                                
                                (397
                                )
                                
                                
                                (306
                                )(Loss)
      income before taxes on income
                                
                                
                                (9,258
                                )
                                
                                
                                51,725
                                
                                
                                
                                47,680
                                
                                
                                
                                38,813
                                
                                
                                
                                20,318Income
      tax (benefit) expense
                                
                                
                                (2,623
                                )
                                
                                
                                19,221
                                
                                
                                
                                19,310
                                
                                
                                
                                15,832
                                
                                
                                
                                (11,553
                                )Net
      (loss) income
                                
                                $
                                (6,635
                                )
                                
                                $
                                32,504
                                
                                
                                $
                                28,370
                                
                                
                                $
                                22,981
                                
                                
                                $
                                31,871Net
      (loss) income per common shareBasic
                                
                                $
                                (0.36
                                )
                                
                                $
                                1.66
                                
                                
                                $
                                1.37
                                
                                
                                $
                                1.12
                                
                                
                                $
                                1.59Diluted
                                
                                
                                (0.36
                                )
                                
                                
                                1.64
                                
                                
                                
                                1.34
                                
                                
                                
                                1.07
                                
                                
                                
                                1.53Cash
      dividends per common share
                                
                                $
                                0.24
                                
                                
                                $
                                0.72
                                
                                
                                $
                                0.54
                                
                                
                                $
                                0.36
                                
                                
                                $
                                0.13Weighted
      average shares outstandingBasic
                                
                                
                                18,526
                                
                                
                                
                                19,572
                                
                                
                                
                                20,694
                                
                                
                                
                                20,500
                                
                                
                                
                                20,099Diluted
                                
                                
                                18,526
                                
                                
                                
                                19,858
                                
                                
                                
                                21,235
                                
                                
                                
                                21,492
                                
                                
                                
                                20,814Selected
      Operating DataLaser
      vision correction procedures
                                
                                
                                115,153
                                
                                
                                
                                192,204
                                
                                
                                
                                185,268
                                
                                
                                
                                142,000
                                
                                
                                
                                95,835





At
      December 31,2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2005
                    
                    
                    2004Balance
      Sheet DataCash,
      cash equivalents and short-term investments
                    
                    $
                    56,335
                    
                    
                    $
                    60,148
                    
                    
                    $
                    95,232
                    
                    
                    $
                    108,061
                    
                    
                    $
                    84,384Working
      capital
                    
                    
                    55,534
                    
                    
                    
                    48,673
                    
                    
                    
                    95,012
                    
                    
                    
                    112,091
                    
                    
                    
                    86,954Total
      assets
                    
                    
                    157,482
                    
                    
                    
                    179,647
                    
                    
                    
                    190,159
                    
                    
                    
                    181,259
                    
                    
                    
                    137,131Debt
      obligations maturing in one year
                    
                    
                    6,985
                    
                    
                    
                    3,941
                    
                    
                    
                    3,360
                    
                    
                    
                    2,122
                    
                    
                    
                    542Long-term
      debt obligations (less current portion)
                    
                    
                    14,120
                    
                    
                    
                    2,012
                    
                    
                    
                    2,431
                    
                    
                    
                    1,434
                    
                    
                    
                    376Retaining
      earnings (deficit)
                    
                    
                    23,515
                    
                    
                    
                    34,597
                    
                    
                    
                    16,320
                    
                    
                    
                    (919
                    )
                    
                    
                    (1,493
                    )Total
      stockholders' investment
                    
                    
                    82,985
                    
                    
                    
                    93,599
                    
                    
                    
                    109,116
                    
                    
                    
                    126,703
                    
                    
                    
                    103,076




17


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





Revenues





We
derived all of our revenues from laser vision correction procedures performed in
our U.S. vision centers.  A number of factors impact our revenues,
including the following:





·
            General
      economic conditions and consumer confidence
  levels


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


·
            The
      availability of patient financing


·
            The
      level of consumer acceptance of laser vision
  correction


·
            The
      effect of competition and discounting practices in our
      industry





Other
factors that may impact our revenues include:





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


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





Our
revenues are primarily a function of the number of laser vision correction
procedures performed and the pricing for these services.  Our vision
centers have a relatively high degree of operating leverage due to the fact that
many of our costs are fixed in nature.  As a result, our level of
procedure volume can have a significant impact on our level of
profitability.  The following table details the number of laser vision
correction procedures performed at our consolidated vision centers during the
last three fiscal years.





2008
                        
                        
                        2007
                        
                        
                        2006First
      quarter
                        
                        
                        44,159
                        
                        
                        
                        59,101
                        
                        
                        
                        53,372Second
      Quarter
                        
                        
                        30,086
                        
                        
                        
                        48,668
                        
                        
                        
                        47,308Third
      Quarter
                        
                        
                        21,484
                        
                        
                        
                        44,547
                        
                        
                        
                        42,539Fourth
      Quarter
                        
                        
                        19,424
                        
                        
                        
                        39,888
                        
                        
                        
                        42,049Year
                        
                        
                        115,153
                        
                        
                        
                        192,204
                        
                        
                        
                        185,268





Our
procedure volume has been severely affected by the deepening credit crisis,
depressed housing prices, and general economic slow down in North America
resulting in a decline in consumer confidence levels and the deferral of
high-end discretionary expenditures for many consumers.  We anticipate
these conditions will continue into 2009 and that industry procedure
volume will continue to decline, which we expect will negatively
affect our revenues.  In response, we reduced our workforce in the
United States in 2008 by approximately 35% so that our staffing levels would be
appropriate for our anticipated procedure volume.  We are currently
not opening vision centers in new markets or relocating existing vision
centers.  We are leveraging consumer insights from extensive market
research conducted over the past several months in an effort
to optimize our marketing efforts, as well as to refine our strategies of
convenience and affordability.  We continue to focus on delivering a
satisfying experience and high quality outcome at an affordable price to every
patient who visits our LasikPlus® vision
centers and are planning to expand our service offerings to other eye-related
medical and surgical services.





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


18





Effective
June 15, 2007, we changed our pricing model and no longer offer separately
priced acuity options.  For substantially all patients, participation
in our acuity programs is now included 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 will recognize revenue previously deferred from the sale of
the separately priced acuity programs in the future over a seven-year period,
our current estimate of the period in which the future costs of performing the
enhancement procedures are expected to be incurred.





In 2008,
revenues decreased by $87,459,000, or 29.9%, to $205,176,000, from $292,635,000
in 2007.  The components of the revenue change include the following
(dollars in thousands):





Decrease
      in revenues from lower procedure volume
                      
                      $
                      (114,100
                      )Impact
      from increase in average selling prices, before revenue
      deferral
                      
                      
                      15,935Change
      in deferred revenues
                      
                      
                      10,706Decrease
      in revenues
                      
                      $
                      (87,459
                      )





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.    IntraLase is now
operational in most of our vision centers.





Effective
July 1, 2008, we implemented a simplified market-specific pricing structure
based on the results of four months of earlier testing in multiple markets. The
revised structure, which is intended to drive procedure volume while maintaining
acceptable margins, establishes local price points that take into account market
competition and other factors. When excluding the impact of deferred revenue,
the revised pricing structure, coupled with price increases related to the
expanded use of IntraLase technology in  our vision centers in late
2007 and into 2008,  has resulted in a $138 increase in average price
per procedure when compared with the prior year. We will continue to monitor the
relationship between price and conversion and make adjustments to price where we
believe revenue can be maximized.





In 2007,
revenues increased by $53,710,000, or 22.5%, to $292,635,000 from $238,925,000
in 2006.  The components of the revenue change include the following
(dollars in thousands):





Increase
      in revenues from higher procedure volume
                      
                      $
                      9,627Impact
      from increase in average selling price, before revenue
      deferral
                      
                      
                      18,068Change
      in deferred revenues
                      
                      
                      26,015Increase
      in revenues
                      
                      $
                      53,710





The
average reported revenue per procedure, which includes the impact of deferred
revenue from the sale of separately priced acuity programs, increased 18.1% to
$1,523 in 2007 from $1,290 in 2006, primarily as a result of the introduction of
IntraLase and secondarily due to the elimination of separately priced equity
programs.





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





2008
                        
                        
                        2007
                        
                        
                        Increase
      in
                          RevenuesRevenues
      deferred
                        
                        $
                        -
                        
                        
                        $
                        (20,054
                        )
                        
                        $
                        20,054Amortization
      of prior deferred revenues
                        
                        
                        18,719
                        
                        
                        
                        28,067
                        
                        
                        
                        (9,348
                        )Net
      decrease in revenues
                        
                        $
                        18,719
                        
                        
                        $
                        8,013
                        
                        
                        $
                        10,706




19





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


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


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


·
            Marketing
      and advertising costs


·
            Depreciation
      of equipment





2008
Compared to 2007





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
increase 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
                    
                    
                    2,923
                    
                    
                    
                    -
                    
                    
                    
                    2,923
                    
                    
                    
                    1.4
                    %
                    
                    
                    0.0
                    %Impairment
      of fixed assets
                    
                    
                    553
                    
                    
                    
                    -
                    
                    
                    
                    553
                    
                    
                    
                    0.3
                    %
                    
                    
                    0.0
                    %





Medical
professional and license fees


Medical
professional and license fees decreased by $7,515,000, 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 $9,181,000, or 30.1%, on lower revenues offset by
the  effects of deferred medical fees. License fees increased by
$1,617,000, or 8.7%.  This is the result of increased procedure fees
of $8,638,000 associated with the IntraLase femtosecond lasers that were added
to our service offering in 2007, which was 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 $2,005,000 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 $1,872,000 in 2008 and
$2,807,000 in 2007.





Direct
costs of services


Direct
costs of services decreased in 2008 by $19,949,000, 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 $8,352,000 as
compared to $14,331,000 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 $2,395,000, 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
$997,000 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 $14,040,000, 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. We are
continuing to work to develop more efficient marketing techniques and in 2008 we
consolidated our media programs under a single, proven lead agency that now
manages our marketing programs and vendors. Our future operating profitability
will depend in large part on the success of our efforts in this
regard.


20





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
$1,496,000 in 2008.





In
addition, in October 2008, we closed our Boise, Idaho vision center, and as of
December 31, 2008, we closed our Tulsa, Oklahoma and Little Rock, Arkansas
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 $1,427,000,
principally related to contract terminations and asset impairments.





Impairment
of Fixed Assets


In 2008,
we recognized a $553,000 impairment charge for certain assets held for use in a
laser vision correction center.  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 $6,763,000, 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 $1,524,000 in 2008 as compared to net
investment income of $5,953,000 in 2007.  The $7,477,000 decline is
due to $3,125,000 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 $2,016,000 and a decrease
of $3,119,000 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


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





Year
      endedDecember
      31,2008
                            
                            
                            2007Federal
      income tax (benefit) expense
                            
                            $
                            (2,666
                            )
                            
                            $
                            16,855State
      income tax expense (benefit), net of federal benefit
                            
                            
                            43
                            
                            
                            
                            2,366Income
      tax (benefit) expense
                            
                            $
                            (2,623
                            )
                            
                            $
                            19,221Effective
      income tax rate
                            
                            
                            28.3
                            %
                            
                            
                            37.2
                            %





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.  We established a full valuation
allowance for the tax benefit generated from the loss on investments because we
did not have capital gains to offset this capital loss.


21





2007
Compared to 2006





The
following table shows the increase in components of operating expenses between
2006 and 2007 in dollars and as a percent of revenues for each period (dollars
in thousands):





%
      of Revenues2007
                        
                        
                        2006
                        
                        
                        Increase
                        
                        
                        2007
                        
                        
                        2006Medical
      professional and license fees
                        
                        $
                        49,312
                        
                        
                        $
                        42,954
                        
                        
                        $
                        6,358
                        
                        
                        
                        16.9
                        %
                        
                        
                        18.0
                        %Direct
      costs of services
                        
                        
                        97,423
                        
                        
                        
                        77,612
                        
                        
                        
                        19,811
                        
                        
                        
                        33.3
                        %
                        
                        
                        32.5
                        %General
      and administrative expenses
                        
                        
                        22,657
                        
                        
                        
                        21,156
                        
                        
                        
                        1,501
                        
                        
                        
                        7.7
                        %
                        
                        
                        8.9
                        %Marketing
      and advertising
                        
                        
                        66,469
                        
                        
                        
                        47,971
                        
                        
                        
                        18,498
                        
                        
                        
                        22.7
                        %
                        
                        
                        20.1
                        %Depreciation
                        
                        
                        11,209
                        
                        
                        
                        8,453
                        
                        
                        
                        2,756
                        
                        
                        
                        3.8
                        %
                        
                        
                        3.5
                        %





Medical
professional and license fees


Medical
professional expenses increased by approximately $2,394,000, or 8.8%, in 2007
from 2006 as a result of increased revenues from higher procedure volumes. As a
result of deferring revenues associated with the sale of separately priced
acuity programs, we also deferred the associated medical professional
fees.  We deferred medical professional fees of $2,005,000 in 2007 and
$3,854,000 in 2006. These deferrals were offset by the amortization of the
prepaid medical professional fee attributable to prior years of $2,807,000 in
2007 and $2,054,000 in 2006. License fees increased by $1,342,000, or 8%, with
approximately 4% of the increase due to higher procedure volume and
approximately 4% from per procedure fees associated with the IntraLase
femtosecond lasers that were added to our service offering in 2007.





Direct
costs of services


Direct
costs of services include the salary component of physician compensation for
certain physicians employed by us, staffing, equipment, medical supplies,
finance charges and facility costs of operating laser vision correction centers.
These direct costs increased in 2007 by $19,811,000, or 25.5%, compared to 2006.
Of this amount, $14,331,000 was a result of 13 additional vision centers in
operation in 2007. The remaining increase resulted from $5,820,000 of increased
bad debt expense partially offset by $340,000 in cost savings at existing
centers.





Bad debt
expense increased in 2007 as compared to 2006 for three primary reasons: (1) we
financed a higher percent of total revenues in 2007; (2) the mix of patient
financing shifted to a greater use of 36-month financing from 12-month
financing, with the longer term receivables having increased credit risk; and
(3) adverse changes in recent collection rates with our patient financing
program given the downturn in the U.S. economy. The future value of revenues we
finance and our ability to collect on such financings will depend on a number of
factors, including the consumer credit environment and our ability to manage
credit risk related to consumer debt, bankruptcies and other credit trends. We
increased the allowance for doubtful accounts to reflect appropriately the
increase in credit loss exposure.





General
and administrative


General
and administrative expenses increased by $1,501,000, or 7.1%, in 2007 as
compared to 2006. Of this amount, $487,000 was due to increase in professional
service fees and $997,000 was for sales tax principally related to purchases of
direct mailing lists.





Marketing
and advertising expenses


Marketing
and advertising expenses increased by $18,498,000, or 38.6%, in 2007 from 2006.
During 2007, these expenses represented 22.7% of revenue, compared with 20.1%
during 2006. The increase resulted primarily from additional spending in
existing markets to continue to drive patient traffic, spending related to the
opening of new vision centers and continued investment in marketing research and
program development. We are continuing to work to develop more efficient
marketing techniques. Our future operating margins will depend in large part on
the success of these efforts.





Depreciation
expense


Depreciation
expense increased by $2,756,000 in 2007 from 2006, primarily as a result of
depreciation of capitalized expenditures at our new vision centers that opened
in 2007, purchases of IntraLase lasers and capital improvements to Bausch &
Lomb lasers.





Non-operating
income and expenses


Net
investment income decreased by $229,000, or 3.7%, in 2007 from 2006 due to a
decrease in investment income of $1,049,000 as a result of a decline in
investment holdings used for our share buyback program, partially offset by an
$820,000 increase in income from patient financing charges.





Other
expense increased by $580,000 in 2007 from 2006. This change resulted mostly
from loss on abandonment of building improvements at our headquarters office
building that was partially renovated.




Income
Taxes


Our tax
expense for 2007 and 2006 totaled $19,221,000 and $19,310,000, respectively. The
effective tax rate was 37.2% in 2007 as compared to 40.5% in 2006. The overall
effective rate was lower in 2007 than in 2006 due to increased holdings of
tax-exempt municipal bonds in our short-term, available-for-sale securities
portfolio and the application of FAS 123(R) to our share-based compensation
expense for incentive stock options, which produced tax expense in 2006 and a
tax benefit in 2007.


22





Liquidity
and Capital Resources





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





2008
                          
                          
                          2007
                          
                          
                          2006Cash
      provided (used) by:Operating
      activities
                          
                          $
                          7,569
                          
                          
                          $
                          54,979
                          
                          
                          $
                          51,661Investing
      activities
                          
                          
                          (9,212
                          )
                          
                          
                          (2,538
                          )
                          
                          
                          (80,467
                          )Financing
      activities
                          
                          
                          7,677
                          
                          
                          
                          (59,258
                          )
                          
                          
                          (54,824
                          )Net
      increase (decrease) in cash and cash equivalents
                          
                          $
                          6,034
                          
                          
                          $
                          (6,817
                          )
                          
                          $
                          (83,630
                          )





Cash
flows generated from operating activities, a major source of our liquidity,
amounted to $7,569,000 in 2008, $54,979,000 in 2007 and $51,661,000 in
2006.  The decrease in cash flow generated from operating activities
during 2008 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 reduced headcount in the
vision centers, national call center and corporate offices during 2008, reduced
marketing expense significantly, and are reducing costs in all other
discretionary areas.  We 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.  Accounts payable declined $2,227,000 in
2008.  The December 31, 2007 balance sheet included open invoices
related to some IntraLase purchases, while the December 31, 2008 balance sheet
did not have any large capital purchase invoices pending.  The decline
in accounts payable was offset partially by changes to vendor terms in 2008,
which generated $3,000,000 in accounts payable and resulting cash flow for the
year.  At December 31, 2008, working capital (excluding debt due
within one year) amounted to $62,519,000 compared to $52,614,000 at the end of
2007.  Liquid assets (cash and cash equivalents, short-term
investments, and accounts receivable) amounted to 200.8% of current liabilities,
compared to 155.3% at December 31, 2007.





Our cash
conservation measures also impacted cash flows from investing and financing
activities.  Capital expenditures were lower in 2008 as
we reduced the number of new center openings and limited the number of
center relocations.   During 2008, we did not repurchase any
shares of our common stock under the August 21, 2007, $50 million share
repurchase program authorized by our Board of Directors.  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
million.  In addition, during the third quarter of 2008 our Board of
Directors suspended payment of a quarterly dividend.  The Board of
Directors will review the decision to pay a dividend
quarterly.   We  paid a quarterly dividend from the
third quarter of 2004 through the second quarter of 2008.





On April
24, 2008, we entered into a loan agreement with PNC Equipment Finance, LLC to
finance the majority of the IntraLase units which we purchased.  At
closing, we drew $19,184,000 on the loan facility, which requires monthly
payments over a five-year period at a fixed interest rate of 4.96%. We typically
have financed our laser purchases with capital lease obligations provided by the
vendors. The IntraLase purchases were made with cash at the time of purchase.
The loan transaction freed up that capital to be used in the business for other
corporate purposes. The remaining unpaid balance on the bank loan was
$16,892,000 at December 31, 2008. The loan agreement contains no financial
covenants and, as with our capital lease obligations, is secured by certain
medical equipment.




At
December 31, 2008 and 2007, we held at par value $5,625,000 and $18,300,000,
respectively, of various auction rate securities.  The assets
underlying the auction rate instruments are primarily municipal bonds, preferred
closed end funds, and credit default swaps.  Historically, these
securities have provided liquidity through a Dutch auction process that resets
the applicable interest rate at pre-determined intervals every 7 to 28 days.
However, these auctions began to fail in the first quarter of 2008. Because
these auctions have failed, we have realized higher interest rates for many of
these auction rate securities than we would have otherwise. Although we have
been receiving interest payments at these rates, the related principal amounts
will not be accessible until a successful auction occurs, a buyer is found
outside of the auction process, the issuer calls the security, or the security
matures according to contractual terms. Maturity dates for our auction rate
securities range from 2017 to 2036. Since these auctions first failed in early
2008, $15.4 million of the related securities have been called at par by their
issuers.





At
December 31, 2008, there was insufficient observable auction rate market
information available to determine the fair value of most of our auction rate
security investments. Therefore, we estimated fair value using a 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.


23





Two of
the seven auction rate securities held within our investment portfolio at
December 31, 2008, with a combined par value of $2,250,000, were designed to
serve as vehicles for credit default swaps. The recent disruptions in the credit
and financial markets are having a significant adverse impact on the credit
default swap markets, with spreads increasing sharply on investment grade
entities due to the demand to protect against counterparty risk. Some defaults
have occurred in the financial sector. Due to increased risk of default, it is
probable that all amounts due (principal and interest) will not be collected
according to these instruments’ contractual terms. Accordingly, we recognized an
other-than-temporary impairment of $1,575,000 for these two auction rate
security investments within the Consolidated Statement of Operations in 2008 to
record the investments at fair value and establish a new cost
basis.  We reported four of the seven auction rate securities,
consisting primarily of municipal bonds with a combined par value of $2,825,000,
at fair value with an other-than-temporary impairment of
$375,000.  Based primarily on the period of time and the extent of the
impairment, we concluded these impairments were other-than-temporary and
accordingly, recorded the loss within the consolidated statement of operations
in 2008.  The issuer of the remaining auction rate security redeemed
it at par in January 2009, and therefore, we recognized no
impairment.





The
following table aggregates our obligations and commitments to make future
payments under existing contracts at December 31, 2008 (dollars in
thousands).  We have excluded contractual obligations for which the
ultimate settlement of quantities or prices are not fixed and
determinable.





Contractual Obligations
                        
                        Total
                        
                        
                        Less than
                          1 year
                        
                        
                        1 - 3 years
                        
                        
                        3 - 5 years
                        
                        
                        More than
                          5 yearsCapital
      lease obligations
                        
                        $
                        4,213
                        
                        
                        $
                        3,402
                        
                        
                        $
                        811
                        
                        
                        $
                        -
                        
                        
                        $
                        -Long-term
      debt obligations
                        
                        
                        16,892
                        
                        
                        
                        3,583
                        
                        
                        
                        7,721
                        
                        
                        
                        5,588
                        
                        
                        
                        -Operating
      lease obligations
                        
                        
                        38,519
                        
                        
                        
                        10,047
                        
                        
                        
                        15,739
                        
                        
                        
                        8,365
                        
                        
                        
                        4,368Deferred
      compensation
                        
                        
                        2,196
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        2,196Total
                        
                        $
                        61,820
                        
                        
                        $
                        17,032
                        
                        
                        $
                        24,271
                        
                        
                        $
                        13,953
                        
                        
                        $
                        6,564





We had
capital expenditures of $14,860,000 and $28,586,000 in 2008 and 2007,
respectively, which consisted primarily of investments incurred in connection
with the opening of new vision centers, capital expenditures related to a new
Customer Call and Data Center, and equipment purchases or upgrades at existing
facilities.  We opened six new vision centers in 2008 and 13 new
vision centers in 2007.





Our costs
associated with the opening of a new vision center generally consist of capital
expenditures such as the purchase or lease of lasers, diagnostic equipment,
office equipment and leasehold improvements. In addition, we typically incur
other startup expenses and pre-opening advertising expenses. Generally, we
estimate the costs associated with opening a new vision center to be between
$1,200,000 and $1,500,000. Actual costs vary from vision center to vision center
based upon the location of the market, the number of lasers purchased or leased
for the vision center, the site of the vision center, the cost of grand opening
marketing and the level of leasehold improvements required.





The
following is a list of the new vision centers we opened in the last two fiscal
years:





2008
                    
                    2007Savannah,
      GA
                    
                    Long
      Island, NYDes
      Moines, IA
                    
                    Omaha,
      NETulsa,
      OK
                    
                    Green
      Bay, WIWoodbridge,
      NJ
                    
                    Harrisburg,
      PANashville,
      TN
                    
                    Little
      Rock, ARArlington,
      TX
                    
                    Colorado
      Springs, COSan
      Diego, CAOklahoma
      City, OKScarsdale,
      NYFresno,
      CABoise,
      IDCoral
      Springs, FLChandler,
      AZ





The
investment in our new Customer Call and Data Center totaled $4,227,000 in
2007.  Laser and equipment upgrades and vision center expansions
resulted in capital expenditures of $14,860,000 in 2008 and $24,359,000 in 2007,
which were funded by cash flow from operations in both years.  The
decreases in 2008 from 2007 related to the addition of IntraLase femtosecond
lasers in 45 centers and upgrades to all Bausch & Lomb lasers in 2007 as
well as reduction in new center openings from 13 in 2007 to six in
2008.


24





We
continue to offer our own sponsored patient financing. As of December 31, 2008,
we had $12,323,000 in patient receivables, net of allowance for doubtful
accounts, which was a decrease of $4,945,000, or 28.6%, since December 31,
2007.  We continually monitor the allowance for doubtful accounts and
will adjust our lending criteria or require greater down payments if our
experience indicates that is necessary.





We 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.





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 principals
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 the Company’s 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.  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 8% to
10% 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
customer 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 2008, which included an increase in the
minimum deposit required, we are taking 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, 2008 of $3,127,000 against patient
receivables of $15,450,000, compared to an allowance of $5,117,000 against
patient receivables of $22,385,000 at December 31, 2007.  Our policy
is to reserve for all receivables that remain open past financial maturity date
and to provide reserves for receivables prior to the maturity date to reduce
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 $2,626,000 in 2008, $1,843,000 in 2007 and $1,022,000 in 2006.
We included these amounts in net investment income 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, 2008, we maintained insurance reserves of $9,489,000, 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 an increase in the reserve of $996,000 from
$8,493,000 at December 31, 2007. 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 expense payments of
$1,308,000.


25





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 under the
provisions of Financial Accounting Standards Board (FASB) Statement No. 5 (SFAS
5), Accounting for
Contingencies.  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, 2008 and 2007 totaled $23,110,000
and $41,829,000, respectively.  We will amortize the December 31, 2008
balance into income as follows:





2009
                    
                    $
                    9,107,0002010
                    
                    $
                    6,149,0002011
                    
                    $
                    4,376,0002012
                    
                    $
                    2,516,0002013
                    
                    $
                    871,0002014
                    
                    $
                    91,000





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.


26





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: building and
building improvements, 5 to 39 years; furniture and fixtures, 3 to 7 years;
medical equipment, 3 to 5 years; other equipment, 3 to 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 four years, which is
reflective of the remaining useful life of the primary assets within the laser
vision correction centers.





During
2008, we recognized a $553,000 impairment charge for certain assets held for use
in a laser vision correction center.  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.  The key
assumptions we used to determine fair value of the related property and
equipment included a cash flow period of four years and a discount rate of
approximately 12%, which were based on our weighted average cost of capital
adjusted for the risks associated with the operations.  A 1% increase
or decrease in the discount rate applied would not have a material effect on the
amount of the impairment charge recorded.





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)
and in all VIEs for which we are considered the primary
beneficiary.  In addition, we consolidate the results of operations of
professional corporations with which we contract to provide the services of
ophthalmologists or optometrists at our vision centers in accordance with EITF
97-2, Application of FASB
Statement 94andAPB
Opinion No. 16 to Physician Management Entities and Certain Other Entities with
Contractual Management Agreements.  We account for investments
in joint ventures and 20% to 50% owned affiliates where we have the ability to
exert significant influence by the equity method.





Recent
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 157 (SFAS 157), “Fair Value Measurements.”  SFAS 157
establishes a framework for measuring fair value in generally accepted
accounting principles, clarifies the definition of fair value within that
framework, and expands disclosures about the use of fair value
measurements.  The adoption of  SFAS 157 for our financial
assets and liabilities did not have a material impact on our consolidated
financial statements.  See Note 1 of the “Notes to Consolidated
Financial Statements” for information regarding the impact of SFAS 157 by the
Company on January 1, 2008.





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 the investments in corporate bonds and the significant portion of the
investments in Treasury money market funds, municipal and U.S. Government bonds,
we believe there is little risk to the valuation of debt
securities.  The investments in equity securities carry more market
risk.





Long-term
investments include auction rate securities that are currently failing
auction.  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, 2008, the par value of our auction rate securities held by us was
$5,625,000. Based on a valuation of these auction rate instruments, we
recognized $1,950,000 in other-than-temporary impairment charges in 2008 to
appropriately record these instruments at fair value.  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.


27





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.





Item 8.  
Financial Statements and Supplementary Data.





Index
to Financial Statements





PageReport
      of Management on Internal Control over Financial Reporting
                  29Reports
      of Independent Registered Public Accounting Firm
                  30Consolidated
      Balance Sheets as of December 31, 2008 and 2007
                  32Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007 and
      2006
                  33Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007 and
      2006
                  34Consolidated
      Statements of Stockholders' Investment as of and for the years ended
      December 31, 2008, 2007 and 2006
                  35Notes
      to Consolidated Financial Statements
                  36




28


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 the Company’s internal control over financial
reporting as of December 31, 2008.  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, 2008, the Company’s 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 and
Young LLP, an independent registered public accounting firm, has audited and
reported on the consolidated financial statements of LCA-Vision Inc. and the
effectiveness of LCA’s internal control over financial reporting.  The
reports of the independent auditors are included herein.





/s/ Steven C. Straus
              
              /s/ Michael J.
CelebrezzeSteven
      C. Straus
              
              Michael
      J. CelebrezzeChief
      Executive Officer
              
              Senior
      Vice President/Finance, Chief Financial(Principal
      Executive Officer)
              
              Officer
      and Treasurer(Principal
      Financial and Accounting Officer)March
      13, 2009




29





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, 2008 and 2007, and the related consolidated statements of
operations, stockholders' investment, and cash flows for each of the three years
in the period ended December 31, 2008.  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, 2008 and 2007, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2008, 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, LCA-Vision Inc.
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB StatementNo. 109, during 2007 and
Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, as
revised, during 2006.





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, 2008, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 9, 2009
expressed an unqualified opinion thereon.





/s/
      Ernst & Young LLP


Cincinnati,
Ohio


March 9,
2009




30







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, 2008, 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, 2008, 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, 2008 and 2007, and the related consolidated statements
of operations, stockholders’ investment, and cash flows for each of the three
years in the period ended December 31, 2008 of LCA-Vision Inc., and our report
dated March 9, 2009 expressed an unqualified opinion thereon.





/s/
      Ernst & Young LLP


Cincinnati,
Ohio


March 9,
2008


31





LCA-VISION
INC.


CONSOLIDATED
BALANCE SHEETS





At December 31,2008
                  
                  
                  2007(Dollars in thousands, except per share amounts)AssetsCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  23,648
                  
                  
                  $
                  17,614Short-term
      investments
                  
                  
                  32,687
                  
                  
                  
                  42,534Patient
      receivables, net of allowance for doubtful accounts of $1,465 and
      $2,987
                  
                  
                  9,678
                  
                  
                  
                  12,712Other
      accounts receivable
                  
                  
                  2,515
                  
                  
                  
                  5,941Prepaid
      professional fees
                  
                  
                  911
                  
                  
                  
                  1,872Prepaid
      income taxes
                  
                  
                  8,957
                  
                  
                  
                  6,391Deferred
      tax assets
                  
                  
                  4,708
                  
                  
                  
                  3,450Prepaid
      expenses and other
                  
                  
                  5,299
                  
                  
                  
                  5,076Total
      current assets
                  
                  
                  88,403
                  
                  
                  
                  95,590Property
      and equipment
                  
                  
                  121,734
                  
                  
                  
                  106,788Accumulated
      depreciation and amortization
                  
                  
                  (70,235
                  )
                  
                  
                  (52,872
                  )Property
      and equipment, net
                  
                  
                  51,499
                  
                  
                  
                  53,916Long-term
      investments
                  
                  
                  3,126
                  
                  
                  
                  2,250Accounts
      receivables, net of allowance for doubtful accounts of $1,662 and
      $2,130
                  
                  
                  2,645
                  
                  
                  
                  4,556Deferred
      compensation plan assets
                  
                  
                  2,196
                  
                  
                  
                  5,540Investment
      in unconsolidated businesses
                  
                  
                  377
                  
                  
                  
                  590Deferred
      tax assets
                  
                  
                  7,027
                  
                  
                  
                  13,561Other
      assets
                  
                  
                  2,209
                  
                  
                  
                  3,644Total
      assets
                  
                  $
                  157,482
                  
                  
                  $
                  179,647Liabilities
      and Stockholders' InvestmentCurrent
      liabilitiesAccounts
      payable
                  
                  $
                  8,169
                  
                  
                  $
                  10,396Accrued
      liabilities and other
                  
                  
                  8,608
                  
                  
                  
                  13,861Deferred
      revenue
                  
                  
                  9,107
                  
                  
                  
                  18,719Debt
      obligations maturing in one year
                  
                  
                  6,985
                  
                  
                  
                  3,941Total
      current liabilities
                  
                  
                  32,869
                  
                  
                  
                  46,917Long-term
      rent obligations
                  
                  
                  1,820
                  
                  
                  
                  -Long-term
      debt obligations (less current portion)
                  
                  
                  14,120
                  
                  
                  
                  2,012Deferred
      compensation liability
                  
                  
                  2,196
                  
                  
                  
                  5,516Insurance
      reserve
                  
                  
                  9,489
                  
                  
                  
                  8,493Deferred
      revenue
                  
                  
                  14,003
                  
                  
                  
                  23,110Stockholders'
      InvestmentCommon
      stock ($.001 par value;  25,199,734 and 25,114,244 shares and
      18,552,985 and 18,482,658 shares issued and outstanding,
      respectively)
                  
                  
                  25
                  
                  
                  
                  25Contributed
      capital
                  
                  
                  174,206
                  
                  
                  
                  172,965Common
      stock in treasury, at cost (6,646,749 shares and 6,631,586
      shares)
                  
                  
                  (114,632
                  )
                  
                  
                  (114,427
                  )Retained
      earnings
                  
                  
                  23,515
                  
                  
                  
                  34,597Accumulated
      other comprehensive (loss) income
                  
                  
                  (129
                  )
                  
                  
                  439Total
      stockholders' investment
                  
                  
                  82,985
                  
                  
                  
                  93,599Total
      liabilities and stockholders' investment
                  
                  $
                  157,482
                  
                  
                  $
                  179,647




See Notes
to Consolidated Financial Statements


32





LCA-VISION
INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS





Year Ended December 31,2008
                    
                    
                    2007
                    
                    
                    2006(Dollars in thousands, except per share amounts)Revenues
      -  Laser refractive surgery
                    
                    $
                    205,176
                    
                    
                    $
                    292,635
                    
                    
                    $
                    238,925Operating
      costs and expensesMedical
      professional and license fees
                    
                    
                    41,797
                    
                    
                    
                    49,312
                    
                    
                    
                    42,954Direct
      costs of services
                    
                    
                    77,474
                    
                    
                    
                    97,423
                    
                    
                    
                    77,612General
      and administrative expenses
                    
                    
                    20,262
                    
                    
                    
                    22,657
                    
                    
                    
                    21,156Marketing
      and advertising
                    
                    
                    52,429
                    
                    
                    
                    66,469
                    
                    
                    
                    47,971Depreciation
                    
                    
                    17,972
                    
                    
                    
                    11,209
                    
                    
                    
                    8,453Restructuring
      expense
                    
                    
                    2,923
                    
                    
                    
                    -
                    
                    
                    
                    -Impairment
      of fixed assets
                    
                    
                    553
                    
                    
                    
                    -
                    
                    
                    
                    -Operating
      (loss) income
                    
                    
                    (8,234
                    )
                    
                    
                    45,565
                    
                    
                    
                    40,779Equity
      in earnings from unconsolidated businesses
                    
                    
                    477
                    
                    
                    
                    814
                    
                    
                    
                    746Net
      investment (loss) income
                    
                    
                    (1,524
                    )
                    
                    
                    5,953
                    
                    
                    
                    6,182Other
      income (loss), net
                    
                    
                    23
                    
                    
                    
                    (607
                    )
                    
                    
                    (27
                    )(Loss)
      income before taxes on income
                    
                    
                    (9,258
                    )
                    
                    
                    51,725
                    
                    
                    
                    47,680Income
      tax (benefit) expense
                    
                    
                    (2,623
                    )
                    
                    
                    19,221
                    
                    
                    
                    19,310Net
      (loss) income
                    
                    $
                    (6,635
                    )
                    
                    $
                    32,504
                    
                    
                    $
                    28,370Net
      (loss) income per common shareBasic
                    
                    $
                    (0.36
                    )
                    
                    $
                    1.66
                    
                    
                    $
                    1.37Diluted
                    
                    $
                    (0.36
                    )
                    
                    $
                    1.64
                    
                    
                    $
                    1.34Weighted
      average shares outstandingBasic
                    
                    
                    18,526
                    
                    
                    
                    19,572
                    
                    
                    
                    20,694Diluted
                    
                    
                    18,526
                    
                    
                    
                    19,858
                    
                    
                    
                    21,235





See Notes
to Consolidated Financial Statements




33





LCA-VISION
INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year Ended December 31,2008
                      
                      
                      2007
                      
                      
                      2006(dollars in thousands)Cash
      flow from operating activities:Net
      (loss) income
                      
                      $
                      (6,635
                      )
                      
                      $
                      32,504
                      
                      
                      $
                      28,370Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                      
                      
                      17,972
                      
                      
                      
                      11,209
                      
                      
                      
                      8,453Provision
      for loss on doubtful accounts
                      
                      
                      5,355
                      
                      
                      
                      7,675
                      
                      
                      
                      1,855Loss
      on investments
                      
                      
                      3,125
                      
                      
                      
                      -
                      
                      
                      
                      -Restructuring
      expense
                      
                      
                      1,426
                      
                      
                      
                      -
                      
                      
                      
                      -Impairment
      of fixed assets
                      
                      
                      553
                      
                      
                      
                      -
                      
                      
                      
                      -Deferred
      income taxes
                      
                      
                      4,965
                      
                      
                      
                      5,369
                      
                      
                      
                      (6,436
                      )Stock-based
      compensation
                      
                      
                      1,878
                      
                      
                      
                      5,024
                      
                      
                      
                      5,665Insurance
      reserve
                      
                      
                      996
                      
                      
                      
                      2,330
                      
                      
                      
                      2,323Equity
      in earnings from unconsolidated affiliates
                      
                      
                      (477
                      )
                      
                      
                      (814
                      )
                      
                      
                      (746
                      )Distributions
      from unconsolidated affiliates
                      
                      
                      690
                      
                      
                      
                      1,128
                      
                      
                      
                      -Changes
      in operating assets and liabilitiesPatient
      receivable
                      
                      
                      (410
                      )
                      
                      
                      (11,500
                      )
                      
                      
                      (3,903
                      )Other
      accounts receivable
                      
                      
                      3,426
                      
                      
                      
                      1,080
                      
                      
                      
                      (1,087
                      )Prepaid
      income taxes
                      
                      
                      (2,566
                      )
                      
                      
                      (4,035
                      )
                      
                      
                      520Prepaid
      expenses and other
                      
                      
                      (223
                      )
                      
                      
                      1,338
                      
                      
                      
                      (2,383
                      )Accounts
      payable
                      
                      
                      (2,227
                      )
                      
                      
                      5,132
                      
                      
                      
                      1,464Deferred
      revenue, net of professional fees
                      
                      
                      (16,847
                      )
                      
                      
                      (7,212
                      )
                      
                      
                      16,202Accrued
      liabilities and other
                      
                      
                      (3,432
                      )
                      
                      
                      5,751
                      
                      
                      
                      1,364Net
      cash provided by operations
                      
                      
                      7,569
                      
                      
                      
                      54,979
                      
                      
                      
                      51,661Cash
      flows from investing activities:Purchases
      of property and equipment
                      
                      
                      (14,860
                      )
                      
                      
                      (28,586
                      )
                      
                      
                      (9,537
                      )Purchases
      of investment securities
                      
                      
                      (391,026
                      )
                      
                      
                      (330,826
                      )
                      
                      
                      (308,943
                      )Proceeds
      from sale of investment securities
                      
                      
                      396,674
                      
                      
                      
                      356,874
                      
                      
                      
                      238,013Net
      cash used in investing activities
                      
                      
                      (9,212
                      )
                      
                      
                      (2,538
                      )
                      
                      
                      (80,467
                      )Cash
      flows from financing activities:Principal
      payments of capital lease obligations and loan
                      
                      
                      (6,410
                      )
                      
                      
                      (5,782
                      )
                      
                      
                      (2,795
                      )Proceeds
      from loan
                      
                      
                      19,184
                      
                      
                      
                      -
                      
                      
                      
                      -Shares
      repurchased for treasury stock
                      
                      
                      (205
                      )
                      
                      
                      (44,940
                      )
                      
                      
                      (51,816
                      )Tax
      (expense) benefits related to stock-based compensation
                      
                      
                      (638
                      )
                      
                      
                      1,949
                      
                      
                      
                      5,390Exercise
      of stock options
                      
                      
                      193
                      
                      
                      
                      3,499
                      
                      
                      
                      5,528Dividends
      paid to stockholders
                      
                      
                      (4,447
                      )
                      
                      
                      (13,984
                      )
                      
                      
                      (11,131
                      )Net
      cash provided by (used in) financing activities
                      
                      
                      7,677
                      
                      
                      
                      (59,258
                      )
                      
                      
                      (54,824
                      )Increase
      (decrease) in cash and cash equivalents
                      
                      
                      6,034
                      
                      
                      
                      (6,817
                      )
                      
                      
                      (83,630
                      )Cash
      and cash equivalents at beginning of year
                      
                      
                      17,614
                      
                      
                      
                      24,431
                      
                      
                      
                      108,061Cash
      and cash equivalents at end of year
                      
                      $
                      23,648
                      
                      
                      $
                      17,614
                      
                      
                      $
                      24,431





See Notes
to Consolidated Financial Statements




34




LCA-VISION
INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' INVESTMENT





Year Ended December 31,2008
                                                                                                                
                                                                                                                
                                                                                                                2007
                                                                                                                
                                                                                                                
                                                                                                                2006Shares
                                                                                                                
                                                                                                                
                                                                                                                Amount
                                                                                                                
                                                                                                                
                                                                                                                Shares
                                                                                                                
                                                                                                                
                                                                                                                Amount
                                                                                                                
                                                                                                                
                                                                                                                Shares
                                                                                                                
                                                                                                                
                                                                                                                Amount(Dollars in thousands)Common
      StockBalance
      at beginning of year
                                                                                                                
                                                                                                                
                                                                                                                25,114,244
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                25
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                24,814,542
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                25
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                24,368,992
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                24Employee
      plans
                                                                                                                
                                                                                                                
                                                                                                                85,490
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                299,702
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                445,550
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                1Balance
      at end of year
                                                                                                                
                                                                                                                
                                                                                                                25,199,734
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                25
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                25,114,244
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                25
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                24,814,542
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                25Common
      Stock in TreasuryBalance
      at beginning of year
                                                                                                                
                                                                                                                
                                                                                                                (6,631,586
                                                                                                                )
                                                                                                                
                                                                                                                $
                                                                                                                (114,427
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (4,993,194
                                                                                                                )
                                                                                                                
                                                                                                                $
                                                                                                                (69,487
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (3,600,794
                                                                                                                )
                                                                                                                
                                                                                                                $
                                                                                                                (17,671
                                                                                                                )Shares
      repurchased
                                                                                                                
                                                                                                                
                                                                                                                (15,163
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (205
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (1,638,392
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (44,940
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (1,392,400
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (51,816
                                                                                                                )Balance
      at end of year
                                                                                                                
                                                                                                                
                                                                                                                (6,646,749
                                                                                                                )
                                                                                                                
                                                                                                                $
                                                                                                                (114,632
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (6,631,586
                                                                                                                )
                                                                                                                
                                                                                                                $
                                                                                                                (114,427
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                (4,993,194
                                                                                                                )
                                                                                                                
                                                                                                                $
                                                                                                                (69,487
                                                                                                                )Contributed
      CapitalBalance
      at beginning of year
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                172,965
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                162,245
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                145,262Employee
      stock plans
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                193
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                3,499
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                5,527Stock
      based compensation
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                1,878
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                5,024
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                5,665Deferred
      tax (expense) benefit of disqualified stock options
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (830
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                2,197
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                5,791Balance
      at end of year
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                174,206
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                172,965
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                162,245Retained
      Earnings (Deficit)Balance
      at beginning of year
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                34,597
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                16,320
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                (919
                                                                                                                )FIN
      48 adjustment
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                -
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (243
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                -Net
      (loss) income
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (6,635
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                32,504
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                28,370Dividends
      paid, $0.24, $0.72 and $0.54 per commonshare in 2008, 2007 and
      2006,
      respectively
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (4,447
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (13,984
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (11,131
                                                                                                                )Balance
      at end of year
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                23,515
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                34,597
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                16,320Accumulated
      Other Comprehensive (Loss) IncomeBalance
      at beginning of year
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                439
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                13
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                7Foreign
      currency translation adjustments
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (533
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                367
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                1Unrealized
      investment (loss) gain, net of tax of $16, ($39) and
      ($3)
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                (35
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                59
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                5Balance
      at end of year
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                (129
                                                                                                                )
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                439
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                13Total
      Stockholders' Investment
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                82,985
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                93,599
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                
                                                                                                                $
                                                                                                                109,116





See Notes
to Consolidated Financial Statements




35


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS





1.
            Description
      of Business and Summary of Significant Accounting
  Policies





Business





We are a
provider of laser vision correction services at our LasikPlus®vision centers. Our
vision centers provide the staff, facilities, equipment and support services for
performing laser vision correction that employ advanced laser technologies to
help correct nearsightedness, farsightedness and astigmatism. We currently use three
suppliers for fixed-site excimer lasers:  Bausch &
Lomb, Abbott Medical Optics and Alcon. We plan to reduce our excimer
laser suppliers to two during 2009.Our vision centers are supported
mainly by independent board-certified ophthalmologists and credentialed
optometrists, as well as other healthcare professionals.  The
ophthalmologists perform the laser vision correction procedures in our vision
centers, and either ophthalmologists or optometrists conduct pre-procedure
evaluations and post-operative follow-ups in-center.   Most of
our patients receive a procedure called LASIK, which we began performing in the
United States in 1997.





As of
December 31, 2008, we operated 75 LasikPlus fixed-site laser vision
correction centers in the United States and a joint venture in
Canada.  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)
and in all VIEs for which we are considered the primary
beneficiary.  In addition, we consolidate the results of operations of
professional corporations with which we contract to provide the services of
ophthalmologists or optometrists at our vision centers in accordance with
Emerging Issue Task Force (EITF) Issue No. 97-2, Application of FASB Statement 94andAPB Opinion No. 16
to Physician Management Entities and Certain Other Entities with Contractual
Management Agreements.  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 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 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
re-classified certain prior-period amounts in the Condensed Consolidated Balance
Sheets and Condensed Consolidated Statements of Cash Flow to conform to current
period presentation.  The reclassifications were not material to the
consolidated financial statements.





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 reevaluates such designation as of each balance sheet
date.  Currently all securities are classified as
available-for-sale.  We carry available-for-sale securities at fair
value, with temporary unrealized gains and losses, net of tax, reported in other
comprehensive income, a component of stockholders’ investment.  The
amortized cost of debt securities in this category reflects amortization of
premiums and accretion of discounts to maturity computed under the effective
interest method.  Such amortization is included in the caption “net
investment (loss) income” within the condensed consolidated statements of
operations.  We also include in net investment (loss) income realized
gains and losses and declines in value judged to be
other-than-temporary.  We base the cost of securities sold upon the
specific identification method.  We include interest and dividends on
securities classified as available-for-sale in net investment (loss)
income.


36


Patient Receivables andAllowance 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 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 current credit
environment.





For
patients whom we finance with an initial term over 12 months, we charge interest
at markets rates, and we recognize revenues based upon the present values of the
expected payments.  Finance and interest charges on patient
receivables were $2,626,000 in 2008, $1,843,000 in 2007 and $1,022,000 in 2006.
We include these amounts in net investment (loss) income 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: building and
building improvements, 5 to 39 years; furniture and fixtures, 3 to 7 years;
medical equipment, 3 to 5 years; other equipment, 3 to 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.





Deferred
Compensation Plan Assets





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.





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 revised pricing
structure, we account for the acuity program as a warranty obligation under the
provisions of Financial Accounting Standards Board (FASB) Statement No. 5 (SFAS
5), Accounting for
Contingencies.  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.





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.




37


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. FASB
Technical Bulletin No. 90-1 (FTB 90-1), Accounting for Separately Priced
Extended Warranties and Product Maintenance Contracts, 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, 2008 and
2007, we maintained insurance reserves of $9,489,000 and $8,493,000,
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.





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.  We account for income taxes under
FASB Statement No. 109 (SFAS 109), Accounting for Income
Taxes.  The provision for income taxes includes income taxes
paid, currently payable or receivable, and those deferred.  Under
SFAS 109, 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 many transactions and calculations where
the ultimate tax determination is uncertain.  In June 2006, the FASB
issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes - An Interpretation of FASB Statement No. 109.  This
Interpretation clarifies the accounting for uncertainty in income taxes
recognized in accordance with SFAS 109 and prescribes a recognition threshold
and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  This Interpretation also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.  The evaluation of a tax position in
accordance with this Interpretation 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 FIN 48 on January 1, 2007 as
further discussed in Note 4.  The cumulative effect of adoption of FIN
48 resulted in a reduction to the January 1, 2007 opening retained earnings
balance of $243,000.




38


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 for
the years ended December 31, 2008, 2007 and 2006 (in thousands, except per share
data).





2008
                        
                        
                        2007
                        
                        
                        2006Basic (Loss) EarningsNet
      (loss) income
                        
                        $
                        (6,635
                        )
                        
                        $
                        32,504
                        
                        
                        $
                        28,370Weighted
      average shares outstanding
                        
                        
                        18,526
                        
                        
                        
                        19,572
                        
                        
                        
                        20,694Basic
      (loss) earnings per share
                        
                        $
                        (0.36
                        )
                        
                        $
                        1.66
                        
                        
                        $
                        1.37Diluted (Loss) EarningsNet
      (loss) income
                        
                        $
                        (6,635
                        )
                        
                        $
                        32,504
                        
                        
                        $
                        28,370Weighted
      average shares outstanding
                        
                        
                        18,526
                        
                        
                        
                        19,572
                        
                        
                        
                        20,694Effect
      of dilutive securitiesStock
      options
                        
                        
                        -
                        
                        
                        
                        251
                        
                        
                        
                        525Restricted
      stock
                        
                        
                        -
                        
                        
                        
                        35
                        
                        
                        
                        16Weighted
      average common shares and potential dilutive shares
                        
                        
                        18,526
                        
                        
                        
                        19,858
                        
                        
                        
                        21,235Diluted
      (loss) earnings per share
                        
                        $
                        (0.36
                        )
                        
                        $
                        1.64
                        
                        
                        $
                        1.34





For 2007
and 2006, we did not include outstanding stock options and restricted stock
awards having a grant price greater than the average market price of the common
shares for the year in the computation of diluted earnings per share because the
effect of these share-based awards would be antidilutive.  The total
number of these shares was 42,970 and 26,317 in 2007 and 2006,
respectively.  For 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 anti-dilutive 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 $1,505,000 at December 31, 2008, and $1,665,000 at December 31,
2007.





Stock-Based
Compensation





Effective
January 1, 2006, on a modified prospective basis, we began using the fair value
method under FASB Statement No. 123(R) (SFAS 123(R)), Share Based Payment, to
recognize equity compensation expense in our results of
operations.  Prior to January 1, 2006, we accounted for stock options
using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 (Opinion 25), Accounting for Stock Issued to
Employees.  SFAS 123(R) requires the cost of all stock-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values at grant date,
or the date of later modification, over the requisite service
period.  In addition, SFAS 123(R) requires unrecognized cost (based on
the amounts previously disclosed in our pro forma footnote disclosure) related
to options vesting after the date of initial adoption to be recognized in the
financial statements over the remaining requisite service period.  The
impact of adopting SFAS 123(R) on January 1, 2006 reduced net income by
$4,511,000 in 2006.




SFAS
123(R) requires the cash flows resulting from income tax deductions in excess of
compensation costs to be classified as financing cash flows.  This
requirement resulted in reduced net operating cash flows and increased net
financing cash flows of $5,390,000 for 2006.  Prior to the adoption of
SFAS 123(R), we presented all income tax benefits from deductions resulting from
stock-based compensation costs as operating cash flows in the Consolidated
Statements of Cash Flows.




39




Prior to
the adoption of SFAS 123(R), we granted primarily stock options to
employees.  Since the adoption of SFAS 123(R), we have reduced
our use of stock options and instead have issued more restricted stock
units.  The restricted stock unit awards made to executive
officers and all 2007 and 2008 awards had performance
conditions.  All other restricted stock units awarded
to non-executive employees and non-employee directors do not have
performance conditions and vest over specified time periods subject to continued
employment or service.





Geographic
Information





Information
about our domestic and international operations follows.  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
2008, 2007 or 2006.





Revenues from External Customers
                    
                    
                    Net Assets
                    
                    
                    Property and Equipment(in thousands)
                    
                    2008
                    
                    
                    2007
                    
                    
                    2006
                    
                    
                    2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007United
      States
                    
                    $
                    205,176
                    
                    
                    $
                    292,635
                    
                    
                    $
                    238,925
                    
                    
                    $
                    79,252
                    
                    
                    $
                    90,117
                    
                    
                    $
                    51,499
                    
                    
                    $
                    53,916Canada
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,733
                    
                    
                    
                    3,482
                    
                    
                    
                    -
                    
                    
                    
                    -$
                    205,176
                    
                    
                    $
                    292,635
                    
                    
                    $
                    238,925
                    
                    
                    $
                    82,985
                    
                    
                    $
                    93,599
                    
                    
                    $
                    51,499
                    
                    
                    $
                    53,916





Fair
Value Measurements





In
September 2006, the FASB issued Statement No. 157 (SFAS 157), "Fair Value
Measurements." SFAS No. 157 defines fair value, establishes a framework for
measuring fair value and expands disclosure requirements about fair value
measurements. SFAS No. 157 was effective for us on January 1, 2008.
However, in February 2008, the FASB released FASB Staff Position (FSP
FAS 157-2 — Effective Date of FASB Statement No. 157), which
delayed the effective date of SFAS 157 for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). The adoption of
SFAS 157 for our financial assets and liabilities did not have a material impact
on our consolidated financial statements. We do not believe the adoption of SFAS
157 for our nonfinancial assets and liabilities, effective January 1, 2009,
will have a material impact on our consolidated financial statements. Refer to
Note 6 for additional information.





2.
            Stockholders'
      Investment





Capital
Stock


We have
27,500,000 authorized shares of common stock with $.001 per share par value and
5,000,000 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.





Upon the
occurrence of certain events, each Right will entitle its holder to purchase
from us one one-hundredth (1/100) of a share of Series A Junior Participating
Preferred Stock, par value $0.001 per share, at a purchase price of $100 per
unit, subject to adjustment.  Series A Preferred Stock are entitled to
receive, when, as, and if declared by the Board of Directors, quarterly
dividends payable in cash in an amount per share equal to the greater of (i) $10
and (ii) 100 times the aggregate per share amount of all cash dividends, and 100
times the aggregate per share amount (payable in kind) of all non-cash dividends
or other distributions other than a dividend payable in shares of common stock,
declared on common stock. We must declare a dividend or distribution on the
Series A Preferred Stock as provided in the immediately preceding sentence after
we declare a dividend or distribution on the common stock other than a dividend
payable in shares of common stock. Accrued and unpaid dividends do not bear
interest.





Under the
terms of the Rights Plan, if a person or group who is deemed an Acquiring Person
as defined in the Rights Plan acquires 20% (or other applicable percentage, as
provided in the Rights Plan) or more of the outstanding common stock, each Right
will entitle its holder (other than such person or members of such group) to
receive, upon exercise, common stock (or, in certain circumstances, cash,
property or other securities of the Company) having a value equal to two times
the exercise price of the Right.  In addition, if the Company is
acquired in a merger or other business transaction after a person or group who
is deemed an Acquiring Person has acquired such percentage of the outstanding
common stock, each Right will entitle its holder (other than such person or
members of such group) to receive, upon exercise, common stock of the acquiring
company having a value equal to two times the exercise price of the
Right.





40




The
Rights will expire on November 23, 2018, unless the date is extended or
unless the Rights are earlier redeemed for $0.001 per Right or exchanged at the
option of the Board of Directors and the Rights also will expire on the
close of business on November 24, 2009 unless, before such date, our
stockholders ratify the adoption of the Rights Plan. Until a Right is exercised,
the holder thereof will have no rights as a stockholder of the Company,
including, without limitation, the right to vote or to receive
dividends.





Our Board
of Directors may amend any of the provisions of the Rights Agreement before the
Distribution Date (as defined in the Rights Plan).





The
adoption of the Rights Plan has no impact on our financial position or results
of operations.  We have reserved 250,000 of our authorized preferred
stock for issuance upon exercise of the Rights.





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 $50,000,000 of
our common stock.  Through August 13, 2007, we repurchased 1,481,630
shares of our common stock under this program at an average price of $33.75 per
share, for a total cost of approximately $50,000,000.  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 $50,000,000 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 $10,000,000.  We did not purchase
any shares of our common stock in 2008 under this program.   At
December 31, 2008, we held 6,646,749 shares of our common stock in
treasury.





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.  Our Board of Directors declared a first quarter 2008
dividend of $0.18 per common share, which was paid on March 31, 2008 to
stockholders of record as of March 17, 2008. Our Board of Directors declared a
second quarter 2008 dividend of $0.06 per share, which was paid on June 6, 2008
to stockholders of record as of May 26, 2008.  In the third quarter of
2008, the Board of Directors decided to suspend payment of a dividend and to
revisit this decision in subsequent quarters.





3.
            Investment
      in Unconsolidated Businesses





Our
investments in unconsolidated businesses were $377,000 and $590,000 at December
31, 2008 and 2007, respectively.   These balances represent our
equity investments in Eyemed/LCA-Vision, LLC (50% ownership at December 31,
2007) and Lasik M.D. Toronto Inc. (20% ownership at December 31,
2008).  We account for these investments using the equity
method.





4.
            Investments




We have
classified certain of our investments in auction rate securities as non-current
assets within the accompanying Consolidated Balance Sheet at December 31, 2008.
As of December 31, 2007, we classified certain of these securities as
short-term investments. Short-term and long-term investments, designated as
available-for-sale, consist of the following (dollars in
thousands):





As of December 31,2008
                    
                    
                    2007Short-term
      investments:Corporate
      obligations
                    
                    $
                    20,971
                    
                    
                    $
                    9,859U.S.
      governmental notes and agencies
                    
                    
                    1,400
                    
                    
                    
                    -Municipal
      securities
                    
                    
                    7,982
                    
                    
                    
                    13,654Equities
                    
                    
                    1,784
                    
                    
                    
                    2,971Auction
      rate municipal debt
                    
                    
                    550
                    
                    
                    
                    15,700Auction
      rate preferred securities
                    
                    
                    -
                    
                    
                    
                    350Total
      short-term investments
                    
                    
                    32,687
                    
                    
                    
                    42,534Long-term
      investments:Auction
      rate municipal debt
                    
                    
                    1,357
                    
                    
                    
                    -Auction
      rate preferred securities
                    
                    
                    1,093
                    
                    
                    
                    -Auction
      rate securities - credit default swaps
                    
                    
                    676
                    
                    
                    
                    2,250Total
      long-term investments
                    
                    
                    3,126
                    
                    
                    
                    2,250Total
      investments
                    
                    $
                    35,813
                    
                    
                    $
                    44,784




41




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





As of December 31, 2008AdjustedCost
                      
                      
                      GrossUnrealizedGains
                      
                      
                      GrossUnrealizedLosses
                      
                      
                      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





As of December 31, 2007AdjustedCost
                    
                    
                    GrossUnrealizedGains
                    
                    
                    GrossUnrealizedLosses
                    
                    
                    Fair ValueCorporate
      obligations
                    
                    $
                    9,859
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    9,859Municipal
      securities
                    
                    
                    13,593
                    
                    
                    
                    61
                    
                    
                    
                    -
                    
                    
                    
                    13,654Equities
                    
                    
                    2,884
                    
                    
                    
                    87
                    
                    
                    
                    -
                    
                    
                    
                    2,971Auction
      rate municipal securities
                    
                    
                    15,700
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    15,700Auction
      rate preferred securities
                    
                    
                    350
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    350Auction
      rate securities - credit default swaps
                    
                    
                    2,250
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,250Total
      Investments
                    
                    $
                    44,636
                    
                    
                    $
                    148
                    
                    
                    $
                    -
                    
                    
                    $
                    44,784




We
recognized gross realized gains of $10,000 and $133,000 on the sale of our
marketable securities during the years ended December 31, 2008 and 2007,
respectively.  We recognized gross realized losses of $0 and $22,000
during the years ended December 31, 2008 and 2007, respectively. We recognized
$1,950,000 and $1,175,000 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 or
2006.  We include realized gains and losses in net investment (loss)
income in our accompanying Consolidated Statements of Operations.




The net
carrying value and estimated fair value of debt securities available for sale
and equity investments at December 31, 2008, 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.





AmortizedCost
                    
                    
                    EstimatedFair ValueDue
      in one year or less
                    
                    $
                    24,883
                    
                    
                    $
                    24,905Due
      after one year through three years
                    
                    
                    5,373
                    
                    
                    
                    5,448Due
      after three years
                    
                    
                    3,676
                    
                    
                    
                    3,676Total
      debt securities
                    
                    
                    33,932
                    
                    
                    
                    34,029Equities
                    
                    
                    1,784
                    
                    
                    
                    1,784Total
      investments
                    
                    $
                    35,716
                    
                    
                    $
                    35,813





Auction
Rate Securities




At
December 31, 2008 and 2007, we held at par value $5,625,000 and $18,300,000 of
various auction rate securities.  The assets underlying the auction
rate instruments are primarily municipal bonds, preferred closed end funds,
and credit default swaps.  Historically, these securities have
provided liquidity through a Dutch auction process that resets the applicable
interest rate at pre-determined intervals every 7 to 28 days. However, these
auctions began to fail in the first quarter of 2008. Since these auctions have
failed, we have realized higher interest rates for many of these auction rate
securities than we would have otherwise. Although we have been receiving
interest payments at these rates, the related principal amounts will not be
accessible until a successful auction occurs, a buyer is found outside of the
auction process, the issuer calls the security, or the security matures
according to contractual terms. Maturity dates for our auction rate
securities range from 2017 to 2036. Since these auctions have failed,
$15,400,000 of the related securities were called at par by their
issuers.





42




At
December 31, 2008, there was insufficient observable auction rate market
information available to determine the fair value of most of our auction rate
security investments. Therefore, we estimated fair value using a trinomial
discount model employing assumptions that market participants would use in their
estimates of fair value. Certain of these assumptions included financial
standing of the issuer, final stated maturities, estimates of the probability of
the issue being called prior to final maturity, estimates of the probability of
defaults and recoveries, expected changes in interest rates paid on the
securities, interest rates paid on similar instruments, and an estimated
illiquidity discount due to extended redemption periods.





Two of
the seven auction rate securities held within our investment portfolio at
December 31, 2008, with a combined par value of $2,250,000, were designed to
serve as vehicles for credit default swaps. The recent disruptions in the credit
and financial markets are having a significant adverse impact on the credit
default swap markets, with spreads increasing sharply on investment grade
entities due to the demand to protect against counterparty risk. Some defaults
have occurred in the financial sector. Due to increased risk of default, it is
probable that all amounts due (principal and interest) will not be collected
according to these instruments’ contractual terms. Accordingly, an
other-than-temporary impairment of $1,575,000 for these two auction rate
security investments was recognized within the Consolidated Statement of
Operations in 2008 to record the investments at fair value and establish a new
cost basis. Four of the seven auction rate securities, consisting of municipal
bonds and preferred securities with a combined par value of $2,825,000, were
reported at a combined fair value of $2,450,000.  Based primarily on
the period of time and the extent of the impairment, we recorded an
other-than-temporary impairment of $375,000 in the consolidated statement of
operations in 2008 related to these instruments.  The remaining
auction rate security was redeemed at par in January 2009, and therefore, we did
not recognize any impairment on this instrument.





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, 2008, as long-term. The
fair value and par value of our long-term auction rate instruments were
$3,126,000 and $5,075,000 at December 31, 2008, respectively.





5.
            Debt





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





Amount OutstandingDecember 31, 2008
                    
                    
                    December 31, 2007Capitalized
      lease obligations
                    
                    $
                    4,213
                    
                    
                    $
                    5,953Bank
      loan
                    
                    
                    16,892
                    
                    
                    
                    -Total
      long-term debt obligations
                    
                    $
                    21,105
                    
                    
                    $
                    5,953Debt
      obligations maturing in one year
                    
                    
                    6,985
                    
                    
                    
                    3,941Long-term
      obligations (less current portion)
                    
                    $
                    14,120
                    
                    
                    $
                    2,012




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





On April
24, 2008, we entered into a bank loan agreement for $19,184,000 to finance
medical equipment. The loan agreement provides for repayment in equal monthly
installments over a five-year period at a fixed interest rate of 4.96%. The loan
agreement contains no financial covenants.





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




43




Aggregate
maturities of long-term debt and capital lease obligations are $6,985,000 in
2009, $4,504,000 in 2010, $4,028,000 in 2011, $4,156,000 in 2012 and $1,432,000
in 2013.  The estimated fair value of our long-term debt and capital
lease obligations is $17,556,000, based on the preset values of the underlying
cash flows discounted at our incremental borrowing rate.





6.
            Fair
      Value Measurements




Effective
January 1, 2008, we adopted SFAS 157, except as it applies to the
nonfinancial assets and nonfinancial liabilities subject to FSP 157-2. SFAS 157
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market
participants would use in pricing an asset or a liability. As a basis for
considering such assumptions, SFAS 157 establishes a three-tier value hierarchy,
which prioritizes the inputs used in the valuation methodologies in measuring
fair value:




Level
      Input:
              
              Input
      Definition:Level
      1
              
              Inputs
      are unadjusted, quoted prices for identical assets or liabilities in
      active markets at the measurement date.Level
      2
              
              Inputs
      other than quoted prices included in Level 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.





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 inActive Markets forIdentical Assets(Level 1)
                  
                  
                  Significant OtherObservable Inputs(Level 2)
                  
                  
                  SignificantUnobservable Inputs(Level 3)
                  
                  
                  TotalAssets:Cash
      and cash equivalents
                  
                  $
                  23,648
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  23,648Investments
                  
                  
                  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 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.





The
following table sets forth a reconciliation of beginning and ending balances for
each major category (dollars in thousands) for assets measured at fair value
using significant unobservable inputs (Level 3) during 2008.




44




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




Subsequent
to initial recognition, we measured certain assets at fair value in 2008 on a
nonrecurring basis.  These assets include certain property and
equipment, principally leasehold improvements, associated with three laser
vision correction centers that were closed in 2008.  Accordingly, we
recognized impairment charges, recorded as a component of restructuring expense
in the Consolidated Statements of Operations, of $818,000 to reflect a fair
value of zero for these assets that will be disposed.  In addition, we
recognized a $553,000 impairment charge for certain assets held for use in a
laser vision correction center.  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 has adversely impacted procedure volume levels.  These fair
value measurements utilized internal discounted cash flow analysis in
determining fair value, which is a Level 3 input under SFAS 157.




7.
            Income
      Taxes





The
following table presents the components of income tax (benefit) expense for the
three years ended December 31, 2008 (dollars in thousands):





2008
                    
                    
                    2007
                    
                    
                    2006Current:Federal
                    
                    $
                    (7,981
                    )
                    
                    $
                    11,990
                    
                    
                    $
                    21,686State
      and local
                    
                    
                    393
                    
                    
                    
                    1,862
                    
                    
                    
                    4,060Total
                    
                    
                    (7,588
                    )
                    
                    
                    13,852
                    
                    
                    
                    25,746Deferred:Federal
                    
                    $
                    5,314
                    
                    
                    $
                    4,865
                    
                    
                    $
                    (5,964
                    )State
      and local
                    
                    
                    (349
                    )
                    
                    
                    504
                    
                    
                    
                    (472
                    )Total
                    
                    
                    4,965
                    
                    
                    
                    5,369
                    
                    
                    
                    (6,436
                    )Income
      tax (benefit) expense
                    
                    $
                    (2,623
                    )
                    
                    $
                    19,221
                    
                    
                    $
                    19,310





We have
made no provision for U.S. income taxes on undistributed earnings of
approximately $3,463,000 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 $411,000.





The
following table presents (loss) income before income taxes for the last three
years (dollars in thousands):




45




2008
                    
                    
                    2007
                    
                    
                    2006Domestic
                    
                    $
                    (9,723
                    )
                    
                    $
                    50,880
                    
                    
                    $
                    46,972Foreign
                    
                    
                    465
                    
                    
                    
                    845
                    
                    
                    
                    708Total
                    
                    $
                    (9,258
                    )
                    
                    $
                    51,725
                    
                    
                    $
                    47,680




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





December 31,2008
                    
                    
                    2007Deferred
      tax assets:Deferred
      revenue
                    
                    $
                    8,090
                    
                    
                    $
                    8,856Allowance
      for doubtful accounts
                    
                    
                    1,216
                    
                    
                    
                    2,043Accrued
      enhancement expense
                    
                    
                    394
                    
                    
                    
                    134Deferred
      compensation
                    
                    
                    854
                    
                    
                    
                    2,203Insurance
      reserves
                    
                    
                    1,601
                    
                    
                    
                    1,955Deferred
      lease credits
                    
                    
                    495
                    
                    
                    
                    226Share-based
      compensation
                    
                    
                    1,135
                    
                    
                    
                    1,548Property
      and equipment
                    
                    
                    -
                    
                    
                    
                    46Investments
                    
                    
                    1,160
                    
                    
                    
                    -Net
      operating loss carryforward
                    
                    
                    548
                    
                    
                    
                    -Other
                    
                    
                    281
                    
                    
                    
                    -Valuation
      allowance
                    
                    
                    (1,160
                    )
                    
                    
                    -Total
      deferred tax assets
                    
                    $
                    14,614
                    
                    
                    $
                    17,011Deferred
      tax liabilities:Property
      and equipment
                    
                    $
                    2,404
                    
                    
                    $
                    -Pre-paid
      postage
                    
                    
                    388
                    
                    
                    
                    -Deferred
      lease incentives
                    
                    
                    87
                    
                    
                    
                    -Total
      deferred tax liabilities
                    
                    $
                    2,879
                    
                    
                    $
                    -Net
      deferred tax assets
                    
                    $
                    11,735
                    
                    
                    $
                    17,011




When
realization of the deferred tax asset is more likely than not to occur, we
recognize the benefit related to the deductible temporary differences
attributable to operations as a reduction of income tax expense. During 2008, we
increased the valuation allowance for deferred tax assets by $1,160,000. This
increase represents a full valuation allowance established 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.  We believe that it is more likely
than not that our remaining deferred tax assets will be utilized.





As of
December 31, 2008, we have net operating loss carryforwards for state
taxes of approximately $15,430,000 for tax purposes, which will be
available to offset future taxable income. If not used, these carryforwards will
expire between 2013 and 2028. 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.





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):





2008
                    
                    
                    2007
                    
                    
                    2006Tax
      at statutory federal rate
                    
                    $
                    (3,240
                    )
                    
                    $
                    18,104
                    
                    
                    $
                    16,689State
      and local income taxes, net of federal benefit
                    
                    
                    (94
                    )
                    
                    
                    1,714
                    
                    
                    
                    2,169Permanent
      differences
                    
                    
                    (220
                    )
                    
                    
                    (194
                    )
                    
                    
                    702Investment
      valuation allowance
                    
                    
                    1,160
                    
                    
                    
                    -
                    
                    
                    
                    -Other
                    
                    
                    (229
                    )
                    
                    
                    (403
                    )
                    
                    
                    (250
                    )Income
      tax (benefit) provision
                    
                    $
                    (2,623
                    )
                    
                    $
                    19,221
                    
                    
                    $
                    19,310





46




We
adopted the provisions of FIN 48 as of January 1, 2007.  FIN 48
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with SFAS 109.  This interpretation
also provides that a tax benefit from an uncertain tax position may be
recognized when it is more likely than not that the position will be sustained
upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits. The amount recognized is measured as
the largest amount of tax benefit that is greater than 50% likely of being
realized upon settlement. The cumulative effect of adoption was a reduction in
the January 1, 2007 opening balance of retained earnings of
$243,000.  Prior to the adoption of FIN 48, accruals for tax
contingencies were provided for in accordance with the requirements of SFAS
5.




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





Balance
      at January 1, 2007
                    
                    $
                    1,546Additions
      based on tax positions related to the current year
                    
                    
                    28Additions
      for tax positions of prior years
                    
                    
                    342Reductions
      for tax positions of prior years
                    
                    
                    (2
                    )Reductions
      due to statute expiration
                    
                    
                    (24
                    )Settlements
                    
                    
                    (1,316
                    )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
                    
                    $
                    441




The total
amount of unrecognized tax benefits that, if recognized, would affect the
effective tax rate is $316,000.  The remaining unrecognized tax
benefits relate to tax positions for which ultimate deductibility is highly
certain but for which there is uncertainty as to the timing of such
deductibility. Recognition of these tax benefits would not affect our effective
tax rate.  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, 2008, we recognized
tax expense of approximately $32,000 in interest and
penalties.  We have approximately $100,000 in interest and penalties
related to unrecognized tax benefits accrued as of December 31,
2008.





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 2006. 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 affect to
the financial statements.  It is reasonably possible that, within the
next 12 months, there could be a change in the amount of unrecognized tax
benefits resulting from IRS reviews for tax years after 2006 or other taxing
authorities, including possible settlement of audit issues, or the expiration of
applicable statutes of limitations.  It is not possible to estimate
reasonably the amount of any such change in unrecognized tax benefits at this
time.





8.
            Leasing
      Arrangements





We lease
office space for our vision centers under lease arrangements that qualify as
operating leases.  For leases that contain predetermined 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.  The liability for predetermined fixed escalations of the
minimum rentals and/or rent abatements is not material to the consolidated
financial statements at December 31, 2008 and 2007.  We use
capitalized leases to finance the lasers used in the laser vision correction
procedures.  We include capital lease assets in property and
equipment.




47




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





December 31, 2008Capital Leases
                    
                    
                    Operating LeasesYear2009
                    
                    $
                    3,501
                    
                    
                    $
                    10,0472010
                    
                    
                    753
                    
                    
                    
                    8,6802011
                    
                    
                    72
                    
                    
                    
                    7,0592012
                    
                    
                    -
                    
                    
                    
                    5,4192013
                    
                    
                    -
                    
                    
                    
                    2,946Beyond
      2013
                    
                    
                    -
                    
                    
                    
                    4,368Total
      minimum rental commitment
                    
                    $
                    4,326
                    
                    
                    $
                    38,519Less
      interest
                    
                    
                    113Present
      value of minimum lease payments
                    
                    $
                    4,213Less
      current installments
                    
                    
                    3,402Long-term
      obligations at December 31, 2008
                    
                    $
                    811




The net
book value of assets under capitalized leases was $7,854,000 at December 31,
2008 and $9,474,000 at December 31, 2007.





Total
rent expense under operating leases amounted to $11,813,000 in 2008, $11,471,000
in 2007 and $8,661,000 in 2006.





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; $80,882 in
2007; and $68,000 in 2006.





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, 2008,
approximately 577,000 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 58,000 shares under the 1995 Plan, 205,000
shares under the 1998 Plan, 133,000 shares under the 2001 Plan, and 181,000
shares under the 2006 Plan.  At December 31, 2008, a total of
1,475,857 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.





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):





2008
                    
                    
                    2007
                    
                    
                    2006Stock
      Options
                    
                    $
                    267
                    
                    
                    $
                    2,179
                    
                    
                    $
                    4,080Restricted
      Stock
                    
                    
                    1,611
                    
                    
                    
                    2,845
                    
                    
                    
                    1,585$
                    1,878
                    
                    
                    $
                    5,024
                    
                    
                    $
                    5,665Income
      Tax Benefit
                    
                    $
                    767
                    
                    
                    $
                    1,294
                    
                    
                    $
                    1,154




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.





48




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 in the following
table.  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 will continue with no increases.





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





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





The total
intrinsic value (market value on date of exercise less exercise price) of
options exercised during 2008, 2007 and 2006 was approximately $60,000,
$7,472,000 and $16,389,000 respectively.   As of December 31,
2008, the aggregate intrinsic value of outstanding stock options, options vested
and expected to vest, and options exercisable was $11,000, $11,000 and $11,000,
respectively.  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 2008 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,
2008.  These amounts will change based on the fair market value of our
stock.





We
received approximately $193,000 for 2008, $3,499,000 for 2007 and $5,528,000 for
2006 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
2008, 2007 and 2006 of approximately ($638,000), $1,949,000 and $5,390,000,
respectively.  SFAS 123(R) requires the cash flows resulting from
income tax deductions in excess of compensation costs to be classified as
financing cash flows.  Prior to the adoption of SFAS 123(R), we
presented all income tax benefits from deductions resulting from stock-based
compensation costs as operating cash flows in the consolidated statements of
cash flows.





At
December 31, 2008, there were $943,000 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 4.09
years.




The
following table summarizes the status of options granted under our 1995, 1998,
2001 and 2006 Plans:





Stock Options
                      
                      
                      Weighted AverageExercise PriceOutstanding
      at January 1, 2006
                      
                      
                      1,494,640
                      
                      
                      $
                      16.64Exercised
                      
                      
                      (440,774
                      )
                      
                      
                      12.54Cancelled/forfeited
                      
                      
                      (96,624
                      )
                      
                      
                      19.21Outstanding
      at December 31, 2006
                      
                      
                      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
                      
                      
                      
                      19.13Options
      exercisable, December 31, 2008
                      
                      
                      379,807
                      
                      
                      
                      20.40Options
      expected to vest, December 31, 2008
                      
                      
                      467,835
                      
                      
                      
                      19.24




The
following table summarizes information about the stock options granted under the
1995, 1998, 2001 and 2006 Plans that were outstanding at December 31,
2008:




49




Stock Options Outstanding
                        
                        
                        Stock Options ExercisableRange of exercise prices
                        
                        
                        # outstanding as
                          of December 31,
                          2008
                        
                        
                        Weighted-
                          average
                          remaining
                          contractual
                          term
                        
                        
                        Weighted-
                          average
                          exercise price
                        
                        
                        # exercisable as
                          of December
                          31, 2008
                        
                        
                        Weighted-
                          average
                          exercise price$             3.33
                        
                        $
                        10.65
                        
                        
                        
                        54,037
                        
                        
                        
                        3.99
                        
                        
                        $
                        5.81
                        
                        
                        
                        54,037
                        
                        
                        $
                        5.8110.67
                        
                        
                        12.19
                        
                        
                        
                        60,243
                        
                        
                        
                        4.86
                        
                        
                        
                        12.05
                        
                        
                        
                        60,243
                        
                        
                        
                        12.0512.50
                        
                        
                        14.08
                        
                        
                        
                        68,538
                        
                        
                        
                        3.27
                        
                        
                        
                        13.29
                        
                        
                        
                        46,875
                        
                        
                        
                        13.4514.28
                        
                        
                        14.28
                        
                        
                        
                        73,524
                        
                        
                        
                        9.18
                        
                        
                        
                        14.28
                        
                        
                        
                        -
                        
                        
                        
                        -14.31
                        
                        
                        22.81
                        
                        
                        
                        47,839
                        
                        
                        
                        5.09
                        
                        
                        
                        19.00
                        
                        
                        
                        45,839
                        
                        
                        
                        19.0227.05
                        
                        
                        27.05
                        
                        
                        
                        90,852
                        
                        
                        
                        6.12
                        
                        
                        
                        27.05
                        
                        
                        
                        89,652
                        
                        
                        
                        27.0528.59
                        
                        
                        30.59
                        
                        
                        
                        50,209
                        
                        
                        
                        1.29
                        
                        
                        
                        30.11
                        
                        
                        
                        50,209
                        
                        
                        
                        30.1133.45
                        
                        
                        38.69
                        
                        
                        
                        27,452
                        
                        
                        
                        4.21
                        
                        
                        
                        37.30
                        
                        
                        
                        27,452
                        
                        
                        
                        37.3042.56
                        
                        
                        42.56
                        
                        
                        
                        500
                        
                        
                        
                        6.62
                        
                        
                        
                        42.56
                        
                        
                        
                        500
                        
                        
                        
                        42.5644.60
                        
                        
                        44.60
                        
                        
                        
                        5,000
                        
                        
                        
                        6.56
                        
                        
                        
                        44.60
                        
                        
                        
                        5,000
                        
                        
                        
                        44.60$             3.33
                        
                        $
                        44.60
                        
                        
                        
                        478,194
                        
                        
                        
                        5.07
                        
                        
                        $
                        19.13
                        
                        
                        
                        379,807
                        
                        
                        $
                        20.40




The
weighted-average fair value of options granted was $14.09 per share during 2008
and $18.43 per share during 2007.





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
2008 with respect to a total of 63,890 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, 2008, there was $1,887,000 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 1.16
years.




The
following table summarizes the restricted stock activity for 2008, 2007 and
2006:





Number ofShare UnitAwards
                    
                    
                    WeightedAverage GrantDate Fair ValueOutstanding
      at January 1, 2006
                    
                    
                    -
                    
                    
                    $
                    -Granted
                    
                    
                    142,895
                    
                    
                    
                    42.40Released
                    
                    
                    (4,776
                    )
                    
                    
                    41.57Forfeited
                    
                    
                    (18,872
                    )
                    
                    
                    42.45Outstanding
      at December 31, 2006
                    
                    
                    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
                    
                    
                    
                    27.86




10.
            Restructuring
      Activities





During
2008, we reduced our workforce throughout the United States by approximately 35%
so that our staffing levels would be appropriate for reduced procedure volume
levels.  We offered employees separated or to be separated from the
Company as a result of these initiatives severance or early retirement packages,
as appropriate, that included both financial and nonfinancial components. We
recorded severance costs associated with these workforce reductions of
$1,496,000 in 2008 within the caption restructuring expense in the Consolidated
Statements of Operations.  We paid these amounts in full prior to
December 31, 2008.





50




Additionally,
in October 2008, we closed our Boise, Idaho vision center.  Also, as
of December 31, 2008, we closed our Tulsa, Oklahoma and Little Rock, Arkansas
vision centers.  We closed these centers based on a number of factors
that included current financial performance, an evaluation of the anticipated
timing of improvement in procedure volume and the extent of the expected
improvement, as well as the costs associated with closing the
center.  These closures resulted in a charge of $1,427,000,
principally related to contract terminations and asset impairments, which were
recorded within the caption restructuring expense in the Consolidated Statements
of Operations.





11.
            Commitments
      and Contingencies





On
September 13, 2007, and October 1, 2007, two complaints were filed against us
and certain of our current and former directors and officers by Beaver County
Retirement Board and Spencer and Jean Lin, respectively, in the United States
District Court for the Southern District of Ohio (Western Division) purportedly
on behalf of a class of 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 have been consolidated into one action.  A consolidated
complaint was filed on April 19, 2008.  The plaintiffs in the
consolidated complaint are seeking damages on behalf of a class of 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 allege that certain of our public disclosures regarding
its 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 September 5, 2008, plaintiffs filed
their memorandum in opposition to the motion to dismiss.  We strongly
believe that these claims lack merit, and we intend to defend against the claims
vigorously.  Due to the inherent uncertainties of litigation, we
cannot predict the outcome of the action at this time, and can give no assurance
that these claims will not have a material adverse effect on our financial
position or results of operations.  We maintain insurance coverage for
litigation defense and settlement costs incurred in connection with this matter
in excess of $1,000,000.





On
October 5, 2007, a complaint was filed in the Court of Common Pleas, Hamilton
County, Ohio, against certain of our current and former officers and directors,
derivatively on our behalf.  The plaintiff, Nicholas Weil, asserts that
three of the defendants breached their fiduciary duties when they allegedly sold
our securities on the basis of material non-public information in 2007. 
The plaintiff also asserts claims for breach of fiduciary duty, abuse of
control, corporate waste, and unjust enrichment in connection with the
disclosures that also are the subject of the securities actions described
above. We are named as a nominal defendant in the complaint, although the
action is derivative in nature.  The plaintiff demands damages and
attorneys fees, and seeks other equitable relief.  On December 20, 2007,
the court stayed this action, pursuant to a stipulation of the parties, pending
the resolution of the motion to dismiss filed in the consolidated class action,
discussed above.  We are in the process of evaluating these
claims.  However, due to the inherent uncertainty of litigation, we cannot
predict the outcome of the action at this time, and can give no assurance that
these claims will not have a material adverse effect on our financial position
or results of operations.  We maintain insurance coverage for
litigation defense and settlement costs incurred in connection with this matter
in excess of $1,000,000.





Our
business results in a number of medical malpractice lawsuits.  Claims
reported to us prior to December 18, 2002 were generally covered by external
insurance policies and to date have not had a material financial impact on our
business other than the cost of insurance and our deductibles under those
policies.  Effective in December 2002, we established a captive
insurance company to provide coverage for claims brought against us after
December 17, 2002.  We use the captive insurance company for both
primary insurance and excess liability coverage.  A number of claims
are now pending with our captive insurance company.  Since the
inception of the captive insurance company in 2002, total claims and expense
payments of $1,308,000 have been disbursed.





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


51


12.
            Additional
      Financial Information





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




Balance
Sheet Information


Property
and Equipment is comprised of the following:
 At December 31,2008
                      
                      
                      2007Land
                      
                      $
                      354
                      
                      
                      $
                      354Building
      and improvements
                      
                      
                      5,815
                      
                      
                      
                      5,513Leasehold
      improvements
                      
                      
                      26,219
                      
                      
                      
                      19,840Furniture
      and fixtures
                      
                      
                      7,058
                      
                      
                      
                      5,403Equipment
                      
                      
                      82,193
                      
                      
                      
                      65,525121,639
                      
                      
                      
                      96,635Accumulated
      depreciation
                      
                      
                      (70,235
                      )
                      
                      
                      (52,872
                      )Construction
      in progress
                      
                      
                      95
                      
                      
                      
                      10,153$
                      51,499
                      
                      
                      $
                      53,916
 
 Accrued
Liabilities and Other is comprised of the following:
 At December 31,2008
                      
                      
                      2007Accrued
      payroll and related benefits
                      
                      $
                      1,801
                      
                      
                      $
                      4,595Accrued
      taxes
                      
                      
                      1,093
                      
                      
                      
                      1,260Accrued
      financing fees
                      
                      
                      447
                      
                      
                      
                      2,047Accrued
      enhancement expense
                      
                      
                      1,671
                      
                      
                      
                      1,372Invoices
      and other expenses accrued at year-end
                      
                      
                      3,596
                      
                      
                      
                      4,587$
                      8,608
                      
                      
                      $
                      13,861
 
 Accumulated
other compenhensive (loss) income consisted of the following:
 December 31,2008
                      
                      
                      2007Unrealized
      invesment gain, net of tax at $43 and $59
                      
                      $
                      54
                      
                      
                      $
                      89Foreign
      currency translation adjustment
                      
                      
                      (183
                      )
                      
                      
                      350Accumulated
      other compenhensive (loss) income
                      
                      $
                      (129
                      )
                      
                      $
                      439
 
 Income
Statement Information:
 
 The
components of net investment (loss) income were as follows (dollars in
thousands):
  For the Year Ended December 31,2008
                            
                            
                            2007
                            
                            
                            2006Interest
      income
                            
                            $
                            2,588
                            
                            
                            $
                            6,349
                            
                            
                            $
                            6,473Interest
      expense
                            
                            
                            (997
                            )
                            
                            
                            (507
                            )
                            
                            
                            (302
                            )Other
      than temporary impairment on securities
                            
                            
                            (3,125
                            )
                            
                            
                            -
                            
                            
                            
                            -Realized
      gains on investments
                            
                            
                            10
                            
                            
                            
                            133
                            
                            
                            
                            18Realized
      losses on investments
                            
                            
                            -
                            
                            
                            
                            (22
                            )
                            
                            
                            (7
                            )Net
      investment (loss) income
                            
                            $
                            (1,524
                            )
                            
                            $
                            5,953
                            
                            
                            $
                            6,182
 
 Cash
Flow Information
 For the Year Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Cash
      paid during the year for:Interest
                          
                          $
                          997
                          
                          
                          $
                          507
                          
                          
                          $
                          302Income
      taxes (refunded) paid
                          
                          
                          (4,460
                          )
                          
                          
                          15,928
                          
                          
                          
                          18,961Non-cash
      investing activities:Capital
      leases
                          
                          $
                          2,378
                          
                          
                          $
                          5,944
                          
                          
                          $
                          5,030
 
 Other
Comprehensive (Loss) Income Information
 For the Year Ended December 31,2008
                          
                          
                          2007
                          
                          
                          2006Comprehensive
      (loss) incomeNet
      (loss) income
                          
                          $
                          (6,635
                          )
                          
                          $
                          32,504
                          
                          
                          $
                          28,370Unrealized
      investment (loss) gain, net of tax of $16, ($39) and ($3)
                          
                          
                          (35
                          )
                          
                          
                          59
                          
                          
                          
                          5Foreign
      currency translation adjustments
                          
                          
                          (533
                          )
                          
                          
                          367
                          
                          
                          
                          1Total
      comprehensive (loss) income
                          
                          $
                          (7,203
                          )
                          
                          $
                          32,930
                          
                          
                          $
                          28,376


52




13.
            Quarterly Financial Data
      (unaudited)





Financial
results for interim periods do not necessarily indicate trends for any
twelve-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):





2008 Quarters
                  
                  
                  2007 QuartersFirst
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  Fourth
                  
                  
                  First
                  
                  
                  Second
                  
                  
                  Third
                  
                  
                  FourthRevenues
                  
                  $
                  79,568
                  
                  
                  $
                  54,181
                  
                  
                  $
                  37,397
                  
                  
                  $
                  34,030
                  
                  
                  $
                  78,663
                  
                  
                  $
                  69,685
                  
                  
                  $
                  74,584
                  
                  
                  $
                  69,703Operating
      income (loss)
                  
                  
                  10,471
                  
                  
                  
                  (2,950
                  )
                  
                  
                  (6,161
                  )
                  
                  
                  (9,594
                  )
                  
                  
                  15,543
                  
                  
                  
                  10,039
                  
                  
                  
                  14,130
                  
                  
                  
                  5,853Income
      (loss) before taxes
                  
                  
                  11,281
                  
                  
                  
                  (1,854
                  )
                  
                  
                  (6,753
                  )
                  
                  
                  (11,932
                  )
                  
                  
                  17,298
                  
                  
                  
                  12,033
                  
                  
                  
                  15,848
                  
                  
                  
                  6,546Net
      income (loss)
                  
                  
                  6,876
                  
                  
                  
                  (573
                  )
                  
                  
                  (4,717
                  )
                  
                  
                  (8,221
                  )
                  
                  
                  10,926
                  
                  
                  
                  7,414
                  
                  
                  
                  10,018
                  
                  
                  
                  4,146Earnings
      (loss) per shareBasic
                  
                  $
                  0.37
                  
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.25
                  )
                  
                  $
                  (0.44
                  )
                  
                  $
                  0.55
                  
                  
                  $
                  0.37
                  
                  
                  $
                  0.51
                  
                  
                  $
                  0.22Diluted
                  
                  $
                  0.37
                  
                  
                  $
                  (0.03
                  )
                  
                  $
                  (0.25
                  )
                  
                  $
                  (0.44
                  )
                  
                  $
                  0.54
                  
                  
                  $
                  0.36
                  
                  
                  $
                  0.51
                  
                  
                  $
                  0.22




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, 2008, our management, with the
participation of our Chief Executive 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 Executive 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 Executive Officer and Chief Financial Officer concluded
that, during the quarter ended December 31, 2008, there were no changes in our
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, LCA-Vision Inc.’s 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.”





Item 9B.  Other
Information.





Not
applicable.




53


PART
III





Item
10.  Directors, Executive Officers and Corporate
Governance.




Our
Board of Directors
  Each of
the following members of our board of directors holds office until the next
annual meeting of stockholders or until his successor has been elected and
qualified.
  William F. Bahl, age 58, is
the co-founder and President of Bahl & Gaynor Investment Counsel, an
independent registered investment adviser located in
Cincinnati.  Prior to founding Bahl & Gaynor in 1990, he served as
Senior Vice President and Chief Investment Officer at Northern Trust Company in
Chicago.  Mr. Bahl is a director of Cincinnati Financial Corporation
and serves as a trustee for the Talbert House Foundation, Deaconess
Associations, Inc. and Hamilton County Parks Foundation.  He is a
member of the Cincinnati Society of Financial Analysts.  He has served
as a member of our board of directors since 2005.
  John H. Gutfreund, age 79.
Since 1993, Mr. Gutfreund has been the President of Gutfreund & Co. Inc., a
financial management consulting firm.  Mr. Gutfreund was a Senior
Advisor of Collins Stewart LLC (formerly C.E. Unterberg Towbin), an investment
partnership for high-growth technology companies, from January 2002 to September
2008.  Formerly, Mr. Gutfreund was with Salomon Brothers from
1953-1991, most recently as its Chairman and Chief Executive
Officer.  Mr. Gutfreund is a director of AXES LLC, Evercel, Inc.,
Montefiore Medical Center, and Nutrition 21, Inc., which he also serves as Board
Chairman.  He is an advisor to The Universal Bond Fund.  He
is also a Member of The Brookings Institution; Council Advisory Committee in New
York; member, Council on Foreign Relations; Lifetime Member, Board of Trustees,
New York Public Library; Honorary Trustee, Oberlin (Ohio) College; and Chairman
Emeritus and Member of the Board of Trustees, Aperture Foundation.  He
has served as a member of our board of directors since 1997.
  John C. Hassan, age 66, has
been a consultant to BSC Ventures, a holding company in the printing and
converting industry, since November 2006.  Prior to that, he had been
the President and CEO of Champion Printing, Inc., a direct mail printing
company, for more than 15 years.  Previously, he was Vice President
Marketing of the Drackett Company, a division of Bristol-Myers
Squibb.  He currently serves on the boards of the Ohio Graphics Arts
Health Fund and the Madeira/Indian Hill Fire Company.  He has served
as a member of our board of directors since 1996.
  Edgar F. Heizer III, age 49,
has been Chairman of Manus Health Systems, Inc., a multi-site dental-care
provider, since July 1997 and was also Chief Executive Officer of Manus Health
Systems from May 1999 to December 2004.  Mr. Heizer also currently
serves as Managing Member of Coral SR LLC and Principal of Heizer Capital,
management and investment firms focused on growth businesses in transition,
which he founded in 1995.  He has served as a member of our board of
directors since February 2009.
  Steven C. Straus, age 52, is
our Chief Executive Officer.  He joined us in that capacity in
November 2006.  Mr. Straus’ healthcare career has spanned three
decades.  Previously, Mr. Straus served sequentially as Chief
Development Officer, Chief Operating Officer and President of MSO Medical, a
bariatric surgery management company, from December 2003 through October
2006.  Prior to December 2008, Mr. Straus was Chief Development
Officer at Titan Health Corporation, an ambulatory surgery center company, from
May 2003 to November 2003, and Vice President, General Manager of OR Partners,
Ambulatory Surgery Center Division of TLC Vision Inc. from October 2001 through
April 2003.  Previously he was President of the Healthcare Products
Group at Jordan Industries; Senior Vice President at Columbia/HCA and Medical
Care, Inc. and served in several management capacities at Baxter Healthcare and
American Hospital Supply Corporation.  He has served as a member of
our board of directors since November 2006.
  54
 E. Anthony Woods, age 68, has
been non-executive Chairman of the Board since March 2006.  Mr. Woods
has been Chairman of Deaconess Association, Inc. (Deaconess), a healthcare
holding company, since 2003, and was previously President and Chief Executive
Officer of Deaconess, from January 1987 through February 2003.  Mr.
Woods is also director of Cincinnati Financial Corporation, Anchor Funding
Services, Inc., Critical Homecare Solutions, Inc. and Phoenix Health
Systems.  He has served as a member of our board of directors since
2004.
  The
complete mailing address of each director is c/o LCA-Vision Inc., 7840
Montgomery Road, Cincinnati, OH 45236.
  Our
Executive Officers
  Our
current executive officers are Steven C. Straus, Chief Executive Officer,
Michael J. Celebrezze, Senior Vice President of Finance, Chief Financial Officer
and Treasurer; David L. Thomas, Senior Vice President of Operations; and Stephen
M. Jones, Senior Vice President of Human Resources. Information about Mr. Straus
is given above under “Our Board of Directors.”
  Michael J. Celebrezze, age
52, was named Senior Vice President of Finance, Chief Financial Officer and
Treasurer on December 1, 2008.  He had previously served as interim
Chief Financial Officer since June 2008 and Senior Vice President and Treasurer
since July 2007.  Michael joined us in July 2006 as Vice
President of Finance and Treasurer from First Transit, Inc., a national public
transportation company with $400 million in revenue, where he served as Chief
Financial Officer from June 2001 through June 2006.  Prior to joining
First Transit, he was employed for 17 years with APCOA/Standard Parking, where
he held a variety of financial positions including Executive Vice President and
Chief Financial Officer.  Mr. Celebrezze holds a Certified Public
Accounting designation in Ohio (inactive) and received a B.S. in Accounting from
Kent State University and an M.B.A. from John Carroll University.
  Stephen M. Jones, age 56, is
Senior Vice President of Human Resources.  He came to us in May 2007
from The Kroger Company, where he was Vice President of Talent Management from
June 2001 through May 2007.  Prior to joining The Kroger Company, he
was Principal and Practice Leader with the Performance and Rewards Practice of
Mercer Consulting, the largest human resources consulting organization in the
United States from June 1993 through June 2001.  Mr. Jones earned a
B.A. in Biology from Brown University, and an M.B.A. in Health Administration
from Widener University.
  David L. Thomas, age 49,
joined us as Senior Vice President of Operations in April 2008.  Prior
to joining us, he was a Senior Manger of McDonald’s Corp., serving as Chief
Operating Officer of Boston Market, Inc. from 2004 until September
2007.  From 2001 until 2004, he was Division President and Senior
Vice-President, Operations for Boston Market.  Previously, Mr. Thomas
held a number of positions with McDonald’s Corporation from 1991 to 2001
including, in 2001, serving as Country Market Manager of McDonald’s Puerto
Rico.  Mr. Thomas is a graduate of the U.S. Military Academy at West
Point.
   55
  Officers
are appointed by and serve at the discretion of the board of
directors.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16(a) of the Securities Exchange Act of 1934 requires our executive officers and
directors, and persons who beneficially own more than ten percent of our equity
securities, to file reports of security ownership and changes in that ownership
with the SEC.  Officers, directors and greater than ten-percent
beneficial owners also are required to furnish us with copies of all Section
16(a) forms they file.  Based upon a review of copies of these forms,
we believe that all Section 16(a) filing requirements were complied with on a
timely basis during and for 2008, except a Form 4 to report one stock option
grant for Mr. Thomas.
  Governance
and Code of Ethics
  Our board
of directors has adopted governance guidelines and principles that, together
with the charters of the committees, provide the framework for corporate
governance at the Company.  We also have a Code of Business Conduct
and Ethics that is applicable to all employees, including executive officers, as
well as to directors to the extent relevant to their services as directors. Our
board has three standing committees: Audit, Compensation, and Nominating and
Governance. Each committee is comprised solely of directors who are
“independent” as defined under Nasdaq Marketplace Rules. The board has adopted a
charter for each of the Audit Committee, the Compensation Committee and the
Nominating and Governance Committee. The Code of Business Conduct and Ethics,
governance guidelines and principles and committee charters are available on our
website at www.lasikplus.com by clicking on “Investors” and “Corporate
Governance.” You may request a copy of any of these documents to be mailed to
you by writing to our Secretary at 7840 Montgomery Road, Cincinnati, Ohio 45236,
or calling 513-792-5629. Any amendments to, or waivers from, the Code of
Business Conduct and Ethics that apply to our principal executive and financial
officers will be posted on our website.
  Audit
Committee Composition and Audit Committee Financial Experts
  The
current members of the Audit Committee are Messrs. Hassan (Chair), Bahl and
Woods. The board of directors has determined that each of Messrs. Hassan, Bahl
and Woods is independent under the Nasdaq Marketplace Rules for audit committee
membership and qualifies as an “audit committee financial expert” under
applicable SEC rules.
 
 56




Audit Committee
Report
  In
accordance with its written charter, the Audit Committee of the Board assists
the Board in fulfilling its responsibility for oversight of the quality and
integrity of our accounting, auditing and financial reporting practices of the
Company.
  In
discharging its oversight responsibility as to the audit process, the Audit
Committee obtains from the independent auditors a formal written statement
describing all relationships between the auditors and us that might bear on the
auditors’ independence consistent with applicable requirements of the Public
Company Accounting Oversight Board, discussed with the auditors any
relationships that may impact their objectivity and independence, and satisfied
itself as to the auditors’ independence.
  The Audit
Committee discusses and reviews with the independent auditors all communications
required by generally accepted auditing standards, including those described in
Statement on Auditing Standards No. 61, as amended, “Communications with Audit
Committees” and, with and without management present, discusses and reviews the
results of the independent auditors’ examination of the financial
statements.
  The Audit
Committee reviewed and discussed our audited financial statements as of and for
the fiscal year ended December 31, 2008 with management and the independent
auditors. Management has the responsibility for the preparation of our financial
statements and the independent auditors have the responsibility for the
examination of those statements.
 
 Based on
the above-mentioned review and discussions with management and the independent
auditors, the Audit Committee recommended to the Board that our audited
financial statements be included in our Annual Report on Form 10-K for the
fiscal year ended December 31, 2008, for filing with the Securities and Exchange
Commission.
 
 John
      C. Hassan (Chair)William
      F. BahlE.
      Anthony Woods
  57


Item
11.   Executive Compensation.







COMPENSATION
COMMITTEE REPORT ON EXECUTIVE COMPENSATION
 
 The
undersigned members of the Compensation Committee of the Board of Directors of
LCA-Vision Inc. during 2008 and currently have furnished the following report
for inclusion in this Annual Report on Form 10-K.
 
 The
Committee has reviewed and discussed the Compensation Discussion and Analysis
presented below with the Company’s management.  Based upon that review
and those discussions, the Committee recommended to the Board of Directors that
the Compensation Discussion and Analysis be included in this Annual Report on
Form 10-K.
 
 William
      F. Bahl (Chair)John
      H. GutfreundJohn
      C. HassanE.
      Anthony Woods
 
 COMPENSATION
DISCUSSION AND ANALYSIS
 
  Our
compensation programs are designed to provide its executive officers with
market-competitive salaries and the opportunity to earn incentive compensation
related to performance expectations identified by the Compensation Committee of
the board of directors.  The objectives of our executive compensation
program as developed by the Compensation Committee are to:
  ●
              Provide
      a direct link between executive officer compensation and the interests of
      our stockholders by making a significant portion of executive officer
      compensation dependent upon our financial
  performance.
  ●
              Support
      the achievement of our annual and long-term goals and objectives as
      determined annually by the Committee or the
  Board.
  ●
              Provide
      opportunities for equity ownership based on competitive levels,
      corporate/segment performance, share price performance and share dilution
      considerations.
  ●
              Provide
      compensation plans and arrangements that encourage the retention of
      better-performing executives.
  Components
and Philosophy of Executive Compensation
  The
Compensation Committee seeks to set total compensation for our executive
officers at levels that are competitive with that paid to executives with
similar levels of responsibilities at similarly-sized corporations that are
deemed comparable to us.  The Compensation Committee’s goal is to
provide total compensation, assuming achievement of target performance measures
for incentive compensation are met, that approximates the
50th  percentile of the comparable companies and that approaches the
75th  percentile of total compensation at such comparable companies if
maximum performance measures are achieved.
 
  58
 
 In
furtherance of this goal, the Compensation Committee’s compensation consultant
prepared for the Committee’s review a list of comparable companies in late
2007.  Compensation for the named executive officers for 2008 was set
by the Committee using a peer group of 25 companies selected from direct
competitors, medical technology companies, healthcare, hospitality, medical
devices and retail with similar market value, revenue, net income and number of
employees.   This group consisted of the following:
  Alliance
      Imaging, Inc.
              PolyMedica
      CorporationAmerican
      Medical Systems Holdings, Inc.
              Radiation
      Therapy Services, Inc.AmSurg
      Corp.
              Select
      Comfort CorporationArthroCare
      Corporation
              SonoSite,
      Inc.Books-A-Million,
      Inc.
              Symbion,
      Inc.Build-A-Bear
      Workshop, Inc.
              Symmetry
      Medical, Inc.California
      Pizza Kitchen, Inc.
              TLC
      Vision CorporationHanger
      Orthopedic Group, Inc.
              Tuesday
      Morning CorporationJos.
      A. Bank Clothiers, Inc.
              VCA
      Antech, Inc.Meridian
      Bioscience, Inc.
              Vital
      Images, Inc.P.F.
      Chang’s China Bistro, Inc.
              Vital
      Signs, Inc.Palomar
      Medical Technologies, Inc.
              Zoll
      Medical CorporationPediatric
      Services of America, Inc.
 
 Using the
comparator group, the Committee’s compensation consultant advises the Committee
as to the nature of the elements of compensation paid by the comparable
companies and then calculates a market rate of compensation for each such
element for each named executive officer’s position (which is essentially equal
to the 50th percentile of the element of compensation paid by those
companies).
  The
compensation of our executive officers is, therefore, designed to be competitive
with that paid by the comparable companies and includes three elements, namely
(i) base salary, (ii) annual incentive cash bonuses, and (iii) long-term equity
incentive compensation.  Cash bonuses and long-term equity incentives
(collectively, “Incentive Compensation”) represent a significant portion of an
executive officer’s potential annual compensation.  In general, the
proportion of an executive officer’s compensation that is Incentive Compensation
increases with the level of responsibility of the
officer.  Allocations by the Committee among the three elements of
compensation are market based in order to enable us to attract and retain
qualified employees and are intended to provide an appropriate salary to our
executive officers while making the greater part of their compensation
contingent on, and tied to, our performance.  The allocation to annual
incentive cash bonuses is intended to encourage and reward short-term
success.  The allocation to equity incentive compensation, in addition
to encouraging and rewarding success over the performance period, is intended to
tie the executive’s interest to our long term success by giving the executive an
equity interest in us.
  The
compensation program is designed to further our current strategic goals, which
are to increase stockholder value by focusing on improving operating results
through increases in revenue coupled with operating
efficiencies.  Executive officers also receive various benefits
generally available to all of our employees, such as a 401(k) plan and medical
plans.
  In
setting annual and long-term Incentive Compensation goals and performance
levels, the Committee intends to provide the executives a challenging yet
reasonable opportunity to reach the threshold amount, while requiring
substantial growth to reach the maximum level without encouraging executives to
take unnecessary and excessive risks.
  59
 Other
than new hires, the Compensation Committee typically takes actions with regard
to executive officer cash and stock compensation in the first quarter of each
year after financial results for the previous fiscal year have been
finalized.
 
 Base Salaries
  The
Compensation Committee seeks to set base salaries for our executive officers at
levels that are competitive with the market rate for executives with similar
roles and responsibilities at comparable companies, adjusted to reflect the
performance of the individual executive officer.  The Committee has
established a target range of 80% to 120% of median level.  In setting
annual salaries for individuals, the Compensation Committee first considers the
market rate compensation paid for similar positions at companies in the
comparator group as a benchmark forecast.  It then considers
individual performance of the executive measured against
expectations.  We have developed a performance development assessment
designed to provide a consistent and efficient approach to evaluating
performance.  The assessment includes six success factors, namely
growth through leadership, growth through management excellence, growth through
people practices, growth through exceptional results, growth through
patient/customer excellence and growth through personal
commitment.  Each executive officer is assessed on a scale of 1 to 5,
with 1 being not applicable and 5 being exceptional performance, in a number of
specific areas under each success factor.  The performance development
assessment includes both a self assessment and a reviewer/supervisor
assessment.  In the case of the Chief Executive Officer, this latter
assessment is provided by the Compensation Committee and the Chairman of the
Board of Directors.  With respect to the other named executive
officers, the assessment is provided by the Chief Executive Officer or (other
than with respect to the Chief Financial Officer) the Chief Financial
Officer.
  The
results of the performance development assessment are used by the Committee in
setting the salary compensation of the Chief Executive Officer.  In
the case of the other named executive officers, the Committee receives advice
from the Chief Executive Officer, but actual compensation decisions are made by
the Committee.  In each case, the decision is based upon the
appropriate market rate salary adjusted subjectively by the Committee to reflect
the results of the individual performance development
assessment.  Salaries paid to the Company’s named executive officers
during 2008 are provided in the Summary Compensation
Table.  Differences between individual named executive officers
reflect the above considerations and also the fact that some served as executive
officers for only a portion of 2008.
  Annual
Incentive Bonuses (Non-Equity Incentive Compensation)
  Our
Executive Cash Bonus Plan establishes performance criteria for the payment of
annual cash incentive bonuses to our executive officers and such other
additional employees as may be selected by the Compensation Committee from time
to time.  Bonus amounts are calculated as a percent of base salary at
the end of the year based upon the extent to which, threshold, target and
maximum performance goals set annually by the Committee are
achieved.  Information on awards made for 2008 is provided elsewhere
in this Proxy Statement under 2008 Grants of Plan Based Awards.
  In late
February and early March 2008, the Committee met to set cash incentive bonuses
for 2008.  The Committee set bonus levels for achieving the threshold,
target and maximum performance for 2008 at 75%, 100% and 125% of base salary,
respectively, for Steven Straus, with linear interpolation between those
percentages.  These levels were established in accordance with Mr.
Straus’ employment agreement, which is described below.  For the other
named executive officers, the bonus levels for achieving threshold, target and
maximum performance were set for 2008 at 20%, 40% and 60% of base salary,
respectively.  In each case, the bonus levels were determined by the
Committee based upon advice from its compensation consultant and were chosen to
be market based in order to enable us to attract and retain competent
employees.  The bonus levels for Mr. Straus also represented the
results of arms length negotiations with him at the time of his employment in
November 2006 as described under Basis for Chief Executive
Compensation.  The 2008 performance measure was adjusted operating
income of $26,370,900 for threshold, $29,301,000 for target and $32,231,000 for
maximum. The adjustment excludes deferred income from separately priced
warranties.  The Committee may select one or more additional or
different objective performance measures in the future.  Based upon
our 2008 performance, no cash bonuses will be paid for 2008.
 
 60




In
February 2009, the Committee determined that, in view of current market
conditions and uncertainties affecting our ability to forecast our operating
results for 2009, it was unable to select objective performance measures for
2009 cash bonuses to our executive officers.  Accordingly, the
Committee determined that 2009 cash bonuses for our executive officers would be
entirely discretionary and the Committee would determine them after financial
results for 2009 are available.
 
 Long-Term
Equity Incentive Grants
  Our stock
incentive plans authorize the Compensation Committee to award stock options and
restricted stock to executive officers and other key employees.  Stock
incentive grants are designed to align the long-term interests of our key
employees with those of its stockholders by enabling key employees to develop
and maintain significant long-term equity ownership positions.
 
 The value
and number of stock incentives granted to an executive officer is market based,
adjusted to reflect the executive’s level of performance responsibility as
reflected in the performance development assessment.  The approach
used by the Committee is similar to that used in setting salary compensation as
described above.
  For 2008,
the Compensation Committee continued a long-term equity incentive program begun
in 2006 under which a performance measure for each year is established,
performance goals are set and threshold, target and maximum performance share
award opportunities are made to our executive officers at the beginning of the
year.  The Committee then considered the form in which equity
consideration awards should be made for 2008.  In doing so, the
Committee noted the uncertain economic conditions under which we were operating
and the effect that external factors, such as consumer confidence and the
overall economy, might have upon our results of operations.  The
Committee also noted that no incentive awards had been earned for 2007 and
considered the resulting negative effect upon our ability to attract and retain
qualified employees.
  Taking
all of these factors into account, the Committee determined that equity
incentive awards for 2008 should consist of performance share awards and
time-based stock options.  The Committee believed that this approach
was appropriate in order to balance risk for the executives and requirements for
stockholder return.  The number of performance share awards was
determined by dividing one-half of each named executive officer’s incentive
award dollar figure by the fair market value of our common stock on the date of
grant.  The performance measure for 2008 was operating income and the
terms of the performance share awards essentially were the same for
2007.  The number of shares to be granted under options was calculated
by multiplying the number of performance shares by three.  The
Committee felt that this was a reasonable allocation of value between
performance shares and options based upon advice received from the Committee’s
compensation consultant.  The performance shares earned may not be
sold by the holder until the third anniversary of the date on which the
performance share award was granted and will be forfeited if the holder’s
employment terminates before that date for any reason other than death or
disability.  Once issued, the performance shares having voting and
dividend rights during the restricted period.  The options are
exercisable at fair market value on the date of grant, and will vest over five
years and expire after 10 years.
  61
 Based
upon market rate data developed for each named executive officer by the
Committee’s compensation consultant, as adjusted subjectively to reflect the
executive’s level of performance and responsibility as reflected in the
performance development assessment and the importance attributed internally to
different executive positions, the Committee established for each named
executive officer a dollar value of target equity incentive
compensation.  Information about grants made for 2008 is provided
elsewhere in this Proxy Statement under 2008 Grants of Plan Based
Awards.  The performance measure for 2008 was adjusted operating
income at the levels described under Annual Incentive Bonus.  The
evaluation of 2008 performance will occur when audited financial information is
available.
  In
accordance with its customary practices, the Committee met in February 2009 and
determined that, in view of the uncertainties described above with respect to
non-equity incentive compensation, equity incentive awards to the executive
officers for 2009 would consist solely of stock options, which were awarded
effective as of March 2, 2009.  The Committee subsequently determined
that these grants inadvertently exceeded the limitation set forth in our 2006
Stock Incentive Plan on the maximum number of options that may be granted to any
person in one year.  Upon the recommendation of our Chief Executive
Officer, on March 10, 2009, the Committee, with the consent of the optionees,
rescinded all of the options granted in 2009.
  Basis
for Chief Executive Compensation
  Effective
November 2, 2006, the board of directors appointed Steven C. Straus as
Chief Executive Officer.  Mr. Straus has an employment agreement dated
November 1, 2006.  The Compensation Committee designed the agreement
in accordance with the principles described under “Components and Philosophy of
Executive Compensation,” and, with advice from the Committee’s compensation
consultant, negotiated it at arm’s length with Mr. Straus.  The
Committee believes that the terms of the Agreement are consistent with market
provisions.  The agreement was amended effective April 28,
2008.  The principal terms of the agreement, as amended, are as
follows:
 ●
                  Annualized salary of not less
      than $380,000.
 ●
                Participation in our Executive
      Cash Bonus Plan with a cash bonus target equal to 100% of his annual base
      salary. The threshold bonus will be 75% of his annual base salary and the
      maximum bonus will be 125% of his annual base salary. The target,
      threshold and maximum bonus goals for 2008 were established by the
      Compensation Committee on March 5,
2008.
 ●
                Participation in our 2008 Stock
      Incentive Plan. Mr. Straus received time-based Restricted Share Units for
      4,682 shares based upon the fair market value on the date of his
      employment and a Performance Share Award for 9,365 shares. Performance
      Shares were to be earned based on our performance metrics for 2007
      determined by the Compensation Committee. Based on our performance, no
      Performance Shares were earned for 2007. Mr. Straus’ Restricted Share
      Units will vest on November 2, 2009, the third anniversary of his date of
      employment.
 ●
                Application of our standard
      Confidentiality Agreement, which provides that for a period of one year
      after termination of his employment with the Company, he will not render
      services, directly or indirectly, to any competing organization or solicit
      employees of the Company to join any competing
      organization.
 The
agreement has a two-year term that will be automatically renewed for successive
two year periods, unless either we or Mr. Straus provides written notice to the
other party not to so renew at least 120 days prior to the anniversary
date.  Mr. Straus also is entitled to certain severance payments as
described under “Executive Compensation – Potential Post-Employment
Payments.”
  62
 Severance
Arrangements
  As
discussed under Potential Post-Employment Payments below, we entered into
agreements with our named executive officers other than Mr. Straus during
2008.  The Compensation Committee and board
of directors considered these agreements important as a tool to retain
executives during difficult economic times or in the event of a change in
control.  The Compensation Committee reviewed the agreements with is
compensation consultant, which advised that the agreements were consistent with
benefits offered by companies in the peer group.
  Accounting
and Tax Treatments of Executive Compensation
  Section
162(m) of the Internal Revenue Code prohibits us from taking an income tax
deduction for any compensation in excess of $1 million per year paid to our
Chief Executive Officer or any of our other four most-highly compensated
executive officers, unless the compensation qualifies as “performance-based” pay
under a plan approved by stockholders.  Our stockholders have approved
our long-term stock incentive plans.  We intend the plans to qualify
as performance-based compensation and be fully deductible by us.  Our
annual cash bonus plan has not been approved by stockholders and does not so
qualify.
  Review
of Past Awards
  When
evaluating the current year compensation awards, the Compensation Committee
reviews awards made in prior years in addition to benchmark data from comparable
companies.
  Adjustment
or Recovery of Awards
  Under the
2006 Stock Incentive Plan, if at any time within one year after the date on
which a participant exercised an option or on which Restricted Stock vests, the
Committee determines in its discretion that the Company or a Subsidiary has been
materially harmed by the participant, then any gain realized by the participant
shall be paid by the participant to us upon notice from us.
 
 Timing of Grants
  We have
not timed, and we do not intend to time, our release of material non-public
information for the purpose of affecting the value of executive
compensation.  The current policy of the Compensation Committee is
grants of options or restricted stock for all employees, including executive
officers, will be approved during, or pre-approved with an effective grant date
during, a trading “window period,” which we define as a period beginning on the
third day following release of its quarterly financial results and ending 15
days before the end of the next fiscal quarter.  If we are in
possession of material non-public information at the time of any proposed grant,
action may be deferred until the information has been made
public.  Restricted stock grants to newly appointed or newly promoted
executive officers will be effective on the date approved by the Compensation
Committee (or, if later, the first day of employment).
 
 EXECUTIVE
COMPENSATION
  Summary
  The
following table summarizes the annual compensation of our Principal Executive
Officer, Principal Financial Officer and of each of our other executive officers
(the “named executives”) for services rendered to us in all capacities in 2008,
2007 and 2006 for years that the officers were named executive
officers.
 
 63
 
 Summary
      Compensation Table
 
 
 Name and Principal
                                          Position
                                        
                                        Year
                                        
                                        Salary ($)
                                        
                                        
                                        Stock
                                          Awards ($)
                                          (7)
                                        
                                        
                                        Option
                                          Awards ($)
                                          (8)
                                        
                                        
                                        Non-Equity
                                          Incentive Plan
                                          Compensation ($)
                                        
                                        
                                        All Other
                                          Compensation
                                          ($)
                                        
                                        
                                        Total ($)Steven
      C. Straus (1)
                                        
                                        2008
                                        
                                        $
                                        380,000
                                        
                                        
                                        $
                                        53,425
                                        
                                        
                                        $
                                        60,276
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        41,752
                                        (9)
                                        
                                        $
                                        535,453Chief
      Executive Officer
                                        
                                        2007
                                        
                                        $
                                        350,000
                                        
                                        
                                        $
                                        53,280
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        196,843
                                        
                                        
                                        $
                                        600,1232006
                                        
                                        $
                                        70,833
                                        
                                        
                                        $
                                        8,612
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        79,445Michael
      J. Celebrezze (2)
                                        
                                        2008
                                        
                                        $
                                        209,583
                                        
                                        
                                        $
                                        2,554
                                        
                                        
                                        $
                                        30,138
                                        
                                        
                                        $
                                        26,250
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        247,275Senior
      Vice President of Finance,
                                        
                                        2007
                                        
                                        $
                                        190,000
                                        
                                        
                                        $
                                        7,533
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        26,250
                                        
                                        
                                        $
                                        6,750
                                        
                                        
                                        $
                                        230,533Chief
      Financial Officerand TreasurerStephen
      M. Jones (3)
                                        
                                        2008
                                        
                                        $
                                        214,900
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        30,138
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        245,038Senior
      Vice President of
                                        
                                        2007
                                        
                                        $
                                        140,000
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        3,500
                                        
                                        
                                        $
                                        143,500Human
      ResourcesDavid
      L. Thomas (4)
                                        
                                        2008
                                        
                                        $
                                        212,596
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        25,660
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        122,787
                                        (10)
                                        
                                        $
                                        361,043Senior Vice President of OperationsAlan
      H. Buckey (5)
                                        
                                        2008
                                        
                                        $
                                        150,987
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        150,987Former Executive Vice President of
                                        
                                        2007
                                        
                                        $
                                        282,000
                                        
                                        
                                        $
                                        121,070
                                        
                                        
                                        $
                                        176,454
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        4,942
                                        
                                        
                                        $
                                        584,466Finance
      and Chief Financial
                                        
                                        2006
                                        
                                        $
                                        270,000
                                        
                                        
                                        $
                                        102,096
                                        
                                        
                                        $
                                        216,727
                                        
                                        
                                        $
                                        115,627
                                        
                                        
                                        $
                                        1,000
                                        
                                        
                                        $
                                        705,450OfficerJames
      H. Brenner (6)
                                        
                                        2008
                                        
                                        $
                                        148,333
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        286,830
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        139,960
                                        (11)
                                        
                                        $
                                        575,123Former Chief Marketing Officer
                                        
                                        2007
                                        
                                        $
                                        166,667
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        178,960
                                        
                                        
                                        $
                                        345,627
 
 
 (1)
              Mr.
      Straus began his employment with us on November 1,
  2006.
 
 (2)
              Mr.
      Celebrezze began his employment with us on July 17, 2006 and was named an
      executive officer on August 21,
2007.
 
 (3)
              Mr.
      Jones began his employment with us on May 1, 2007 and was named an
      executive officer on August 21,
2007.
 
 (4)
              Mr.
      Thomas began employment with us on March 1,
  2008.
 
 (5)
              Mr.
      Buckey resigned his employment with us effective June 24,
      2008.
 
 (6)
              Mr.
      Brenner’s employment with us terminated effective July 31,
      2008.
 
 (7)
              The
      Long Term Incentive Grants section under Compensation Discussion and
      Analysis describes the equity awards granted to the named
      executives.  Represents expense recognized in accordance with
      SFAS 123(R) as described in Note 1 of the audited financial statements
      included in Item 8.
  64
  (8)
              Represents
      expense recognized in accordance with SFAS 123(R) for stock options issued
      prior to January 1, 2008 but not vested as of January 1,
      2008.  We did not grant any stock options in 2006 or
      2007.  Refer to the Outstanding Equity Awards at Fiscal Year-End
      table for details of outstanding stock options for named
      executives.  We estimate the fair value of each stock option
      using the Black-Scholes option pricing model using the assumptions in the
      following table.  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.  The risk-free rate is based on the U.S. Treasury yield
      curve in effect at the date of grant.  The expected life of the
      options is based on historical data and is not necessarily indicative of
      exercise patterns that may occur.
 
 (9)
              Consists
      of $23,585 of moving cost reimbursement and tax gross-up for relocation
      expense of $18,167.
 
 (10)
              Consists
      of $88,366 of moving cost reimbursement and tax gross up for relocation
      expense of $34,421.
 
 (11)
              Consists
      of $106,250 of severance payments, $16,574 of moving cost reimbursement,
      tax gross up for relocation expense of $13,051 and $4,085 of
      post-employment health benefits.
 
 We
estimated the fair value of each common stock option granted during 2008 using
the following weighted-average assumptions:
  2008Dividend
      yield
                  
                  
                  5-7.1%Expected
      volatility
                  
                  
                  361-362%Risk-free
      interest rate
                  
                  
                  3-3.1%Expected
      lives (in years)
                  
                  
                  5
 
 Plan-Based
Compensation
  The
following table summarizes the programs under which grants of cash or
equity-based compensation were available to the named executives in
2008.    Because actual financial results for 2008 did not meet
the threshold performance level, none of these awards will be paid.
 
 2008
Grants of Plan Based Awards
 
 Estimated Future Payouts Under Non-
                          Equity Incentive Plan Awards
                        
                        
                        Estimated Future Payouts Under
                          Equity Incentive Plan Awards
                        
                        
                        All other
                          option awards:
                          number of
                          securities
                        
                        
                        Exercise or base
                          price of option
                        
                        
                        Grant date fair
                          value of stockName
                        
                        GrantDate
                        
                        Threshold
                          ($)
                        
                        
                        Target($)
                        
                        
                        Max ($)
                        
                        
                        Threshold
                          (#)
                        
                        
                        Target(#)
                        
                        
                        Max (#)
                        
                        
                        underlying
                          options (#)
                        
                        
                        awards
                          ($/Sh)
                        
                        
                        and option
                          awardsSteven
      C. Straus
                        
                        3/5/2008
                        
                        $
                        285,000
                        
                        
                        $
                        380,000
                        
                        
                        $
                        475,000
                        
                        
                        
                        6,127
                        
                        
                        
                        12,254
                        
                        
                        
                        18,381
                        
                        
                        
                        36,762
                        
                        
                        $
                        14.28
                        
                        
                        $
                        699,948Michael
      J. Celebrezze
                        
                        3/5/2008
                        
                        $
                        41,917
                        
                        
                        $
                        83,833
                        
                        
                        $
                        125,750
                        
                        
                        
                        3,063
                        
                        
                        
                        6,127
                        
                        
                        
                        9,190
                        
                        
                        
                        18,381
                        
                        
                        $
                        14.28
                        
                        
                        $
                        349,974Stephen
      M. Jones
                        
                        3/5/2008
                        
                        $
                        42,980
                        
                        
                        $
                        85,960
                        
                        
                        $
                        128.940
                        
                        
                        
                        3,063
                        
                        
                        
                        6,127
                        
                        
                        
                        9,190
                        
                        
                        
                        18,381
                        
                        
                        $
                        14.28
                        
                        
                        $
                        349,974David
      L. Thomas (3)
                        
                        4/1/2008
                        
                        $
                        41,250
                        
                        
                        $
                        82,500
                        
                        
                        $
                        123,750
                        
                        
                        
                        3,610
                        
                        
                        
                        7,221
                        
                        
                        
                        10,831
                        
                        
                        
                        21,663
                        
                        
                        $
                        14.28
                        
                        
                        $
                        431,527Alan
      H. Buckey (4)
                        
                        3/5/2008
                        
                        $
                        58,374
                        
                        
                        $
                        116,748
                        
                        
                        $
                        175,122
                        
                        
                        
                        4,814
                        
                        
                        
                        9,628
                        
                        
                        
                        14,442
                        
                        
                        
                        28,884
                        
                        
                        $
                        14.28
                        
                        
                        $
                        549,951James
      H. Brenner (4)
                        
                        3/5/2008
                        
                        $
                        51,000
                        
                        
                        $
                        102,000
                        
                        
                        $
                        153,000
                        
                        
                        
                        4,814
                        
                        
                        
                        9,628
                        
                        
                        
                        14,442
                        
                        
                        
                        28,884
                        
                        
                        $
                        14.28
                        
                        
                        $
                        549,951
  65
 
 (1)
Awards under the Company's Executive Cash Bonus Plan. See "Compensation
Discussion and Analysis" for a discussion of the plan.
 (2)
Awards under the Company's 2006 Stock Incentive Plan. See "Compensation
Discussion and Analysis" for a discussion of the plan.
 (3) We
hired Mr. Thomas on April 1, 2008 and provided the plan-based awards on a pro
rata basis using 9/12 proration.
 (4) As
former employees, Messrs. Buckey and Brenner were not eligible for any payments
of these awards.
 
 Outstanding
Equity Awards at Fiscal 2008 Year-End
  The
following table details information on outstanding equity-based compensation
awards for the named executives as of December 31, 2008.
  Option
      Awards
                    
                    
                    Stock
      AwardsName
                    
                    Number of
                      Securities
                      Underlying
                      Unexercised
                      Options (#)
                      Unexercisable
                    
                    
                    Equity
                      Incentive Plan
                      Awards:
                      Number of
                      Securities
                      Underlying
                      Unexercised
                      Unearned
                      Options (#)
                    
                    
                    Option
                      Exercise
                      Price (S)
                    
                    
                    Option
                      Expiration
                      Date
                    
                    
                    Number of
                      Shares or
                      Units of Stock
                      that Have Not
                      Vested (#)
                    
                    
                    Market
                      Value
                      of Shares or
                      Units of
                      Stock
                      that Have
                      Not
                      Vested ($)
                    
                    
                    Equity
                      Incentive
                      Plan Awards:
                      Number of
                      Unearned
                      Shares, Units
                      or
                      Other Rights
                      that Have Not
                      Vested (#) (7)
                    
                    
                    Equity
                      Incentive
                      Plan Awards:
                      Market or
                      Payout
                      Value of
                      Unearned
                      Shares,
                      Units or Other
                      Rights that
                      Have
                      Not Vested ($)
                      (7)Steven
      C. Straus
                    
                    
                    -
                    
                    
                    
                    36,762
                    (1)
                    
                    $
                    14.28
                    
                    
                    3/5/2018
                    
                    
                    
                    4,682
                    (2)
                    
                    $
                    19,243
                    
                    
                    
                    6,127
                    
                    
                    
                    25,182Michael
      J. Celebrezze
                    
                    
                    -
                    
                    
                    
                    18,381
                    (3)
                    
                    $
                    14.28
                    
                    
                    3/5/2018
                    
                    
                    
                    166
                    (4)
                    
                    
                    682
                    
                    
                    
                    3,063
                    
                    
                    
                    12,589Stephen
      M. Jones
                    
                    
                    -
                    
                    
                    
                    18,381
                    (5)
                    
                    $
                    14.28
                    
                    
                    3/5/2018
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,063
                    
                    
                    
                    12,589David
      L. Thomas
                    
                    
                    -
                    
                    
                    
                    21,663
                    (6)
                    
                    $
                    12.94
                    
                    
                    4/1/2018
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    3,610
                    
                    
                    
                    14,837Alan
      H. Buckey
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,814
                    
                    
                    
                    19,786James
      H. Brenner
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    4,814
                    
                    
                    
                    19,786
  
 66
 Vesting
Schedule
  (I)
      (2) Steven C. Straus11/2/2009
                  
                  
                  4,6823/2/2009
                  
                  
                  
                  
                  
                  
                  7,3533/2/2010
                  
                  
                  
                  
                  
                  
                  7,3533/2/2011
                  
                  
                  
                  
                  
                  
                  7,3523/2/2012
                  
                  
                  
                  
                  
                  
                  7,3523/2/2013
                  
                  
                  
                  
                  
                  
                  7,3524,682
                  
                  
                  
                  36,762(3)(4)
      Michael J. Celebrezze7/17/2009
                  
                  
                  1663/2/2009
                  
                  
                  
                  
                  
                  
                  3,6773/2/2010
                  
                  
                  
                  
                  
                  
                  3,6763/2/2011
                  
                  
                  
                  
                  
                  
                  3,6763/2/2012
                  
                  
                  
                  
                  
                  
                  3,6763/2/2013
                  
                  
                  
                  
                  
                  
                  3,676166
                  
                  
                  
                  18,381(5)
      Stephen M. Jones3/2/2009
                  
                  
                  3,6773/21/11
                  
                  
                  1,6763/2/2011
                  
                  
                  3,6763/2/2012
                  
                  
                  3,6763/2/2013
                  
                  
                  3,67618,381(6)
      David L. Thomas3/2/2009
                  
                  
                  4,3333/2/2010
                  
                  
                  4,3333/2/2011
                  
                  
                  4,3333/2/2012
                  
                  
                  4,3323/2/2013
                  
                  
                  4,33221,663
 
 (7) Based
on threshold awards under our Long Term Equity Incentive Plan.  No
amounts were earned or paid under this plan for 2008 performance.  See
"Compensation Discussion and Analysis."
 
 The
following table summarizes the value of the named executives’ stock options
exercised or restricted awards vested during 2008.  We calculated the
stock award value realized on vesting by multiplying the number of shares by the
market value on the vesting date.
  2008
Option Exercises and Stock Vested
  Option Awards
                
                
                Stock AwardsName
                
                Number of
                  Shares
                  Acquired
                  on Exercise
                  (#)
                
                
                Value Realized
                  on Exercise
                  ($)
                
                
                Number of
                  Shares
                  Acquired
                  on Vesting
                  (#)
                
                
                Value Realized
                  on Vesting
                  ($)Steven
      C. Straus
                
                _
                
                
                _
                
                
                _
                
                
                _Michael
      J. Celebrezze
                
                _
                
                
                _
                
                
                
                167
                
                
                
                828David
      L. Thomas
                
                _
                
                
                _
                
                
                _
                
                
                _Stephen
      M. Jones
                
                _
                
                
                _
                
                
                _
                
                
                _Alan
      H. Buckey
                
                
                7,650
                
                
                
                50,720
                
                
                _
                
                
                _James
      H. Brenner
                
                _
                
                
                _
                
                
                _
                
                
                _
 
 67
 Nonqualified
Deferred Compensation
  We offer
a non-qualified deferred compensation plan.  Eligible participants
include all surgeons, whether our employees or independent contractors or
employees or independent contractors of professional corporations that are
affiliated with us.  Eligible participants also include other
employees of ours with annual base compensation for such year equal to or
exceeding $120,000.  We have not provided any match to the participant
deferral.  None of the named executive officers participated in the
deferred compensation plan in 2008.
  As of
December 31, 2008, based on the recommendation of the participants and approval
of the Board’s Compensation Committee, we terminated the non-qualified deferred
compensation plan.  In accordance with the Plan, all disbursements
will occur between the periods of 12 months and 24 months after termination of
the Plan.
 
 Potential Post-Employment
Payments
  Chief
Executive Officer
  Under the
terms of Mr. Straus’ employment agreement, as amended, if we terminate Mr.
Straus’ employment without Cause (Cause is defined as a conviction of a felony
involving theft or moral turpitude or willful failure to perform duties) or he
terminates his employment for Good Reason (Good Reason is defined as a material
reduction of title, authority, duties or responsibilities, relocation more than
35 miles from our headquarters in Cincinnati, Ohio, reduction of base salary or
bonus percentage, material breach of our obligations, or removal from or failure
to be elected to the board of directors), or his employment terminates upon the
expiration of any two-year employment term as a result of our notice to him of
non-renewal of the employment term or his employment terminates due to death or
disability, he will be entitled to the following severance and benefits in
addition to any then-accrued and unpaid compensation and benefits from
us:  (i) continuation of base salary, payable monthly, for 24 months
following termination, (ii) continuation of health, dental and vision benefits
for 24 months with premiums charged to him at active employee rates, (iii) in
the case of any such termination occurring after the sixth complete month of the
fiscal year of termination, a bonus under the Executive Cash Bonus Plan for the
year of termination in an amount based on actual performance for the year
(provided all subjective individual performance measures will be deemed
satisfied), pro-rated for the fraction of the year during which he was employed,
and payable when annual bonuses are paid to other senior executives, (iv) all of
his time-based Restricted Share Units will vest in full and all of his
Performance Share Awards will vest pro rata (and treated as having been earned
at a target level of performance if the performance period is not then
completed) based on the ratio of the number of days employed from the date of
grant to the number of days constituting the vesting period.  In the
event of a Change of Control, all of his time-based Restricted Share Units will
vest in full and all of his Performance Share Awards will be treated as earned
at target (if the performance period is not then completed) and will vest in
full.  Change of Control is defined as any “person” becoming the
“beneficial owner,” directly or indirectly, of 20% or more of the total voting
power of all of our voting securities then outstanding and the acquisition of
such beneficial ownership was not pre-approved by at least a majority of our
directors; at any date the individuals who constituted our Board at the
beginning of the two-year period immediately preceding such date (together with
any new directors whose election by our Board, or whose nomination for election
by our stockholders, was approved by a vote of at least a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute at least a majority of the
directors then in office; or immediately after a transaction involving us, our
voting shares outstanding immediately prior to such transaction do not represent
more than 50% of the total voting power of our voting securities or surviving or
acquiring entity or any parent thereof outstanding immediately after such
transaction.  All of the foregoing payments are subject to downward
adjustment to avoid the application of certain excise taxes.
  68
 In
connection with his employment agreement, Mr. Straus also entered into a
Confidentiality, Inventions and Non-competition Agreement with us that includes,
among other provisions, an agreement not to compete with us in the United States
or in foreign countries where we market our products or services
for a period of one year after his termination of employment.
  Other
Named Executives
  Effective
June 26, 2008, we entered into agreements with each of Messrs. Thomas,
Celebrezze, Jones and Brenner.  The principal terms of the agreements
are as follows:
  ●
              The
      executive’s employment will be for a one year term that will be
      automatically renewed for successive one year periods, unless either we or
      he provides written notice to the other party not to so renew at least 90
      days prior to December 31 of each year.●
              The
      executive may terminate the Agreement if (A) we have breached any material
      provision of the agreement; (B) there is a material diminution in the
      executive’s authority, duties or responsibilities; (C) there is a change
      of more than 35 miles in the executive’s workplace; or (D) a successor or
      assign (whether direct or indirect, by purchase, merger, consolidation or
      otherwise) to all or substantially all of our business and/or assets fails
      to assume all of our obligations under the Agreement; in each case after
      notice and failure to cure.  We may terminate the employment if
      (i) the executive has breached any material provision and within 30 days
      after notice thereof, the executive fails to cure such breach; or (ii) the
      executive at any time refuses or fails to perform, or misperforms, any of
      his obligations under or in connection with the Agreement in a manner of
      material importance to us and within 30 days after notice the executive
      fails to cure such action or inaction; or (iii) a court determines that
      the executive has committed a fraud or criminal act in connection with his
      employment that materially affects us.●
              If
      the executive’s employment is terminated by us for any reason other than
      pursuant to clauses (i) through (iii) above, or by the executive pursuant
      to clauses (A), (B), (C) or (D) above, or we give notice of non-renewal as
      described above, the executive shall be entitled to the following
      severance and benefits: (i) continuation of base salary and benefits for
      12 months, (ii) in the case of any such termination occurring after the
      sixth complete month of the fiscal year of termination, a bonus under our
      Executive Cash Bonus Plan for the year of termination in an amount based
      on actual performance for the year (provided, all subjective individual
      performance measures will be deemed satisfied), pro-rated for the fraction
      of the year during which the Employee was employed, and payable when
      annual bonuses are paid to other senior executives, (iii) all of the
      executive’s Options and Time-Based Restricted Share Awards will vest in
      full, (iv) the executive will be issued shares under outstanding
      Performance-Based Restricted Share Awards based on the actual level of
      achievement of the performance criteria for the applicable performance
      period applicable to the Awards, pro-rated to reflect the number of days
      from the start of the applicable performance period to the date the
      executive ceases to be employed by us divided by the total number of days
      in the applicable performance period, any such shares to be issued to the
      executive at the same time as shares are issued to other senior executive
      officers; and (v) specified accrual
obligations.
   69
  ●
              In
      the event of a Change in Control (as defined under our 2006 Stock
      Incentive Plan) all of the executive’s Options and Time-Based Restricted
      Share Awards will vest in full and all of the executive’s
      Performance-Based Restricted Share Awards will be treated as earned at
      target (if the performance period is not then completed) and the shares
      subject thereto will be issued to the executive within 10 days of such
      Change in Control.   ●
              Each
      executive entered into a one year Confidentiality, Inventions and
      Non-competition Agreement in connection with these
    agreements.
    Upon the
promotion of Michael J. Celebrezze as our Senior Vice President of Finance,
Chief Financial Officer and Treasurer on December 1, 2008, we amended his
agreement to reflect an increase of his base salary from $205,000 to
$260,000.
  Mr.
Brenner’s offer letter also provided that if we were to terminate his employment
for any reason other than cause, we would pay 12 months of base salary over a
twelve-month period and would maintain his benefits, in exchange for continued
adherence with Confidentiality, Inventions and Non-competition
Agreements.  We terminated Mr. Brenner’s employment on July 31,
2008.  The actual payment to Mr. Brenner after his termination through
December 31, 2008 was $106,250 in severance and $4,085 in health and welfare
benefits.  He is entitled to receive $148,750 in severance and
approximately $5,719 in health and welfare benefits through July 31,
2009
  Upon his
resignation, Mr. Buckey was not entitled to any post-employment
compensation.
  Other
Arrangements
  Our Stock
Incentive Plans contain change of control provisions that provide that under
certain conditions all unvested stock options and grants become fully vested
immediately.
 
 The
following table summarizes potential post-employment compensation to Messrs.
Straus, Celebrezze, Thomas and Jones for any reason other than involuntary
termination with cause (in which case no payments would be made) based on an
assumption that a triggering event took place on December 31, 2008 and using the
$4.11 per share closing price for the common stock on that date:
  Mr. Straus (1)
                  
                  
                  Mr. Celebrezze (2)
                  
                  
                  Mr. Thomas (2)
                  
                  
                  Mr. Jones (2)CompensationSeverance
                  
                  $
                  760,000
                  
                  
                  $
                  260,000
                  
                  
                  $
                  275,000
                  
                  
                  $
                  214,900Non
      equity Incentive Plan Payments (3)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Time-Based
      Restricted Stock (4)
                  
                  
                  19,243
                  
                  
                  
                  682
                  
                  
                  
                  -
                  
                  
                  
                  -Performance-Based
      Restricted Stock (3)
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Benefits
      and Perquisites
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Health
      and Welfare Benefits
                  
                  
                  19,608
                  
                  
                  
                  9,804
                  
                  
                  
                  9,804
                  
                  
                  
                  6,834Total
      compensation
                  
                  $
                  798,851
                  
                  
                  $
                  270,486
                  
                  
                  $
                  284,804
                  
                  
                  $
                  221,734
 
 
 (1)
              Mr.
      Straus has an employment agreement for two years of pay and health
      benefits.
  (2)
              Messrs.
      Celebrezze, Thomas and Jones have employment agreements for one year of
      pay and health benefits.
   70
  (3)
              Assumes
      payment under incentive compensation plans for 2008 performance, which is
      not expected to occur.
  (4)
              Only
      one grant of time-based restricted stock shares is unvested for each of
      these individuals.  Their agreements call for immediate vesting
      of all unvested shares.  As of December 31, 2008, all options
      granted these executives had a strike price of $14.28, which was higher
      than the $4.11 market price.  Therefore, we have determined
      their values as of that date to be
$0.
 
 DIRECTOR
COMPENSATION
  Non-employee
directors receive an annual fee of $40,000, paid one-half in cash and one-half
in shares of unrestricted Common Stock. Payments are made quarterly in arrears,
pro-rated from the time that an individual first becomes a
director.  In addition, each non-employee director receives a
Restricted Share Unit award having a value of $75,000, granted at the close of
business on the date of our Annual Meeting of Stockholders and pro-rated based upon the date upon which an
individual first became a director.  These Restricted Share Units vest
over a two-year period, one half on the first anniversary of the date of issue
and the remainder on the second anniversary of the date of issue, contingent on
the individual remaining a non-employee director on those dates.  The
chairman of the Audit Committee receives an annual cash payment of $10,000 and
the Chairs of the Compensation Committee and Nominating and Governance Committee
receive an annual cash payment of $5,000 each, payable quarterly. Finally, upon
first becoming a non-employee Director, an individual receives a grant of 1,000
shares of Restricted Share Units which vests over a two-year period. In addition
to the compensation to non-employee directors listed above, in
2008,  Mr. Woods received an annualized fee of $125,000 paid quarterly
in cash for his board service as non-executive Chairman of the Board. At
the recommendation of the Nominating and Governance Committee, the board of
directors determined there would be no change to the compensation structure
in 2009.
  Steven C.
Straus, who was a director during 2008, did not receive any additional
compensation for serving on the board of directors.
  Name
                            
                            Fees
      Earned
                              or
      Paid in
                              Cash ($) (1)
                            
                            
                            Stock Awards
                              ($) (2)(3)
                            
                            
                            Option
                              Awards
                              ($)
                            
                            
                            All
      Other
                              Compensation
                              ($)
                            
                            
                            Total
      ($)E.
      Anthony Woods Chairman of the Board
                            
                            $
                            145,000
                            
                            
                            $
                            98,323
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            243,323William
      F. Bahl
                            
                            $
                            25,000
                            
                            
                            $
                            98,323
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            123,323John
      H. Gutfreund
                            
                            $
                            23,750
                            
                            
                            $
                            98,323
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            122,073John
      C. Hassan
                            
                            $
                            30,000
                            
                            
                            $
                            98,323
                            
                            
                            $
                            0
                            
                            
                            $
                            0
                            
                            
                            $
                            128,323
 
 
 (1)
              Mr.
      Woods received compensation of $125,000 in cash during 2008 for his
      services as nonexecutive Chairman of the
Board.
 
 (2)
              The
      equity compensation expense to be recorded in the 2008 financial
      statements for stock awards made to the directors during 2008 is shown in
      this column.
 
 (3)
              The
      grant date of fair value as measured by FAS 123(R) for awards made to
      directors in 2008 are as follows:
  71
 
 3/31/2008
                    
                    
                    5/12/2008
                    
                    
                    6/30/2008
                    
                    
                    9/30/2008
                    
                    
                    12/31/2008E.
      Anthony Woods
                    
                    $
                    5,000
                    
                    
                    $
                    74,997
                    
                    
                    $
                    4,999
                    
                    
                    $
                    5,002
                    
                    
                    $
                    5,002William
      F. Bahl
                    
                    $
                    5,000
                    
                    
                    $
                    74,997
                    
                    
                    $
                    4,999
                    
                    
                    $
                    5,002
                    
                    
                    $
                    5,002John
      H. Gutfreund
                    
                    $
                    5,000
                    
                    
                    $
                    74,997
                    
                    
                    $
                    4,999
                    
                    
                    $
                    5,002
                    
                    
                    $
                    5,002John
      C. Hassan
                    
                    $
                    5,000
                    
                    
                    $
                    74,997
                    
                    
                    $
                    4,999
                    
                    
                    $
                    5,002
                    
                    
                    $
                    5,002
  The
aggregate number of stock awards and stock options outstanding at December 31,
2008 was:
  Stock
      Awards
                      
                      
                      Options
                      
                      
                      TotalE.
      Anthony Woods
                      
                      
                      8,722
                      
                      
                      
                      33,713
                      
                      
                      
                      42,435William
      F. Bahl
                      
                      
                      8,722
                      
                      
                      
                      28,857
                      
                      
                      
                      37,579John
      H. Gutfreund
                      
                      
                      8,722
                      
                      
                      
                      2,344
                      
                      
                      
                      11,066John
      C. Hassan
                      
                      
                      8,722
                      
                      
                      
                      9,376
                      
                      
                      
                      18,098




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







SECURITY
OWNERSHIP
 OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
  The
following table and notes set forth certain information with respect to the
beneficial ownership of common stock, our only voting security, as of March 6,
2009, by (1) each person who is known by us to be the beneficial owner of more
than 5% of our outstanding common stock, (2) each director and named executive
officer, and (3) all directors and executive officers as a group, based upon
18,552,985 shares outstanding as of that date.
 
 SEC rules
provide that shares of common stock which an individual or group has a right to
acquire within 60 days of March 6, 2009 are deemed to be outstanding for
purposes of computing the percentage ownership of that individual or group, but
are not deemed to be outstanding for the purpose of computing the percentage
ownership of any other person shown on the table.
   72
   Name
      and Address of Beneficial Owner
                                                                  
                                                                  Natureof
                                                                    Ownership
      (1)
                                                                  Percent
                                                                    of
      ClassStephen
      N. Joffe, Craig P.R. Joffe and Alan H. Buckey
                                                                  
                                                                  2,115,320
                                                                  (2)
                                                                  
                                                                  11.4%c/o
      Steven Wolosky, Esq.Olshan
      Grundman Frome Rosenzweig & Wolosky LLPPark
      Avenue TowerPark
      East 55th StreetNew
      York, NY  10022Edwardo
      Baviera Sabater, Julio Baviera Sabater,
                                                                  
                                                                  1,400,484
                                                                  (3)
                                                                  
                                                                  7.5%Inversiones
      Telesan BV and Investment Ballo Holding BVPaseo
      de la Castellano 20P28046
      Madrid, SpainHWP
      Capital Partners II L.P.
                                                                  
                                                                  1,303,882
                                                                  (4)
                                                                  
                                                                  7.0%300
      Cresent Court, Suite 1700Dallas,
      TX  75201Barclays
      Global Investors, NA
                                                                  
                                                                  1,275,594
                                                                  (5)
                                                                  
                                                                  6.9%400
      Howard StreetSan
      Francisco, CA  94105Royce
      & Associates, LLC
                                                                  
                                                                  1,261,066
                                                                  (6)
                                                                  
                                                                  6.8%1414
      Avenue of the AmericasNew
      York, NY  10019Janus
      Capital Management LLC
                                                                  
                                                                  1,095,000
                                                                  (7)
                                                                  
                                                                  5.8%Perkins
      Small Cap Value Fund151
      Detroit StreetDenver,
      CO  80206E.
      Anthony Woods, Chairman of the Board
                                                                  
                                                                  79,276
                                                                  (8)
                                                                  
                                                                  *Steven
      C. Straus, Chief Executive Officer, Director
                                                                  
                                                                  23,853
                                                                  (9)
                                                                  
                                                                  *William
      H. Bahl, Director
                                                                  
                                                                  50,923
                                                                  (10)
                                                                  
                                                                  *John
      H. Gutfreund, Director
                                                                  
                                                                  19,110
                                                                  (11)
                                                                  
                                                                  *John
      C. Hassan, Director
                                                                  
                                                                  31,911
                                                                  (12)
                                                                  
                                                                  *Edgar
      F. Heizer III, Director
                                                                  
                                                                  -
                                                                  
                                                                  
                                                                  *Michael
      J. Celebrezze, Senior Vice President of Finance,
                                                                  
                                                                  9,261
                                                                  (13)
                                                                  
                                                                  *Chief
      Financial Officer and TreasurerDavid
      L. Thomas, Senior Vice President/Operations
                                                                  
                                                                  5,333
                                                                  (14)
                                                                  
                                                                  *Stephen
      M. Jones, Senior Vice President of Human Resources
                                                                  
                                                                  3,677
                                                                  (15)
                                                                  
                                                                  *All
      directors and executive officers as a group (9 persons)
                                                                  
                                                                  223,344
                                                                  (16)
                                                                  
                                                                  1.2%*
      Less than 1%
  73
  (1)
              Except
      as otherwise noted, the persons named in the table have sole voting and
      dispositive powers with respect to all shares of Common Stock shown as
      beneficially owned by them, subject to community property laws, where
      applicable.
 
 (2)
              This
      information is based on a Schedule 13D filed with the SEC on November 5,
      2008, as amended, in which Messrs. S. Joffe, C. Joffe and Buckey reported
      having shared voting and dispositive powers over 2,115,320 shares of
      Common Stock.  According to this filing, Messrs. S. Joffe, C.
      Joffe and Buckey beneficially own 1,171,952, 865,468 and 77,900 shares,
      respectively, and Jason T. Mogel, Robert Probst, Robert H. Weisman and
      Edward J. VonderBrink do not directly own any
  shares.
 
 (3)
              This
      information is based on a Schedule 13D/A filed with the SEC on February
      23, 2009.  According to this filing, Sr. Eduardo Baviera
      Sabaeter and Inversiiones Telesan BV each have sole voting and dispositive
      power over 765,786 shares of common stock and Sr. Julio Baviera Sabater
      and Investment Ballo Holding BV each have sole voting and dispositive
      power over 634,698 shares of Common
Stock.
 
 (4)
              This
      information is based on a Schedule 13G/A filed with the SEC on December
      22, 2006.  According to this filing, HWP Capital Partners, HWP
      II, L.P., HWII, LLC and Robert B. Haas have sole voting and dispositive
      power over these shares.
 
 (5)
              This
      information is based on a Schedule 13G filed with the SEC on February 5,
      2009 by Barclays Global Investors, NA and certain affiliates
      (“Barclays”).  According to this filing, Barclays has sole
      voting power over 1,054,889 shares of common stock and sole dispositive
      power over 1,275,594 shares of common
stock.
 
 (6)
              This
      information is based on a Schedule 13G filed with the SEC by Royce &
      Associates LLC, a registered investment advisor, on January 26, 2009, in
      which it reported having sole voting and dispositive power over these
      shares.
 
 (7)
              This
      information is based on a Schedule 13G filed with the SEC on February 17,
      2009 by Janus Capital Management LLC, a registered investment advisor, in
      which it reported having shared voting and dispositive power over
      1,095,000 shares of common stock.  According to this filing,
      Janus Capital Management has a direct 78.4% ownership of Perkins
      Investment Management LLC, which reports having sole voting and
      dispositive power over 1,080,000 shares of common
  stock.
 
 (8)
              Includes
      for Mr. Woods 33,713 shares issuable upon the exercise of certain
      unexercised stock options.
  (9)
              Includes
      for Mr. Straus 7,353 shares issuable upon the exercise of stock optiosn
      that will best within 60 days.
  74
  (10)
              Includes
      for Mr. Bahl 28,857 shares issuable upon the exercise of certain
      unexercised stock options.
 
 (11)
              Includes
      for Mr. Gutfreund 2,344 shares issuable upon the exercise of certain
      unexercisedstock options.
 
 (12)
                Includes
      for Mr. Hassan 9,376 shares issuable upon the exercise of certain
      unexercised stock
      options. Of the shares owned by Mr. Hassan, 13,626 are held in a
      margin account.
 
 (13)
              Includes
      for Mr. Celebrezze 3,677 shares issuable upon the exercise of stock
      options thatwill vest within 60
days.
 
 (14)
              Includes
      for Mr. Thomas 4,333 shares issuable upon the exercise of stock options
      thatwill vest within 60 days.
 
 (15)
              Includes
      for Mr. Jones 3,677 shares issuable upon the exercise of stock options
      that willvest within 60 days.
 
 (16)
              Includes
      160,736 shares issuable upon the exercise of certain unexercised stock
      optionsheld by such persons and stock options that will vest within 60
      days.


The
information called for by Item 201(d) of Regulation S-K is presented below as of
December 31, 2008.


Equity
Compensation Plan Information




Plan Category
                          
                          Number of securities to
                            be issued upon exercise
                            of outstanding awards,
                            options, warrants and
                            rights
                            A
                          
                          
                          Weighted-average
                            exercise price 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
                          
                          
                          576,589
                          
                          
                          $
                          19.13
                          
                          
                          
                          1,475,857Equity
      compensation plans not approved by security holders
                          
                          
                          -
                          
                          
                          
                          -Total
                          
                          
                          576,589
                          
                          
                          $
                          19.13
                          
                          
                          
                          1,475,857






75




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





Certain
Transactions
   Related
persons include our executive officers, directors, director nominees, 5% or more
beneficial owners of our common stock and immediate family members of these
persons. The Audit Committee is responsible for reviewing and approving or
ratifying related person transactions that would require approval under the
proxy rules or which would affect independence under our principles of corporate
governance. If an Audit Committee member or his or her family member is involved
in a related person transaction, the member will not participate in the approval
or ratification of the transaction. In instances where it is not practicable or
desirable to wait until the next meeting of the Audit Committee for review of a
related person transaction, the Chair of the Audit Committee (or, if the Chair
or his or her family member is involved in the related person transaction, any
other member of the Audit Committee) has delegated authority to act between
Audit Committee meetings for these purposes. A report of any action taken
pursuant to delegated authority must be made at the next Audit Committee
meeting.
  For the
Audit Committee to approve a related person transaction, it must be satisfied
that it has been fully informed of the interests, relationships and actual or
potential conflicts present in the transaction and must believe that the
transaction is fair to us. The Audit Committee also must believe, if necessary,
that we have developed a plan to manage any actual or potential conflicts of
interest. The Audit Committee may ratify a related person transaction that did
not receive pre-approval if it determines that there is a compelling business or
legal reason for us to continue with the transaction, the transaction is fair to
us and the failure to comply with the policy’s pre-approval requirements was not
due to fraud or deceit.
  During
2008, there were no transactions or series of transactions involving us and any
of its executive officers, directors, holders of more than 5% of our common
stock or any immediate family member of any of the foregoing persons that are
required to be disclosed pursuant to Item 404 of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
  Any
situation that might be construed as disqualifying a director as “independent”
will be brought to the attention of the Nominating and Governance Committee
which will make a recommendation to the board of directors regarding the
director’s continued service on board Committees.
  Director
Independence
  The board
of directors has affirmatively determined that Messrs. Bahl, Gutfreund, Hassan,
Heizer and Woods are “independent” directors as defined in the Marketplace Rules
of the NASDAQ Stock Market.  In making this determination, the board
noted that Mr. Heizer had been a consultant to MSO Medical at the time when Mr.
Straus was an officer of that company and determined that this relationship did
not affect Mr. Heizer’s independence.




76





Item
14.  Principal Accountant Fees and Services.




Information
on fees billed by Ernst & Young for services during 2008 and 2007 is
provided below.
  Audit
Fees.   Audit fees totaled $469,447 and $431,965 in 2008 and 2007,
respectively. Audit fees include fees associated with the annual audit of our
consolidated financial statements and the effectiveness of our internal control
over financial reporting. Audit fees also include fees associated with reviews
of our quarterly reports on Forms 10-Q, the statutory audit requirement with
respect to our captive insurance company, and reviews of registration
statements.
 
 Audit Related
Fees.  We did not pay Ernst & Young any amounts in 2008 or
2007 for assurance or related services that are (1) reasonably related to the
performance of the audit or review of our financial statements and (2) not
reported under “Audit Fees” above.
  Tax Fees.
 We did not use Ernst & Young for any tax compliance, tax advice or tax
planning services in 2008 or 2007.
 
 All Other
Fees.  Ernst & Young did not provide any products or perform any
services for us in 2008 or 2007 other than the audit services described
above.
 
 Our Audit
Committee pre-approved the services provided and the fees charged by Ernst &
Young.







77


PART
IV





Item 15.  Exhibits
and 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
  ReportingReports
      of Independent Registered Public Accounting FirmConsolidated
      Balance Sheets as of December 31, 2008 and 2007Consolidated
      Statements of Operations for the years ended December 31, 2008, 2007, and
      2006Consolidated
      Statements of Cash Flows for the years ended December 31, 2008, 2007, and
      2006Consolidated
      Statements of Stockholders' Investment for years ended December 31, 2008,
      2007, and 2006Notes
      to Consolidated Financial
Statements
 
 (a)(2)
                List
      of SchedulesSchedule
      IIValuation and Qualifying Accounts and
      ReservesAll
      other financial statement schedules have been omitted because the required
      information is either inapplicable or presented in the consolidated
      financial statements.Schedule
      II   Valuation and Qualifying Accounts and
      Reserves




LCA-Vision
      Inc.For
      the years ended December 31, 2008, 2007 and 2006(in
      thousands)
  Description
                
                Balance atBeginning ofPeriod
                
                
                Charges toCost andExpenses
                
                
                Deductions
                
                
                Balance atEnd of PeriodYear
      ended December 31, 2008Allowance
      for doubtful accounts
                
                $
                5,117
                
                
                $
                5,355
                
                
                $
                7,345
                
                
                $
                3,127Insurance
      reserve
                
                
                8,493
                
                
                
                1,432
                
                
                
                436
                
                
                
                9,489Year
      ended Decemebr 31, 2007:Allowance
      for doubtful accounts
                
                $
                2,842
                
                
                $
                7,675
                
                
                $
                5,400
                
                
                $
                5,117Insurance
      reserves
                
                
                6,163
                
                
                
                2,662
                
                
                
                332
                
                
                
                8,493Year
      ended December 31, 2006Allowance
      for doubtful accounts
                
                $
                3,145
                
                
                $
                1,855
                
                
                $
                2,158
                
                
                $
                2,842Insurance
      reserves
                
                
                3,840
                
                
                
                2,530
                
                
                
                207
                
                
                
                6,163




78




(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)
                              
                              Bylaws,
      as amended effective as of December 31, 2008 (Exhibit 3(b)
      to Current Report on Form 8-K filed January 6,
    2009)*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)*4(a)
                              
                              Rights
      Agreement dated November 24, 2008 between the Registrant and Computershare
      Trust Company, N.A. (Exhibit 4.1 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)
                              
                              Employment
      Agreement of Alan H. Buckey (Exhibit 10.2 to the Registration Statement
      No.333-109034 on Form S-3, filed September 23, 2003)*10(f)
                              
                              Executive
      Cash Bonus Plan (as amended February 21, 2006) (Exhibit 10.1 to Current
      Report on Form 8-K filed February 24, 2006)*10(g)
                              
                              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(h)
                              
                              Form
      of Stock Option Agreement with outside directors (Exhibit 10.3 to Current
      Report on Form 8-K filed February 24, 2006)*10(i)
                              
                              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(j)
                              
                              LCA-Vision
      Inc. 2006 Stock Incentive Plan (definitive Proxy Statement for 2006 Annual
      Meeting of Stockholders, filed April 28, 2006)*10(k)
                              
                              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(l)
                              
                              Employment
      Agreement of Steven C. Straus (Exhibit 99.1 to Current Report on Form 8-K
      filed November 6, 2006)*10(m)
                              
                              Letter
      Agreement between the Registrant and David L. Thomas (Exhibit 99.2 to
      Current Report on Form 8-K filed March 24, 2008)*10(n)
                              
                              Amendment
      to Employment Agreement of Steven C. Straus (Exhibit 99.1 to Current
      Report on From 8-K filed May 2, 2008)*10(o)
                              
                              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(p)
                              
                              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,
    200821
                              
                              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 Executive
    Officer31.2
                              
                              Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32
                              
                              Section
      1350
Certifications
 
 *
Incorporated by reference.
 
 79
  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 13th day of March,
2009.
 
 LCA-Vision
      Inc.By:
                /s/ Steven C. StrausSteven
      C. Straus, Chief Executive
Officer
 
 POWER OF
ATTORNEY
 
 KNOW ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitutes and appoints each of Steven C. Straus 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, 2008, 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 13th day of March, 2009.
 
 /s/ Steven C. Straus
                
                Chief
      Executive OfficerSteven
      C. Straus
                
                (Principal
      Executive Officer)/s/ Michael J. Celebrezze
                
                Senior
      Vice President/Finance, Chief  Financial Officer
      &Michael
      J. Celebrezze
                
                Treasurer(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
  80