**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, 2007





o
            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 o 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 o 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
o


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


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


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


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




The
      aggregate market value of the Common Stock held by non-affiliates of the
      registrant as of June 30, 2007, the last business day of the registrant’s most
      recently completed second quarter, was approximately $963,814,000 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 February
      14,
      2008 was 18,483,883.




DOCUMENTS
      INCORPORATED BY REFERENCE





Portions
      of the registrant’s definitive Proxy Statement for its Annual Meeting of
      Stockholders to be held May 12, 2008 are incorporated by reference in Items
      10,
      11, 12, 13 and 14 of Part III of this Report.








**LCA-VISION
      INC.**





**FISCAL
      YEAR 2007 FORM 10-K ANNUAL REPORT**





**TABLE
      OF CONTENTS**




Page**Part
                  I.**Item
                  1.
              Business
              3Item
                  1A.
              Risk
                  Factors
              9Item
                  1B.
              Unresolved
                  Staff Comments
              14Item
                  2.
              Properties
              14Item
                  3.
              Legal
                  Proceedings
              141tem
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              15**Part
                  II.**Item
                  5.
              Market
                  for Registrant's Common Equity, Related Stockholder Matters and
                  Issuer
                  Purchases of Equity Securities
              15Item
                  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
              24Item
                  8.
              Financial
                  Statements and Supplementary Data
              24Item
                  9.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              46Item
                  9A.
              Controls
                  and Procedures
              46Item
                  9B.
              Other
                  Information
              46**Part
                  III.**Item
                  10.
              Directors,
                  Executive Officers and Corporate Governance
              47Item
                  11.
              Executive
                  Compensation
              47Item
                  12.
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              47Item
                  13.
              Certain
                  Relationships and Related Transactions, and Director
                  Independence
              47Item
                  14.
              Principal
                  Accountant Fees and Services
              47**Part
                  IV.**Item
                  15.
              Exhibits
                  and Financial Statement Schedules
              48Signatures
              50




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**





LCA-Vision
      Inc. (the Company or LCA-Vision) is a leading provider of fixed-site laser
      vision correction services at our Lasik *Plus* 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.
      Our vision centers are supported by independent, board-certified
      ophthalmologists and credentialed optometrists, as well as other health care
      professionals. The ophthalmologists perform the laser vision correction
      procedures in our vision centers, and either ophthalmologists or optometrists
      conduct pre-procedure evaluations and post-operative follow-ups in-center.
      We
      have performed over 930,000 laser vision correction procedures in our vision
      centers in the United States and Canada since 1991. Most of our patients receive
      a procedure called LASIK, which we began performing in the United States in
      1997.





As
      of
      December 31, 2007, we operated 72 Lasik *Plus* fixed-site laser vision correction centers generally located in larger
      metropolitan markets in the United States. We also have a joint venture in
      Canada.





The
      Company derives all of its 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**




Laser
      vision correction procedures are designed 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, an assessment is made 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. A speculum is
      inserted to prevent blinking and topical anesthetic eye drops are applied.
      The
      patient reclines in a chair, 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. A series of patient follow-up visits is scheduled 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 four suppliers for fixed-site excimer lasers: Bausch & Lomb,
      Advanced Medical Optics, Alcon and Wavelight. We also utilize the IntraLase
      femtosecond laser supplied by Advanced Medical Optics in most of our vision
      centers.





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





*PRK
      and Surface Ablation* ***.*** PRK
      has
      been approved by the U.S. Food and Drug Administration (FDA) 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, a contact lens bandage is placed
      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
      procedures in the United States. In LASIK procedures, an automated microsurgical
      instrument called a microkeratome or a femtosecond laser is typically used
      to
      create a thin flap, which remains hinged to the eye. The corneal flap is then
      laid back and excimer laser pulses are applied to the exposed surface of the
      cornea to treat the eye according to the patient’s prescription. The corneal
      flap is then folded back to its original position and inspected to ensure that
      it remains secured in position by the natural suction of the cornea. Since
      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 and enjoying shorter
      recovery periods. 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
      170 million Americans, or approximately 50% 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 6.2
      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 1.4 million laser vision correction procedures performed
      in
      2007 **.** It
      is
      estimated that the potential market for laser vision correction procedures
      in
      the United States is approximately 120 million procedures, according to some
      industry reports on the U.S. refractive market. 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, November 2007





(e)
      =
      2008 data estimated




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
      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. Our call center personnel are trained
      to
      answer questions regarding procedures and generally have access both to a
      physician to address more difficult inquiries and to past patients who can
      relate procedure experience. Once in the vision center, potential patients
      can
      receive 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, our vision centers are designed 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.





*Opening
      and operating new laser vision correction centers.*  We
      plan
      to continue 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.





*Developing
      and implementing innovative direct marketing campaigns.*  Our
      marketing programs seek to reinforce the Lasik *Plus* brand
      name in addition to raising awareness concerning laser vision correction and
      promoting our vision centers and the experience of our independent
      ophthalmologists. In each market, we target a specific demographic group of
      potential patients through the use of print media, radio, internet, television
      and direct mail campaigns, among other strategies. In most advertisements,
      prospective patients are provided 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.





5




**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. Eye care services
      in the United States are delivered through 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. Industry sources estimate that such local providers represent
      over 50% 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. Among the laser vision correction providers, we believe we are
      the
      largest provider in terms of number of procedures performed in fixed-site vision
      centers in the United States based on total company 2007 volume.





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 11, 2008, we had approximately 784 employees, 695 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**





Not
      all
      of the names we use for our products and services have been registered with
      the
      United States Patent and Trademark Office. Where we use the “TM” (trademark)
      symbol, it is our intention 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.
      There are several companies - including Bausch & Lomb, Advanced Medical
      Optics, Alcon and Wavelight, the four suppliers we currently use - whose excimer
      laser systems have been approved by the FDA for commercial sale in the United
      States. We currently rely primarily on Bausch & Lomb, Advanced 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.





**Government** **Regulation**





Our
      operations are subject to extensive federal, state and local laws, rules and
      regulations affecting the healthcare industry and the delivery of healthcare.
      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, contractual
      arrangements with hospitals, surgery centers, ophthalmologists and optometrists,
      among others, are extensively regulated by state and federal laws,
      some of which may be applicable to our business operations.





6




Failure
      to comply with applicable FDA requirements could subject excimer or femtosecond
      laser manufacturers and us to 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, clearance or approvals could
      be withdrawn in some circumstances. Failure by us or our principal suppliers
      to
      comply with regulatory requirements, or any adverse regulatory action, could
      result in us being named as a party in ensuing litigation or in 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, the failure of Advanced Medical Optics, Bausch & Lomb, Alcon or
      Wavelight or any other manufacturers or suppliers that supply or may supply
      excimer lasers, diagnostic or other equipment or necessary services to us to
      comply with applicable federal, state, or foreign regulatory requirements,
      or
      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
      use
      of an excimer laser to treat both eyes on the same day (bilateral treatment)
      has
      not been approved by the FDA. 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, manufacturers are required 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.




*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.





7




*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 voluntarily settle 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.
      Violation of a state’s fee-splitting prohibition may result in civil or criminal
      fines, as well as loss of licensing privileges of
      the
      physician participating in such arrangements .
      Many
      states do not offer clear guidance on what relationships constitute
      fee-splitting, particularly in the context of providing management services
      for
      doctors. Although we have endeavored to structure our business operations in
      material compliance with these laws, state authorities could find that
      fee-splitting prohibitions apply to our business practices in
      their
      states. If any aspect of our operations were found to violate fee-splitting
      laws
      or regulations, this could
      have a material adverse effect on our business, financial condition and results
      of operations.





*Corporate
      practice of medicine and optometry*





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




·
            Employing
                eye care professionals


·
            Controlling
                clinical decision making


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





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





*Facility
      licensure and certificates of need*





State
      Departments of Health may require us to obtain licenses in the various states
      in
      which we have or acquire laser vision correction centers or other business
      operations. We believe that we have obtained the necessary material licensure
      in
      states where licensure is required and that we are not required to obtain
      licenses in other states. However, not all of the regulations governing the
      need
      for licensure are clear and there is 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.





8




*Healthcare
      reform*





Healthcare
      reform is considered by many in the United States 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**





The
      Company’s websites are *www.lasikplus.com* and *www.lca-vision.com* .
      There,
      the Company makes available, free of charge, its 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. All such reports will be
      available as soon as reasonably practicable after they are filed with or
      furnished to the Securities and Exchange Commission (SEC). 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 the Company’s 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 the Company files 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**





*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 have experienced in prior fiscal periods and believe we
      are
      experiencing now, 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 may result 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.*





Following
      the events of September 11, 2001, we experienced a marked drop-off in business.
      As oil prices have increased and the economy has recently slowed, we also have
      experienced 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 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 declined, resulting in an increased cost of
      marketing per procedure, a decline in our revenue and earnings growth, and
      an
      erosion 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.*





Our
      revenues are generated by 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
      to consistently 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.





10




*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.*




As
      a
      result of industry, competitive or clinical factors, among others, we may be
      required to introduce alternate ophthalmic laser technology or other surgical
      or
      non-surgical methods for correcting refractive vision disorders than those
      that
      we currently use in our laser vision correction centers. Such alternative
      technologies could include various intraocular lens technologies or an increase
      in the proportion of custom wavefront treatments we perform, among others.
      Introducing such technology or such changes 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. Such changes could include higher costs to us
      or
      higher prices for our patients. 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 expanded the role and mix of financing as a percentage of our revenues.
      As
      a result, our direct financing program has grown, increasing our 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, 2007,
      we
      had $22,385,000 in gross patient receivables, compared to $16,285,000 as of
      December 31, 2006. 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 increased in 2007 to $7.7 million, up from $1.9 million in 2006, due
      to
      an increase in expected uncollectible accounts.





11





*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 slightly 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


·
            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.*





Concerns
      have been raised with respect to the predictability and stability of results
      and
      potential complications or side effects of laser vision correction. Laser vision
      correction has been provided 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. Several significant verdicts have been
      awarded 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 under correction


·
            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 four suppliers - Bausch & Lomb, Advanced Medical Optics,
      Alcon, and Wavelight - 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.





12





We
      currently rely primarily on Bausch & Lomb, Advanced Medical Optics and
      McKesson to provide us with patient interface kits and microkeratomes, 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 microkeratomes and microkeratome blades,
      and,
      if alternate or additional suppliers were needed, there can be no assurance
      that
      microkeratomes and microkeratome blades 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. As the percentage of our patients
      who
      choose to obtain financing from such unaffiliated finance company grows, so
      too
      does our reliance on such finance company. There can be no assurance that
      financing services will be available in such structures or at such interest
      rates or costs as we or our patients may require. Any reduction in available
      financing could limit our ability to maintain or increase the volume of
      procedures that we perform, which could result in a decrease in our revenues
      and
      profitability.





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





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




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


·
            Anti-kickback
                statutes in some states


·
            Fee-splitting
                laws in some states


·
            Corporate
                practice of medicine restrictions in some
                states


·
            Physician
                self-referral laws in some states


·
            Anti-fraud
                provisions in some states


·
            Facility
                license requirements and certificates of need in some
                states


·
            Conflict
                of interest regulations in some
                states


·
            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 and various state boards of medicine and optometry.
      We are subject to a 2003 FTC 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. We cannot be certain that this order to which
      we agreed, or any future action by the Federal Trade Commission, 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 primarily rely and intend to continue
      to
      primarily rely on the independent ophthalmologists’ professional liability
      insurance policies and manufacturers’ insurance policies for product liability
      coverage, 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.





13




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
      established a captive insurance company and, if significant claims are paid,
      it
      could affect our profitability and our financial condition.*





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





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





Not
      all
      of the names we use for our products and services have been registered 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.





**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 2,600 to 6,900 square feet with lease expiration dates ranging
      from June 30, 2008 to July 31, 2017.





**Item
      3. Legal Proceedings** **.**





On
      September 13, 2007, and October 1, 2007, two complaints were filed against
      LCA-Vision and certain of its 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 shareholders who purchased our
      common stock between February 12, 2007, and July 30, 2007.  On November 8,
      2007, an additional complaint was filed against LCA-Vision and certain of its
      current and former directors and officers in the United States District Court
      for the Southern District of Ohio (Western Division).  This action was
      filed purportedly on behalf of a class of shareholders who purchased our common
      stock between February 12, 2007, and November 2, 2007.  The plaintiffs in
      each complaint assert claims under Sections 10(b) and 20(a) of the Securities
      Exchange Act of 1934, alleging that certain of LCA-Vision's public disclosures
      regarding its financial performance and prospects were false or misleading.
      The
      plaintiffs seek to recover damages on behalf of the class members.  These
      cases have been consolidated into one action; the consolidated complaint is
      due
      on March 11, 2008.  LCA-Vision is in the process of evaluating these
      claims.  We strongly believe that these actions lack merit, and we intend
      to defend against the claims vigorously. However, 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 current and former officers and directors of
      LCA-Vision, derivatively on behalf of the Company.  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.  LCA-Vision 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 to be filed in
      the
      consolidated class action, discussed above. LCA-Vision is 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.





14




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.
      Due
      to substantial increases in insurance premiums, effective as of December 18,
      2002, we established a captive insurance company to provide coverage for claims
      brought against us after December 17, 2002. The Company uses the captive
      insurance company for both primary insurance and excess liability coverage.
      A
      number of claims are now pending with our captive insurance company. Since
      the
      inception of the captive insurance company in 2002, total claim and expense
      payments of $870,000 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.





**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 20,000 beneficial holders of our common stock
      as of January 28, 2008 **.**





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.





**2007**
            
            **2006****High**
            
            **Low**
            
            **High**
            
            **Low**First
                Quarter
            
            $
            47.54
            
            $
            33.27
            
            $
            56.68
            
            $
            40.30Second
                Quarter
            
            
            49.32
            
            
            40.74
            
            
            58.25
            
            
            46.00Third
                Quarter
            
            
            50.69
            
            
            28.91
            
            
            54.57
            
            
            37.58Fourth
                Quarter
            
            
            30.76
            
            
            15.31
            
            
            37.43
            
            
            29.90




The
      Company has consistently paid a quarterly dividend since the third quarter
      of
      2004. While the Company intends to pay regular quarterly dividends for the
      foreseeable future, each dividend is reviewed quarterly and requires declaration
      by the Board of Directors. The following table sets forth the quarterly cash
      dividends paid for 2007 and 2006.





**2007**
            
            **2006**First
                Quarter
            
            $
            0.18
            
            $
            0.12Second
                Quarter
            
            
            0.18
            
            
            0.12Third
                Quarter
            
            
            0.18
            
            
            0.12Fourth
                Quarter
            
            
            0.18
            
            
            0.18$
            0.72
            
            $
            0.54





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




15


The
      following table provides information regarding the Company’s purchases of its
      common stock during the quarter ended December 31, 2007.





**Issuer
      Purchases of Equity Securities**





**Period**
            
            **Total**
              **Number
                of**
              **Shares**
              **Purchased**
            
            **Average**
              **Price
                Paid per**
              **Share**
            
            **Total
                Number of**
              **Shares
                Purchased as**
              **Part
                of Publicly**
              **Announced
                Plans or**
              **Programs**
            
            **Maximum
                Number**
              **of
                Dollars that May**
              **Yet
                be Purchased**
              **under
                the Plans or**
              **Programs**10/1/07
                - 10/31/07
            
            
            -
            
            $
            -
            
            
            -
            
            $
            50,000,00011/1/07
                - 11/30/07
            
            
            588,408
            
            
            16.99
            
            
            588,408
            
            
            40,000,01112/1/07
                - 12/31/07
            
            
            -
            
            
            -
            
            
            -
            
            
            40,000,011Total
            
            
            588,408
            
            
            16.99
            
            
            588,408
            
            
            40,000,011





On
      August
      21, 2007, our Board of Directors authorized a new share repurchase plan under
      which the Company is authorized to purchase up to $50 million of its common
      stock. Through December 31, 2007, the Company had repurchased 588,408 shares
      of
      its common stock at an average price of $16.99 per share, for a total cost
      of
      approximately $10,000,000.




16


**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,****2007**
              
              **2006**
              
              **2005**
              
              **2004**
              
              **2003****Consolidated
                  Statements of Operations Data:**Revenues:Laser
                  refractive surgery
              
              $
              292,635
              
              $
              238,925
              
              $
              176,874
              
              $
              120,364
              
              $
              78,835Operating
                  costs and expenses:Medical
                  professional and license fees
              
              
              49,312
              
              
              42,954
              
              
              33,499
              
              
              23,599
              
              
              15,520Direct
                  costs of services
              
              
              97,423
              
              
              77,612
              
              
              54,952
              
              
              40,842
              
              
              31,507General
                  and administrative expenses
              
              
              22,657
              
              
              21,156
              
              
              14,021
              
              
              10,292
              
              
              8,043Marketing
                  and advertising
              
              
              66,469
              
              
              47,971
              
              
              31,813
              
              
              20,468
              
              
              12,566Depreciation
              
              
              11,209
              
              
              8,453
              
              
              7,636
              
              
              7,045
              
              
              6,377Total
                  expenses
              
              
              247,070
              
              
              198,146
              
              
              141,921
              
              
              102,246
              
              
              74,013Operating
                  income
              
              
              45,565
              
              
              40,779
              
              
              34,953
              
              
              18,118
              
              
              4,822Equity
                  in earnings from unconsolidated businesses
              
              
              814
              
              
              746
              
              
              328
              
              
              369
              
              
              317Net
                  investment income
              
              
              5,953
              
              
              6,182
              
              
              3,929
              
              
              2,137
              
              
              522Other
                  expense, net
              
              
              (607
              )
              
              (27
              )
              
              (397
              )
              
              (306
              )
              
              (130
              )Income
                  before taxes on income
              
              
              51,725
              
              
              47,680
              
              
              38,813
              
              
              20,318
              
              
              5,531Income
                  tax expense (benefit)
              
              
              19,221
              
              
              19,310
              
              
              15,832
              
              
              (11,553
              )
              
              591Net
                  income
              
              $
              32,504
              
              $
              28,370
              
              $
              22,981
              
              $
              31,871
              
              $
              4,940Net
                  income per common shareBasic
              
              $
              1.66
              
              $
              1.37
              
              $
              1.12
              
              $
              1.59
              
              $
              0.30Diluted
              
              
              1.64
              
              
              1.34
              
              
              1.07
              
              
              1.53
              
              
              0.30Cash
                  dividends per common share
              
              $
              0.72
              
              $
              0.54
              
              $
              0.36
              
              $
              0.13
              
              $
              -Weighted
                  average shares outstandingBasic
              
              
              19,572
              
              
              20,694
              
              
              20,500
              
              
              20,099
              
              
              16,391Diluted
              
              
              19,858
              
              
              21,235
              
              
              21,492
              
              
              20,814
              
              
              16,616**Selected
                  Operating Data**Laser
                  vision correction procedures
              
              
              192,204
              
              
              185,268
              
              
              142,000
              
              
              95,835
              
              
              65,485





**At December 31,****2007**
            
            **2006**
            
            **2005**
            
            **2004**
            
            **2003****Balance
                Sheet Data**Cash,
                cash equivalents and and short-term investments
            
            $
            60,148
            
            $
            95,232
            
            $
            108,061
            
            $
            84,384
            
            $
            64,408Working
                capital
            
            
            48,032
            
            
            95,012
            
            
            112,091
            
            
            86,954
            
            
            56,076Total
                assets
            
            
            179,647
            
            
            190,159
            
            
            181,259
            
            
            137,131
            
            
            90,993Capital
                lease obligations maturing in one year
            
            
            3,941
            
            
            3,360
            
            
            2,122
            
            
            542
            
            
            -Capital
                lease obligations, excluding current portion
            
            
            2,012
            
            
            2,431
            
            
            1,434
            
            
            376
            
            
            -Retaining
                earnings (deficit)
            
            
            34,597
            
            
            16,320
            
            
            (919
            )
            
            (1,493
            )
            
            (45,672
            )Total
                stockholders' investment
            
            
            93,599
            
            
            109,116
            
            
            126,703
            
            
            103,076
            
            
            70,200




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. Our revenues are impacted by a number of factors,
      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


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


·
            New
                vision center openings and our ability to increase procedure volume
                at
                existing vision centers


·
            The
                availability of patient financing


·
            The
                continued growth and increased acceptance of laser vision
                correction


·
            The
                effect of competition and discounting practices in our
                industry


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





We
      expect
      the U.S. economy, including its impact on consumer spending habits and our
      industry, to continue to be challenging throughout 2008, and we estimate that
      industry procedure volume could decline by more than 10%, which we expect will
      negatively affect our revenues. In response, during January 2008, we reduced
      our
      workforce throughout the United States by approximately 16% so that our staffing
      levels would be appropriate for expected procedure volume. Related expense
      of
      approximately $500,000 will be reflected in results for the first quarter of
      2008. We remain committed to selectively investing in our national expansion
      by
      opening vision centers in new markets, and relocating and renovating existing
      vision centers. We are leveraging consumer insights from extensive market
      research conducted over the past several months 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 Lasik *Plu* s
      vision
      centers.





We
      offer
      our patients extended acuity programs. Prior to June 15, 2007, these programs
      were separately priced and included a no-acuity plan, a one-year acuity plan,
      and a lifetime acuity plan. Under applicable accounting rules, 100% of revenues
      from the sale of the extended acuity program are 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 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, 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, participation in the
      Company’s lifetime acuity program is now included in the base surgical price.
      Under this pricing model, no warranty-related revenue deferrals have occurred
      or
      will occur for procedures performed after June 15, 2007. Revenue previously
      deferred from the sale of the separately priced acuity programs will be
      recognized in the future over a seven year period.





18





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.





**2007**
            
            **2006**
            
            **2005**First
                quarter
            
            
            59,101
            
            
            53,372
            
            
            37,578Second
                Quarter
            
            
            48,668
            
            
            47,308
            
            
            36,010Third
                Quarter
            
            
            44,547
            
            
            42,539
            
            
            34,187Fourth
                Quarter
            
            
            39,888
            
            
            42,049
            
            
            34,225Year
            
            
            192,204
            
            
            185,268
            
            
            142,000





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:





Revenue
                from higher procedure volume
            
            $
            9,627,000Impact
                from average selling price, before revenue deferral
            
            
            18,068,0002007
                deferred revenue from the sale of separately priced acuity
                programs
            
            
            (20,054,000
            )2007
                benefit from amortization of prior deferred revenue
            
            
            28,067,0002006
                deferred revenue from the sale of separately priced acuity
                programs
            
            
            38,539,0002006
                benefit from amortization of prior deferred revenue
            
            
            (20,537,000
            )





The
      average reported revenue per procedure, which includes the impact of deferred
      revenue from the sale of separately priced acuity programs, increased about
      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 acuity programs.





In
      2006,
      revenues increased by $62,051,000, or 35.1%, to $238,925,000 from $176,874,000
      in 2005. The components of the revenue change include:





Revenue
                from higher procedure volume
            
            $
            58,624,000Impact
                from average selling price, before revenue deferral
            
            
            5,906,0002006
                deferred revenue from the sale of separately priced acuity
                progarms
            
            
            (38,539,000
            )2006
                benefit from amortization of prior deferred revenue
            
            
            20,537,0002005
                deferred revenue from the sale of separately priced acuity
                programs
            
            
            26,135,0002005
                benefit from amortization of prior deferred revenue
            
            
            (10,612,000
            )





The
      average reported revenue per procedure, which includes the impact of deferred
      revenue from the sale of separately priced acuity programs, increased 4% to
      $1,290 in 2006 from $1,246 in 2005.





*Operating
      Costs and Expenses*





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 Revenues****2007**
            
            **2006**
            
            **Increase**
            
            **2007**
            
            **2006**Medical
                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 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, the associated medical professional fee is also deferred.
      The
      deferrals of medical professional fees were $2,005,000 in 2007 and $3,854,00
      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.





19




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.
      The
      allowance for doubtful accounts has been increased to appropriately reflect
      the
      increase in credit loss exposure.





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 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 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.





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
      a
      $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 is undergoing renovations.





2006
      Compared to 2005





The
      following table shows the increase in components of operating expenses between
      2005 and 2006 in dollars and as a percent of revenues for each period (dollars
      in thousands):


**% of Revenues****2006**
            
            **2005**
            
            **Increase**
            
            **2006**
            
            **2005**Medical
                professional and license fees
            
            $
            42,954
            
            $
            33,499
            
            $
            9,455
            
            
            18.0
            %
            
            18.9
            %Direct
                costs of services
            
            
            77,612
            
            
            54,952
            
            
            22,660
            
            
            32.5
            %
            
            31.1
            %General
                and administrative expenses
            
            
            21,156
            
            
            14,021
            
            
            7,135
            
            
            8.9
            %
            
            7.9
            %Marketing
                and advertising
            
            
            47,971
            
            
            31,813
            
            
            16,158
            
            
            20.1
            %
            
            18.0
            %Depreciation
            
            
            8,453
            
            
            7,636
            
            
            817
            
            
            3.5
            %
            
            4.3
            %





Medical
      professional expenses increased by approximately $5,621,000, or 28.3%, in 2006
      from 2005 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, the associated medical professional fee is also deferred.
      Medical professional fees were decreased in 2006 by $3,854,000 and in 2005
      by
      $2,613,000. This was partially offset by the amortization of the prepaid medical
      professional fee attributable to prior years of $2,054,000 in 2006 and
      $1,061,000 in 2005. License fees increased by $3,834,000, or 18%, primarily
      as a
      result of higher procedure volume.





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 2006 by $22,660,000, or 41%, compared to 2005.
      Of this amount, $19,669,000 was as a result of increased salaries, fringe
      benefits, rents and utilities, financing fees, insurance, laser rent and
      surgical supplies in connection with an increase in the number of vision centers
      and our higher procedure volumes. The recording of stock-based compensation
      expense resulted in expense of $2,991,000 in 2006.





20





General
      and administrative expenses increased by $7,135,000, or 51%, in 2006 as compared
      to 2005. Of this amount, $4,461,000 was primarily due to increases in salaries,
      fringe benefits, contractual professional services and director fees. The
      recording of stock-based compensation expense resulted in expense of $2,674,000
      in 2006.





Marketing
      and advertising expenses increased by $16,158,000, or 51%, in 2006 from 2005,
      primarily as a result of our efforts to support new markets and existing
      markets. The marketing and advertising expense increased more than the increase
      in revenue in 2006.





Depreciation
      expense increased by $817,000 in 2006 from 2005, primarily as a result of
      depreciation of capitalized expenditures at our new vision centers that opened
      in 2006.





Net
      investment income increased by $2,253,000, or 57%, in 2006 from 2005, due to
      income on long-term receivables and the investment in available-for-sale
      securities.





*Income
      Taxes*





Our
      tax
      expense for 2007, 2006, and 2005 totaled $19,221,000, $19,310,000 and
      $15,832,000, respectively. The effective tax rate was 37.2% in 2007 as compared
      to 40.5% in 2006 and 40.8% in 2005. The overall effective rate was lower in
      2007
      than in 2006 and 2005 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 2005 and 2006 and a tax benefit in 2007. See
      Note
      4 to Notes to Consolidated Financial Statements for the reconciliation of our
      tax provision for the last three years to the 35% U.S. statutory
      rate.





**Liquidity
      and Capital Resources**





Cash
      and
      cash equivalents and short-term investments totaled $60,148,000 as of December
      31, 2007, down from $95,232,000 at December 31, 2006. Net cash provided by
      operating activities in 2007 was $54,979,000. Proceeds from the exercise of
      stock options totaled $3,499,000. Repurchase of shares for treasury stock
      amounted to $44,940,000.





During
      the second quarter of 2006, the Company, with guidance from the Board of
      Directors, adopted a new investment policy for the company’s liquid assets. The
      objectives of the policy are to maintain adequate liquidity, to provide safety
      of principal, to maximize the after-tax rate of return, and to maintain a
      well-diversified portfolio. This policy places limitations on maturity,
      acceptable credit ratings, authorized securities, and credit
      concentration.





Our
      contractual obligations for future cash payments as of December 31, 2007 are
      summarized in the following table (dollars in thousands).





**Payments due by Period****Contractual
                Obligations**
            
            **Total**
            
            **Less
                than 1 year**
            
            **1
                - 3 years**
            
            **3
                - 5 years**
            
            **More than 5 years**Capital
                leases
            
            $
            6,741
            
            $
            4,412
            
            $
            2,329
            
            $
            -
            
            $
            -Operating
                lease obligations
            
            
            38,845
            
            
            9,034
            
            
            15,854
            
            
            9,783
            
            
            4,174Deferred
                compensation
            
            
            5,516
            
            
            -
            
            
            -
            
            
            -
            
            
            5,516Total
            
            $
            51,102
            
            $
            13,446
            
            $
            18,183
            
            $
            9,783
            
            $
            9,690




We
      had
      capital expenditures of $28,864,000 and $9,656,000 in 2007 and 2006,
      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.





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.




21




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




**2007**
            
            **2006**Long
                Island, NY
            
            Paramus,
                NJOmaha,
                NE
            
            Grand
                Rapids, MIGreen
                Bay, WI
            
            Seattle,
                WAHarrisburg,
                PA
            
            Sugar
                Land, TXLittle
                Rock, AR
            
            Denver,
                COColorado
                Springs, CO
            
            New
                Haven, CTSan
                Diego, CA
            
            Dallas,
                TXOklahoma
                City, OK
            
            Oakdale,MNScarsdale,
                NY
            
            Lexington,
                KYFresno,
                CA
            
            Lincoln
                Park, ILBoise,
                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 $24,637,000 in 2007 and $9,656,000 in 2006, which were funded
      by
      cash flow from operations in both years. The increases in 2007 over 2006 related
      to the addition of IntraLase femtosecond lasers in 45 centers and upgrades
      to
      all Bausch & Lomb lasers, as well as increased expenditures as three more
      centers were added in 2007 compared with 2006.





We
      continue to offer our own sponsored patient financing. As of December 31, 2007,
      we had $17,268,000 in patient receivables, net of allowance for doubtful
      accounts, which was an increase of $3,825,000, or 28.5%, since December 31,
      2006, compared to growth in revenue of 22.5%. 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.





Other
      assets include $500,000 of cash maintained by our consolidated captive insurance
      company pursuant to statutory requirements as of December 31, 2007. These funds
      are not available for general corporate purposes.





We
      believe that cash flow from
      operations, available cash and short-term investments provide sufficient cash
      reserves and liquidity to fund our working capital needs, capital expenditures
      and capital lease obligations. Liquid assets (cash, cash equivalents, short-term
      investments and patient and other accounts receivable) amounted to 166% of
      current liabilities at December 31, 2007, compared to 279% at December 31,
      2006.





**Critical
      Accounting Estimates**





*Patient
      Receivables*





We
      provide patient financing to certain 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 and the remainder is deducted over a period
      of 12 to 36 months. Accounts receivable for patients that we finance for a
      period of 12 months or less are recorded at the undiscounted total expected
      payments less an estimated allowance for doubtful accounts. For patients we
      finance with an initial term over 12 months, we record the present value of
      expected payments less an estimated allowance for doubtful accounts using a
      17.5% discount rate. The discount rate assumption is based upon current market
      rates charged by other providers of unsecured credit to similar customers.
      Interest income is recorded over the term of the payment program.





*Allowance
      for Doubtful Accounts*





As
      a
      result of an expansion of the amount of patient financing provided in 2007,
      we
      are exposed to increased credit risk than we have experienced in the past.
      Based
      upon our own experience with patient financing, we have established an allowance
      for doubtful accounts as of December 31, 2007 of $5,117,000 against patient
      receivables of $22,385,000, compared to an allowance of $2,842,000 against
      patient receivables of $16,285,000 at December 31, 2006. 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 bring receivables
      net of reserves down to the estimated net realizable value based on historical
      collectibility rates and recent default activity. To the extent that our actual
      allowance for doubtful account write-offs are greater than our estimated bad
      debt reserve, it 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.




22




*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. The financial statements of the captive insurance company
      are
      consolidated with our financial statements since it is a wholly-owned
      enterprise. As of December 31, 2007, we maintained insurance reserves of
      $8,493,000, which primarily represent 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 $2,330,000 from
      $6,163,000 at December 31, 2006. The loss reserves developed by our actuaries
      are determined by comparing our historical claim experience to comparable
      insurance industry experience.





*Accrued
      Enhancement Expense*





Effective
      June 15, 2007, participation in our lifetime acuity program is included in
      the
      base surgical price for substantially all of our patients. Under the lifetime
      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 lifetime acuity program
      as a warranty obligation under the provisions of Financial Accounting Standards
      Board (FASB) Statement No. 5 (SFAS 5), *Accounting
      for Contingencies* .
      Accordingly, the costs expected to be incurred to satisfy the obligation are
      accrued 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.





*Deferred
      Revenues*





We
      offer
      our patients extended acuity programs. Prior to June 15, 2007, these programs
      were separately priced and included a no-acuity plan, a one-year acuity plan,
      and a lifetime acuity plan. Under applicable accounting rules, 100% of revenues
      from the sale of the extended acuity program are 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 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, 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, participation in the
      Company’s lifetime acuity program now is included in the base surgical price.
      Under this pricing model, no warranty-related revenue deferrals have occurred
      or
      will occur for procedures performed after June 15, 2007. Revenue previously
      deferred from the sale of the separately priced acuity programs will be
      recognized in the future over a seven year period.





The
      balances in deferred revenue at December 31, 2007 and 2006 totaled $41,829,000
      and $49,842,000, respectively. The December 31, 2007 balance will amortize
      into
      income as follows:





2008
            
            $
            18,718,0002009
            
            $
            9,106,0002010
            
            $
            6,151,0002011
            
            $
            4,376,0002012
            
            $
            2,516,0002013
            
            $
            871,0002014
            
            $
            91,000





23




**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 94*and*APB 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.





**Recent
      Accounting Pronouncements**





See
      Note
      1 of the “Notes to Consolidated Financial Statements” for information regarding
      the Company’s adoption or planned adoption of recent accounting
      pronouncements.





**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. Investments are
      recorded at fair value.




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, since our capital leases 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
            25Reports
                of Independent Registered Public Accounting Firm
            26-27Consolidated
                Balance Sheets as of December 31, 2007 and 2006
            28Consolidated
                Statements of Operations for the years ended December 31, 2007, 2006
                and
                2005
            29Consolidated
                Statements of Cash Flows for the years ended December 31, 2007, 2006
                and
                2005
            30Consolidated
                Statements of Stockholders' Investment for the years ended December
                31,
                2007, 2006 and 2005
            31Notes
                to Consolidated Financial Statements
            32




24


**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, 2007. 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, 2007,
      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/
                  Alan H. BuckeySteven
                  C. Straus
              
              Alan
                  H. BuckeyChief
                  Executive Officer
              
              Executive
                  Vice President/Finance, Chief Financial Officer(Principal
                Executive Officer)
              
              (Principal
                    Financial and Accounting Officer)February
                  27, 2008




25


**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, 2007 and 2006, and the related consolidated statements of
      operations, stockholders' investment, and cash flows for each of the three
      years
      in the period ended December 31, 2007. 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, 2007 and 2006, and the consolidated results of its operations
      and
      its cash flows for each of the three years in the period ended December 31,
      2007, 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 Statement
      No* .
      *109*, during 2007. In addition, LCA-Vision Inc. adopted
      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, 2007, based on criteria established
      in
      Internal Control—Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission and our report dated February 27,
      2008
      expressed an unqualified opinion thereon.




/s/
      Ernst
& Young LLP


Cincinnati,
      Ohio


February
      27, 2008


26




**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, 2007, 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, 2007, based
      on **** the
      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, 2007 and 2006, and the related consolidated statements
      of operations, stockholders’ investment, and cash flows for each of the three
      years in the period ended December 31, 2007, and our report dated February
      27,
      2008 expressed an unqualified opinion thereon.





/s/
      Ernst
& Young LLP


Cincinnati,
      Ohio


February
      27, 2008


27




**LCA-VISION
        INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
  **At
                    December 31,****2007**
                
                **2006**(Dollars
                    in thousands, except per share amounts)AssetsCurrent
                    assetsCash
                    and cash equivalents
                
                $
                17,614
                
                $
                24,431Short-term
                    investments
                
                
                42,534
                
                
                70,801Patient
                    receivable, net of allowance for doubtful accounts of $3,628
                    and
                    $2,310
                
                
                12,071
                
                
                11,269Other
                    accounts receivable
                
                
                5,941
                
                
                7,021Prepaid
                    professional fees
                
                
                1,872
                
                
                2,223Prepaid
                    income taxes
                
                
                6,391
                
                
                2,356Deferred
                    tax assets
                
                
                3,450
                
                
                11,155Prepaid
                    expenses and other
                
                
                5,076
                
                
                6,414Total
                    current assets
                
                
                94,949
                
                
                135,670Property
                    and equipment
                
                
                106,788
                
                
                77,323Accumulated
                    depreciation and amortization
                
                
                (52,872
                )
                
                (46,399
                )Property
                    and equipment, net
                
                
                53,916
                
                
                30,924Long-term
                    investments
                
                
                2,250
                
                
                -Accounts
                         receivable, net of allowance for doubtful accounts of $1,489
                    and
                    $532
                
                
                5,197
                
                
                2,174Deferred
                    compensation plan assets
                
                
                5,540
                
                
                4,090Investment
                    in unconsolidated businesses
                
                
                590
                
                
                904Deferred
                    tax assets
                
                
                13,561
                
                
                12,141Other
                    assets
                
                
                3,644
                
                
                4,256Total
                    assets
                
                $
                179,647
                
                $
                190,159Liabilities
                    and stockholders' investmentCurrent
                    liabilitiesAccounts
                    payable
                
                $
                10,396
                
                $
                5,264Accrued
                    liabilities and other
                
                
                13,861
                
                
                9,800Deferred
                    revenue
                
                
                18,719
                
                
                22,234Capital
                    lease obligations maturing in one year
                
                
                3,941
                
                
                3,360Total
                    current liabilities
                
                
                46,917
                
                
                40,658Capital
                    lease obligations
                
                
                2,012
                
                
                2,431Deferred
                    compensation liability
                
                
                5,516
                
                
                4,136Insurance
                    reserve
                
                
                8,493
                
                
                6,163Deferred
                    revenue
                
                
                23,110
                
                
                27,608Minority
                    equity interest
                
                
                -
                
                
                47Stockholders'
                    investmentCommon
                    stock ($.001 par value; 25,114,244 and 24,814,542 shares and
                    18,482,658
                    and 19,821,348 shares issued and outstanding,
                    respectively)
                
                
                25
                
                
                25Contributed
                    capital
                
                
                172,965
                
                
                162,245Common
                    stock in treasury, at cost (6,631,586 shares and 4,993,194
                    shares)
                
                
                (114,427
                )
                
                (69,487
                )Retained
                    earnings
                
                
                34,597
                
                
                16,320Accumulated
                    other comprehensive income
                
                
                439
                
                
                13Total
                    stockholders' investment
                
                
                93,599
                
                
                109,116Total
                    liabilities and stockholders' investment
                
                $
                179,647
                
                $
                190,159


See
        Notes
        to Consolidated Financial Statements


28


**LCA-VISION
        INC.**
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**




**Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**(Dollars
                  in thousands, except per share amounts)Revenues
                  - Laser refractive surgery
              
              $
              292,635
              
              $
              238,925
              
              $
              176,874Operating
                  costs and expensesMedical
                  professional and license fees
              
              
              49,312
              
              
              42,954
              
              
              33,499Direct
                  costs of services
              
              
              97,423
              
              
              77,612
              
              
              54,952General
                  and administrative expenses
              
              
              22,657
              
              
              21,156
              
              
              14,021Marketing
                  and advertising
              
              
              66,469
              
              
              47,971
              
              
              31,813Depreciation
              
              
              11,209
              
              
              8,453
              
              
              7,636Operating
                  income
              
              
              45,565
              
              
              40,779
              
              
              34,953Equity
                  in earnings from unconsolidated businesses
              
              
              814
              
              
              746
              
              
              328Net
                  investment income
              
              
              5,953
              
              
              6,182
              
              
              3,929Other
                  expense, net
              
              
              (607
              )
              
              (27
              )
              
              (397
              )Income
                  before taxes on income
              
              
              51,725
              
              
              47,680
              
              
              38,813Income
                  tax expense
              
              
              19,221
              
              
              19,310
              
              
              15,832Net
                  income
              
              $
              32,504
              
              $
              28,370
              
              $
              22,981Income
                  per common shareBasic
              
              $
              1.66
              
              $
              1.37
              
              $
              1.12Diluted
              
              $
              1.64
              
              $
              1.34
              
              $
              1.07Weighted
                  average shares outstandingBasic
              
              
              19,572
              
              
              20,694
              
              
              20,500Diluted
              
              
              19,858
              
              
              21,235
              
              
              21,492


See
        Notes
        to Consolidated Financial Statements


29


**LCA-VISION
        INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**




**Years
                  Ended December 31,****2007**
              
              **2006**
              
              **2005**(dollars
                  in thousands)Cash
                  flow from operating activities:Net
                  income
              
              $
              32,504
              
              $
              28,370
              
              $
              22,981Adjustments
                  to reconcile net income to net cash provided by operating
                  activities:Depreciation
              
              
              11,209
              
              
              8,453
              
              
              7,636Provision
                  for loss on doubtful accounts
              
              
              7,675
              
              
              1,855
              
              
              1,778Deferred
                  income taxes
              
              
              5,369
              
              
              (6,436
              )
              
              (2,297
              )Tax
                  benefit on disqualified disposition of stock options
              
              
              -
              
              
              -
              
              
              5,670Stock-based
                  compensation
              
              
              5,024
              
              
              5,665
              
              
              -Insurance
                  reserve
              
              
              2,330
              
              
              2,323
              
              
              1,272Equity
                  in earnings from unconsolidated affiliates
              
              
              (814
              )
              
              (746
              )
              
              (328
              )Distributions
                  from unconsolidated affiliates
              
              
              1,128
              
              
              -
              
              
              1,215Changes
                  in working capital:Patient
                  accounts receivable
              
              
              (11,500
              )
              
              (3,903
              )
              
              (3,800
              )Other
                  accounts receivable
              
              
              1,080
              
              
              (1,087
              )
              
              (3,554
              )Prepaid
                  income taxes
              
              
              (4,035
              )
              
              520
              
              
              (2,608
              )Prepaid
                  expenses and other
              
              
              1,338
              
              
              (2,383
              )
              
              (1,544
              )Accounts
                  payable
              
              
              5,132
              
              
              1,464
              
              
              (1,723
              )Deferred
                  revenue, net of professional fees
              
              
              (7,212
              )
              
              16,202
              
              
              13,971Accrued
                  liabilities and other
              
              
              5,751
              
              
              1,364
              
              
              829Net
                  cash provided by operations
              
              
              54,979
              
              
              51,661
              
              
              39,498Cash
                  flows from investing activities:Purchases
                  of property and equipment
              
              
              (28,864
              )
              
              (9,656
              )
              
              (10,748
              )Purchases
                  of investment securities
              
              
              (330,826
              )
              
              (308,943
              )
              
              -Proceeds
                  from sale of investment securities
              
              
              356,874
              
              
              238,013
              
              
              -Other,
                  net
              
              
              278
              
              
              119
              
              
              170Net
                  cash used in investing activities
              
              
              (2,538
              )
              
              (80,467
              )
              
              (10,578
              )Cash
                  flows from financing activities:Principal
                  payments of capital lease obligations
              
              
              (5,782
              )
              
              (2,795
              )
              
              (1,140
              )Shares
                  repurchased for treasury stock
              
              
              (44,940
              )
              
              (51,816
              )
              
              (2,209
              )Tax
                  benefits related to stock-based compensation
              
              
              2,121
              
              
              5,409
              
              
              -Exercise
                  of stock options
              
              
              3,499
              
              
              5,528
              
              
              4,884Dividends
                  paid to stockholders
              
              
              (13,984
              )
              
              (11,131
              )
              
              (7,407
              )Other
              
              
              (172
              )
              
              (19
              )
              
              -Net
                  cash used in financing activities
              
              
              (59,258
              )
              
              (54,824
              )
              
              (5,872
              )(Decrease)
                  increase in cash and cash equivalents
              
              
              (6,817
              )
              
              (83,630
              )
              
              23,048Cash
                  and cash equivalents at beginning of year
              
              
              24,431
              
              
              108,061
              
              
              85,013Cash
                  and cash equivalents at end of year
              
              $
              17,614
              
              $
              24,431
              
              $
              108,061


See
        Notes
        to Consolidated Financial Statements
  30




**LCA-VISION
        INC.**
 **CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' INVESTMENT**




**Year
                  Ended December 31,****2007**
              
              **2006**
              
              **2005****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**(Dollars
                  in thousands)Common
                  StockBalance
                  at beginning of year
              
              
              24,814,542
              
              $
              25
              
              
              24,368,992
              
              $
              24
              
              
              23,767,353
              
              $
              24Employee
                  plans
              
              
              299,702
              
              
              -
              
              
              445,550
              
              
              1
              
              
              601,639
              
              
              -Balance
                  at end of year
              
              
              25,114,244
              
              $
              25
              
              
              24,814,542
              
              $
              25
              
              
              24,368,992
              
              $
              24Common
                  Stock in TreasuryBalance
                  at beginning of year
              
              
              (4,993,194
              )
              $
              (69,487
              )
              
              (3,600,794
              )
              $
              (17,671
              )
              
              (3,550,794
              )
              $
              (15,462
              )Shares
                  repurchased
              
              
              (1,638,392
              )
              
              (44,940
              )
              
              (1,392,400
              )
              
              (51,816
              )
              
              (50,000
              )
              
              (2,209
              )Balance
                  at end of year
              
              
              (6,631,586
              )
              $
              (114,427
              )
              
              (4,993,194
              )
              $
              (69,487
              )
              
              (3,600,794
              )
              $
              (17,671
              )Contributed
                  CapitalBalance
                  at beginning of year
              
              
              
              
              $
              162,245
              
              
              
              
              $
              145,262
              
              
              
              
              $
              134,708Employee
                  stock plans
              
              
              
              
              
              3,499
              
              
              
              
              
              5,527
              
              
              
              
              
              4,884Stock
                  based compensation
              
              
              
              
              
              5,024
              
              
              
              
              
              5,665
              
              
              
              
              
              -Deferred
                  tax benefit of disqualified stock options
              
              
              
              
              
              2,197
              
              
              
              
              
              5,791
              
              
              
              
              
              5,670Balance
                  at end of year
              
              
              
              
              $
              172,965
              
              
              
              
              $
              162,245
              
              
              
              
              $
              145,262Retained
                  Earnings (Deficit)Balance
                  at beginning of year
              
              
              
              
              $
              16,320
              
              
              
              
              $
              (919
              )
              
              
              
              $
              (16,493
              )Net
                  income
              
              
              
              
              
              32,504
              
              
              
              
              
              28,370
              
              
              
              
              
              22,981Adjustments
                  for adoption of FIN 48
              
              
              
              
              
              (243
              )
              
              
              
              
              -
              
              
              
              
              
              -Dividends
                            paid, $0.72, $0.54 and $0.36 per common share in 2007,
                            2006 and 2005,
                            respectively
              
              
              
              
              
              (13,984
              )
              
              
              
              
              (11,131
              )
              
              
              
              
              (7,407
              )Balance
                  at end of year
              
              
              
              
              $
              34,597
              
              
              
              
              $
              16,320
              
              
              
              
              $
              (919
              )Accumulated
                  Other Comprehensive IncomeBalance
                  at beginning of year
              
              
              
              
              $
              13
              
              
              
              
              $
              7
              
              
              
              
              $
              299Foreign
                  currency translation adjustments
              
              
              
              
              
              367
              
              
              
              
              
              1
              
              
              
              
              
              (286
              )Unrealized
                  investment gain (loss), net of tax
              
              
              
              
              
              59
              
              
              
              
              
              5
              
              
              
              
              
              (6
              )Balance
                  at end of year
              
              
              
              
              $
              439
              
              
              
              
              $
              13
              
              
              
              
              $
              7Total
                  Stockholders' Investment
              
              
              
              
              $
              93,599
              
              
              
              
              $
              109,116
              
              
              
              
              $
              126,703


See
        Notes
        to Consolidated Financial Statements


31




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




**1.**
            **Description
                Of Business And Summary Of Significant Accounting
                Policies**





**Business**





We
      are a
      leading developer and operator of fixed-site laser vision correction centers
      at
      our Lasik *Plus* 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 fixed-site excimer lasers manufactured by Bausch & Lomb,
      Advanced Medical Optics, Alcon and Wavelight. Our
      vision centers are supported mainly by independent board-certified
      ophthalmologists and credentialed optometrists as well as other health care
      professionals. The ophthalmologists perform the laser vision correction
      procedures in our vision centers, and 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, 2007, we operated 72 Lasik *Plus* fixed-site laser vision correction centers generally located in larger
      metropolitan markets in the United States. We are also part of 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 EITF 97-2, *Application
      of FASB Statement 94*and*APB 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**





Certain
      prior period amounts have been reclassified in the Consolidated Balance Sheets
      and Consolidated Statements of Cash Flows 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. Other assets include $500,000 of cash
      maintained by our consolidated captive insurance company pursuant to statutory
      requirements as of December 31, 2007. These funds are not available for general
      corporate purposes.





32




**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. Available-for-sale securities
      are carried at fair market value, with unrealized gains and losses, net of
      tax,
      reported in accumulated other comprehensive income. The amortized cost of debt
      securities in this category is adjusted for amortization of premiums and
      accretion of discounts to maturity computed under the effective interest method.
      Such amortization is included in net investment income. Realized gains and
      losses and declines in value judged to be other-than-temporary are also included
      in net investment income. The cost of securities sold is based upon the specific
      identification method. Interest and dividends on securities classified as
      available-for-sale are included in net investment income.





The
      following table is a summary of available-for-sale securities (dollars in
      thousands) at December 31, 2007 and 2006:





**December
                31, 2007****Amortized
                Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Estimated
                Fair**
              **Value
                (Net**
              **Carrying Value)**Corporate
                bonds
            
            $
            12,459
            
            $
            -
            
            $
            -
            
            $
            12,459Municipal
                bonds
            
            
            29,293
            
            
            61
            
            
            -
            
            
            29,354Equities
            
            
            2,884
            
            
            87
            
            
            -
            
            
            2,971Total
                investments
            
            $
            44,636
            
            $
            148
            
            $
            -
            
            $
            44,784




**December
                31, 2006****Amortized
                Cost**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized**
              **Losses**
            
            **Estimated
                Fair**
              **Value
                (Net**
              **Carrying Value)**Corporate
                bonds
            
            $
            6,795
            
            $
            -
            
            $
            -
            
            $
            6,795U.S.
                Government securities
            
            
            11,468
            
            
            12
            
            
            (6
            )
            
            11,474Municipal
                bonds
            
            
            52,615
            
            
            10
            
            
            (93
            )
            
            52,532Total
                investments
            
            $
            70,878
            
            $
            22
            
            $
            (99
            )
            $
            70,801




The
      gross
      realized gains and losses on sales of available-for-sale securities for the
      twelve months ended December 31, 2007 totaled $133,000 and $22,000,
      respectively. The gross realized gains and losses on sales of available-for-sale
      securities for the twelve months ended December 31, 2006 totaled $18,000 and
      $7,000, respectively.





Certain
      of the corporate and municipal bonds included in our available-for-sale security
      portfolio are auction rate instruments that pay a floating rate of interest
      that
      is set periodically through a Dutch Auction process. Rates are determined by
      the
      credit quality of the issuer, supply and demand of a particular issue, frequency
      of the rate reset and any tax benefits associated with the security. At December
      31, 2007, our available-for-sale security portfolio includes $18,300,000 in
      auction rate instruments.





At
      December 31, 2007, there were two instruments with a combined fair value of
      $2,250,000 that had experienced a failed auction. These instruments have been
      classified as long-term assets in our Consolidated Balance Sheets at December
      31, 2007. In February 2008, the Company had four additional instruments
      with a combined fair value of $2,275,000 that had experienced a failed auction.
      In instances where failures occur, the reset interest rate typically range
      from
      LIBOR plus 50 to 200 basis points for corporate bond securities to as high
      as
      20% for municipal bonds. As with our entire corporate and municipal bond
      portfolio, these instruments are all investment grade and guaranteed by
      investment grade monoline insurers. We have no reason to believe that the
      underlying issuers are at risk. Because the underlying bonds are all AAA rated,
      guaranteed by investment grade monoline insurers and the interest rate resets
      are above market, we believe these securities offer good value. We have the
      ability to hold these instruments until maturity, if necessary.




33




Other
      than the two instruments totaling $2,250,000 noted above, our available-for-sale
      security portfolio is classified as short-term at December 31, 2007, since
      we
      intend that such investments are available for operating purposes. The net
      carrying value and estimated fair value of debt securities available for sale
      at
      December 31, 2007, by contractual maturity, is shown below. Expected maturities
      may differ from contractual maturities because the issuers of the securities
      may
      have the right or obligation to prepay obligations without prepayment penalties.





**Amortized
                Cost**
            
            **Estimated Fair**
              **Value**(Dollars
                in thousands at December 31, 2007)Due
                in one year or less
            
            $
            18,904
            
            $
            18,936Due
                after one year through three years
            
            
            2,546
            
            
            2,565Due
                after three years
            
            
            20,302
            
            
            20,312Total
                debt securities
            
            $
            41,752
            
            $
            41,813Equities
            
            
            2,884
            
            
            2,971Total
                investments
            
            $
            44,636
            
            $
            44,784




**Patient
      and Other Accounts Receivable**





Patient
      and other accounts receivable are comprised primarily of amounts owed to the
      Company from patients and from credit card companies, a third-party financing
      company and vendors. Patient receivables are presented net of allowances for
      doubtful accounts of $5,117,000 and $2,842,000 at December 31, 2007 and 2006,
      respectively. For patients that we finance with an initial term over 12 months,
      we recognize revenues based upon the present values of the expected payments. Finance
      charges on patient receivables were $1,843,000 in 2007, $1,094,000 in 2006
      and
      $857,000 in 2005. These amounts are included in net investment income within
      the
      Consolidated Statements of Operation. At December 31, 2007 and 2006, the
      discount in receivables with an initial term over 12 months was $99,000 and
      $117,000, respectively.





**Allowance
      for Doubtful Accounts**




We
      provide patient financing to certain 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 the remainder is generally deducted automatically from
      the
      patient’s checking account over a period of 12 to 36 months. We have recorded an
      allowance for doubtful accounts as a best estimate of the amount of probable
      credit losses from our patient financing program. Each month, we review the
      allowance and adjust the allowance based upon our own experience with patient
      financing and the credit experience of other centers that provide financing
      to
      customers similar to ours. Receivables are charged off 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 and recent default
      activity.





**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, the related cost and accumulated depreciation
      are deducted from the amounts reported in the Consolidated Balance Sheets and
      any gains or losses on disposition are recognized in the Consolidated Statements
      of Operations. We expense repair and maintenance costs as incurred. Assets
      recorded under capitalized leases are included 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. Amortization
      of
      leasehold improvements is recorded 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. Recorded values
      of
      property and equipment that are not expected to be recovered through
      undiscounted future net cash flows are written down to fair value, which is
      generally determined from estimated discounted cash flows for assets held for
      use.





34




**Deferred
      Compensation Plan Assets**





The
      deferred compensation plan assets are invested in a variety of mutual funds
      including a money market fund, a bond fund and several equity funds. Assets
      are
      reported at fair value.





**Financial
      Instruments**





*Concentration
      of Credit Risk*





Financial
      instruments that subject us to concentrations of credit risk consist primarily
      of temporary cash investments and investments. Our policy is to place our
      temporary cash investments in investment-grade, interest-bearing corporate
      securities or obligations of, or guaranteed by, the U.S. government or state
      and
      municipal related entities and in selected equities.





*Fair
      Values of Financial Instruments*





The
      cost
      basis of our cash and cash equivalents, patient and other accounts receivable
      with an initial term within 12 months and accounts payable approximate their
      fair values due to their short term maturities. For patient receivables with
      an
      initial term in excess of 12 months, we record the present value of the expected
      payments discounted at a rate commensurate with current market rates charged
      by
      other providers of unsecured credit to similar customers. The fair values of
      available-for-sale securities are based on quoted market prices.




**Accrued
      Enhancement Expense**





Effective
      June 15, 2007, participation in our lifetime acuity program is included in
      the
      base surgical price for substantially all of our patients. Under the lifetime
      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 lifetime acuity program
      as a warranty obligation under the provisions of Financial Accounting Standards
      Board (FASB) Statement No. 5 (SFAS 5), *Accounting
      for Contingencies.* Accordingly, the costs expected to be incurred to satisfy the obligation are
      accrued 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.





**Deferred
      Revenues**





We
      offer
      our patients extended acuity programs. Prior to June 15, 2007, these programs
      were separately priced and included a no-acuity plan, a one-year acuity plan,
      and a lifetime acuity plan. Under applicable accounting rules, 100% of revenues
      from the sale of the extended acuity program are 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 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, 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, participation in the
      Company’s lifetime acuity program now is included in the base surgical price.
      Under this pricing model, no warranty-related revenue deferrals have occurred
      or
      will occur for procedures performed after June 15, 2007. Revenue previously
      deferred from the sale of the separately priced acuity programs will be
      recognized in the future over a seven year period.





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.
      The Company uses the captive insurance company for both primary insurance and
      excess liability coverage. A number of claims are now pending with our captive
      insurance company. The financial statements of the captive insurance company
      are
      consolidated with our financial statements since it is a wholly-owned
      enterprise. As of December 31, 2007 and 2006, we maintained insurance reserves
      of $8,493,000 and $6,163,000, respectively, which primarily represent an
      actuarially determined estimate of future costs associated with claims filed
      as
      well as claims incurred but not yet reported. The loss reserves developed by
      our
      actuaries are determined by comparing our historical claim experience to
      comparable insurance industry experience.




35




**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.  Income taxes are accounted for 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, deferred tax
      assets and liabilities are determined based on differences between the financial
      reporting and tax basis of assets and liabilities, and are measured using
      enacted tax rates and laws that are expected to be in effect when the
      differences reverse.  The effect on deferred taxes of changes in tax
      rates is recognized in the period in which the enactment date
      changes.  Valuation allowances are established when necessary on a
      jurisdictional basis to reduce deferred tax assets to the amounts expected
      to be
      realized. During 2007, we utilized our remaining $1,954,000 in net operating
      loss carryforwards to reduce our current period taxable income.





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.





**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 earnings per share for the
      years ended December 31, 2007, 2006 and 2005 (in thousands, except per share
      data).





**2007**
            
            **2006**
            
            **2005**Basic
                EarningsNet
                income
            
            $
            32,504
            
            $
            28,370
            
            $
            22,981Weighted
                average shares outstanding
            
            
            19,572
            
            
            20,694
            
            
            20,500Basic
                earnings per share
            
            $
            1.66
            
            $
            1.37
            
            $
            1.12Diluted
                EarningsNet
                income
            
            $
            32,504
            
            $
            28,370
            
            $
            22,981Weighted
                average shares outstanding
            
            
            19,572
            
            
            20,694
            
            
            20,500Effect
                of dilutive securitiesStock
                options
            
            
            251
            
            
            525
            
            
            992Restricted
                stock
            
            
            35
            
            
            16
            
            
            -Weighted
                average common shares and potential dilutive shares
            
            
            19,858
            
            
            21,235
            
            
            21,492Diluted
                earnings per share
            
            $
            1.64
            
            $
            1.34
            
            $
            1.07




For
      each
      reported year, outstanding stock options having a grant price greater than
      the
      average market price of the common shares for the year were not included in
      the
      computation of diluted earnings per share because the effect of these options
      would be antidilutive. The total number of these shares was 42,970, 26,317
      and
      19,578 in 2007, 2006 and 2005, respectively.




36





**Revenue
      Recognition**





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 collectibility is reasonably assured.
      Revenues associated with separately priced acuity programs are deferred and
      recognized 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.





**Marketing
      and Advertising Expenditures**





Marketing
      and advertising costs are expensed 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. The printing
      and postage costs are expensed as the items are mailed. The mailing lists are
      amortized over a twelve-month period consistent with their use. Prepaid
      advertising expense (principally direct mail cost) was $1,665,000 at December
      31, 2007, and $3,702,000 at December 31, 2006.





**Stock-Based
      Compensation**





Effective
      January 1, 2006, on a modified prospective basis, the Company began using the
      fair value method under SFAS No. 123(R), *Share
      Based Payment* ,
      to
      recognize equity compensation expense in our results of operations. Prior to
      January 1, 2006, the Company 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.





Under
      the
      modified prospective approach, the amount of compensation cost recognized
      includes: (i) compensation cost for all share-based payments granted prior
      to,
      but not yet vested as of, January 1, 2006, based on the grant date fair value
      estimate in accordance with the provisions of SFAS 123(R) and (ii) compensation
      cost for all stock-based payments granted subsequent to January 1, 2006, based
      on the grant date fair value estimate in accordance with the provisions of
      SFAS
      123(R). We recognize the cost of stock-based awards on a straight-line basis
      over the requisite service period. The amount of stock-based compensation
      capitalized was not material to our consolidated financial statements.





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 $5,409,000 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.





Prior
      to
      the adoption of SFAS 123(R), the Company granted primarily stock options to
      employees. Since the adoption of SFAS 123(R), the Company has not granted any
      stock options except for one stock option grant for 3,000 shares, but instead
      has issued restricted stock units. Restricted stock unit awards to executive
      officers have performance conditions and cliff vesting. Restricted stock units
      awarded to other employees and non-employee directors do not have performance
      conditions and vest over specified time periods subject to continued employment
      or service.





As
      a
      result of adopting SFAS 123(R) on January 1, 2006, and our resulting decision
      to
      begin issuing restricted stock units after January 1, 2006, the Company’s income
      before income taxes and net income for 2006 were lower than if we had continued
      to account for share-based compensation under Opinion 25 in the following
      amounts (in thousands except per share amounts):




**2006**Decrease
                in income before income taxes
            
            $
            5,665Decrease
                in net income
            
            $
            4,511Decrease
                in earnings per shareBasic
            
            $
            0.22Diluted
            
            $
            0.21




Because
      we adopted SFAS 123(R) using the modified prospective approach, the prior years
      were not restated. The following table sets forth the effect on net income
      and
      basic and diluted earnings per share as if we had applied the fair value
      recognition provisions for our stock-based compensation arrangements for 2005
      (dollars in thousands except per share amounts).




37




**2005**Net
                income, as reported
            
            $
            22,981Deduct:
                total stock-based employee compensation expense determined under
                fair
                value based method, net of tax
            
            
            2,627Pro
                forma net income
            
            $
            20,354Earnings
                per share:Basic
                - as reported
            
            $
            1.12Basic
                - pro forma
            
            $
            0.99Diluted
                - as reported
            
            $
            1.07Diluated
                - pro forma
            
            $
            0.95





**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 2007, 2006 or 2005.




**Revenues from External Customers**
            
            **Net Assets**
            
            **Property and Equipment**(in
                thousands)
            
            **2007**
            
            **2006**
            
            **2005**
            
            **2007**
            
            **2006**
            
            **2007**
            
            **2006**United
                States
            
            $
            292,635
            
            $
            238,925
            
            $
            171,906
            
            $
            90,117
            
            $
            106,846
            
            $
            53,916
            
            $
            30,924Canada
            
            
            -
            
            
            -
            
            
            4,968
            
            
            3,482
            
            
            2,270
            
            
            -
            
            
            -$
            292,635
            
            $
            238,925
            
            $
            176,874
            
            $
            93,599
            
            $
            109,116
            
            $
            53,916
            
            $
            30,924




**Recent
      Accounting Pronouncements**





In
      September 2006, the FASB issued Statement of Financial Account Standards No.
      157
      (SFAS 157), *Fair
      Value Measurements* ,
      which
      defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. SFAS 157 also requires expanded disclosures to provide
      information about the extent to which fair value is used to measure assets
      and
      liabilities, the methods and assumptions used to measure fair value, and the
      effects of fair value measures on earnings. This Statement applies under other
      accounting pronouncements that require or permit fair value measurements since
      the FASB has previously concluded in those accounting pronouncements that fair
      value is the relevant measurement attribute. SFAS 157 became effective for
      us on
      January 1, 2008. We are currently in the process of finalizing the effect the
      adoption of SFAS 157 will have on the consolidated financial
      statements.





**2.**  **Stockholders'
      Investment**





On
      November 22, 2006, the Company announced that the Board of Directors authorized
      a share repurchase plan under which the Company was authorized to purchase
      up to
      $50,000,000 of its common stock. Through August 13, 2007, the Company
      repurchased 1,481,630 shares of its 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 the Company is authorized to purchase up to $50,000,000 of its common
      stock. Though December 31, 2007, the Company had repurchased 588,408 shares
      of
      its common stock under this new program at an average price of $16.99 per share,
      for a total cost of approximately $10,000,000.





At
      December 31, 2007, there were 6,631,586 shares of common stock held in treasury.





**3.**  **Investment
      in Unconsolidated Businesses**





Our
      investments in unconsolidated businesses were $590,000 and $904,000 at December
      31, 2007 and 2006, respectively. These balances represent our equity investments
      in Eyemed/LCA-Vision, LLC (50% ownership at December 31, 2007) and Lasik M.D.
      Toronto Inc. (30% ownership at December 31, 2007). We account for these
      investments using the equity method.




On
      July
      1, 2005, we transferred financial and operational control of Lasik M.D. Toronto
      Inc. to our joint venture partners in Toronto, Canada. As a result, effective
      July 1, 2005, we began to account for the results of Lasik M.D. Toronto Inc.
      using the equity method. Prior to July 1, 2005, the financial results and
      balance sheet of Lasik M.D. Toronto Inc. were consolidated into our financial
      statements. For accounting purposes, reclassification of prior period financial
      statements is not permitted under U.S. generally accepted accounting principles.
      While there was no material difference in the net income or earnings per share
      as a result of this change, our revenues and reported procedure volume no longer
      include the procedures performed in Canada.




38




**4.**  **Income
      Taxes**





The
      components of income tax expense for the three years ended December 31, 2007
      are
      presented in the following table (dollars in thousands):





**2007**
            
            **2006**
            
            **2005**Current:Federal
            
            $
            11,990
            
            $
            21,686
            
            $
            14,247State
                and local
            
            
            1,862
            
            
            4,060
            
            
            3,386Foreign
            
            
            -
            
            
            -
            
            
            496Total
            
            
            13,852
            
            
            25,746
            
            
            18,129Deferred:Federal
            
            
            4,865
            
            
            (5,964
            )
            
            (2,255
            )State
                and local
            
            
            504
            
            
            (472
            )
            
            (42
            )Total
            
            
            5,369
            
            
            (6,436
            )
            
            (2,297
            )Income
                tax expense
            
            $
            19,221
            
            $
            19,310
            
            $
            15,832




The
      foreign tax provisions consist primarily of Canadian income taxes. We have
      made
      no provision for U.S. income taxes on undistributed earnings of approximately
      $3,300,000 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 $447,000.





Income
      before income taxes for the last three years is presented in the following
      table
      (dollars in thousands):





**2007**
            
            **2006**
            
            **2005**Domestic
            
            $
            50,880
            
            $
            46,972
            
            $
            37,638Foreign
            
            
            845
            
            
            708
            
            
            1,175Total
            
            $
            51,725
            
            $
            47,680
            
            $
            38,813




39




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




**December
                31,****2007**
            
            **2006**Current
                deferred tax assets:Deferred
                revenue
            
            $
            1,014
            
            $
            8,133Net
                operating loss carryforwards
            
            
            -
            
            
            684Allowance
                for doubtful accounts
            
            
            2,043
            
            
            1,135Insurance
                reserves
            
            
            259
            
            
            601Accrued
                enhancement expense
            
            
            134
            
            
            571Other
            
            
            -
            
            
            31Total
                current deferred tax assets
            
            $
            3,450
            
            $
            11,155Long-term
                deferred tax assets:Deferred
                revenue
            
            $
            7,842
            
            $
            9,366Deferred
                compensation
            
            
            2,203
            
            
            1,567Insurance
                reserves
            
            
            1,696
            
            
            -Deferred
                lease credits
            
            
            226
            
            
            -Share-based
                compensation
            
            
            1,548
            
            
            978Property
                and equipment
            
            
            46
            
            
            230Total
                long-term deferred tax assets
            
            $
            13,561
            
            $
            12,141Net
                deferred tax assets
            
            $
            17,011
            
            $
            23,296





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




**2007**
            
            **2006**
            
            **2005**Tax
                at statutory federal rate
            
            $
            18,104
            
            $
            16,689
            
            $
            13,585State
                and local income taxes, net of federal benefit
            
            
            1,714
            
            
            2,169
            
            
            2,084Permanent
                differences
            
            
            (194
            )
            
            702
            
            
            49Other
            
            
            (403
            )
            
            (250
            )
            
            114Income
                tax expense
            
            $
            19,221
            
            $
            19,310
            
            $
            15,832




During
      2007, we utilized our remaining $1,954,000 in net operating losses to reduce
      our
      current period taxable income.





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 *.*





Through
      December 31, 2007, the amount of our unrecognized tax benefits decreased by
      $972,000 to $574,000, principally as a result of a tax accounting method change
      related to fixed asset depreciable lives. This decrease was offset by a
      $1,134,000 change in deferred tax assets and a $162,000 increase of income
      tax
      expense. A reconciliation of the beginning and ending amount of unrecognized
      tax
      benefits is as follows:




Balance
                at January 1, 2007
            
            $
            1,546,000Additions
                based on tax positions related to the current year
            
            
            28,000Additions
                for tax positions of prior years
            
            
            342,000Reductions
                for tax positions of prior years
            
            
            (2,000
            )Reductions
                due to statute expiration
            
            
            (24,000
            )Settlements
            
            
            (1,316,000
            )Balance
                at December 31, 2007
            
            $
            574,000





The
      total
      amount of unrecognized tax benefits that, if recognized, would affect the
      effective tax rate is $141,000. 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, the Company does not presently
      anticipate that any increase or decrease in unrecognized tax benefits will
      be
      material to the consolidated financial statements.




40




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, 2007, we recognized tax benefit of
      approximately $62,000 in interest and penalties. We have approximately $68,000
      in interest and penalties related to unrecognized tax benefits accrued as of
      December 31, 2007.





We
      file
      income tax returns in the U.S. federal jurisdiction, various U.S. state
      jurisdictions and Canada. With few exceptions, the Company is subject to audit
      by taxing authorities for fiscal years ending 2004 through 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, the Company 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. The Internal Revenue Service recently began an audit of our 2006
      tax year. It is not possible to predict the timing of the conclusion of this
      audit. Based on the early status of the audit and the protocol of finalizing
      audits by the relevant tax authorities, it is not possible to estimate the
      impact of such changes, if any, to previously recorded unrecognized tax
      benefits.





**5.**  **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, 2007 and 2006. Capitalized
      leases are being used to finance the lasers used in the laser vision correction
      procedures. Capital lease assets are included in property and
      equipment.





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





**December 31, 2007****Capital Leases**
            
            **Operating Leases**Year2008
            
            $
            4,412
            
            $
            9,0342009
            
            
            2,066
            
            
            8,5782010
            
            
            263
            
            
            7,2762011
            
            
            -
            
            
            5,6942012
            
            
            -
            
            
            4,089Beyond
                2012
            
            
            -
            
            
            4,174Total
                minimum rental commitment
            
            
            6,741
            
            $
            38,845Less
                interest
            
            
            788Present
                value of minimum lease payments
            
            
            5,953Less
                current installments
            
            
            3,941Long-term
                obligations at December 31, 2007
            
            $
            2,012




The
      net
      book value of assets under capitalized leases was $9,474,000 at December 31,
      2007 and $5,763,000 at December 31, 2006.





Total
      rent expense under operating leases amounted to $11,471,000 in 2007, $8,661,000
      in 2006 and $6,385,000 in 2005.




**6.**  **Employee
      Benefits**





*Savings
      Plan*




41




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 $80,882 in 2007; $68,000 in
      2006; and $52,000 in 2005.





*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, 2007, approximately
      781,000 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 91,000 shares under the 1995 Plan, 333,000 shares under the
      1998 Plan, 266,000 shares under the 2001 Plan, and 91,000 shares under the
      2006
      Plan. At December 31, 2007, a total of 1,633,414 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.





As
      disclosed in Note 1, we adopted SFAS 123(R) on January 1, 2006 under the
      modified prospective method. 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):




**2007**
            
            **2006**Stock
                Options
            
            $
            2,179
            
            $
            4,080Restricted
                Stock
            
            
            2,845
            
            
            1,585$
            5,024
            
            $
            5,665Income
                Tax Benefit
            
            $
            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.





The
      fair
      value of each stock option is estimated on the date of the grant using a
      Black-Scholes option pricing model that uses assumptions noted in the following
      table. Expected volatility is based 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. The dividend yield reflects the assumption that the current dividend
      payout will continue with no increases.





In
      2007,
      there were 3,000 stock options granted. No stock options were granted in 2006.
      The fair value of each common stock option granted during 2007 and 2005 was
      estimated using the following weighted-average assumptions:




**2007**
            
            **2005**Dividend
                yield
            
            
            3.69
            %
            
            1.0
                - 1.2
            %Expected
                volatility
            
            
            417
            %
            
            77
                - 93
            %Risk-free
                interest rate
            
            
            3.54
            %
            
            3.28
                - 4.33
            %Expected
                lives (in years)
            
            
            3
            
            
            2
                - 5





The
      total
      intrinsic value (market value on date of exercise less exercise price) of
      options exercised during 2007, 2006 and 2005 was approximately $7,472,000,
      $16,389,000 and $19,780,000 respectively. As of December 31, 2007, the aggregate
      intrinsic value of outstanding stock options, options vested and expected to
      vest, and options exercisable was $2,662,000, $2,648,000 and $2,448,000,
      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 2007 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, 2007.
      These amounts will change based on the fair market value of our
      stock.





Cash
      received from option exercises under all share-based payment arrangements for
      2007 was approximately $3,499,000 for 2007, $5,528,000 for 2006 and $4,884,000
      for 2005. The actual tax benefit recognized for the tax deductions from option
      exercises under all share-based payment arrangements for 2007 and 2006 was
      approximately $2,121,000 and $5,409,000, 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.




42




At
      December 31, 2007, there was $1,404,000 of total unrecognized, pre-tax
      compensation cost related to non-vested stock options. This cost is expected
      to
      be recognized over a weighted-average period of approximately 0.82
      years.





The
      Company did not make any modifications to outstanding share options prior to
      the
      adoption of SFAS 123(R). There were no changes in valuation methodology after
      the adoption of SFAS 123(R). The only change of assumptions was in the
      recognition of forfeitures. Prior to the adoption of SFAS 123(R), forfeitures
      were recognized on a proforma basis in the period in which they occurred. With
      the adoption of SFAS 123(R), the Company now estimates forfeitures based on
      a
      number of factors, including historical forfeiture rates, trends and expected
      forfeitures (currently estimated at 4%).





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




**Stock Options**
              
              **Weighted Average
                  Exercise Price**Outstanding
                  at January 1, 2005
              
              
              1,773,465
              
              $
              10.83Granted
              
              
              403,398
              
              
              28.99Exercised
              
              
              (601,639
              )
              
              8.12Cancelled/forfeited
              
              
              (80,584
              )
              
              16.54Outstanding
                  at December 31, 2005
              
              
              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
              
              
              19.73Options
                  exercisable, December 31, 2007
              
              
              506,666
              
              
              18.87Options
                  expected to vest, December 31, 2007
              
              
              632,614
              
              
              19.71


The
      following table summarizes information about the stock options granted under
      the
      1995, 1998, 2001 and 2006 Plans that were outstanding at December 31,
      2007:




**Stock Options Outstanding**
              
              **Stock Options Exercisable****Range of exercise prices**
              
              **Outstanding as**
                **of
                  December 31,**
                **2007**
              
              **Weighted-**
                **average**
                **remaining**
                **contractual life**
              
              **Weighted-**
                **average**
                **exercise price**
              
              **Exercisable as**
                **of December**
                **31, 2007**
              
              **Weighted-**
                **average**
                **exercise prie**$
              2.33
              
              $
              10.59
              
              
              74,960
              
              
              4.15
              
              $
              6.05
              
              
              74,960
              
              $
              6.0510.65
              
              
              12.19
              
              
              90,368
              
              
              5.82
              
              
              11.95
              
              
              86,618
              
              
              11.9512.50
              
              
              14.08
              
              
              73,125
              
              
              2.77
              
              
              13.42
              
              
              65,625
              
              
              13.4214.31
              
              
              16.60
              
              
              103,389
              
              
              6.40
              
              
              16.39
              
              
              67,089
              
              
              16.2817.27
              
              
              22.81
              
              
              60,401
              
              
              6.00
              
              
              20.67
              
              
              44,300
              
              
              20.8227.05
              
              
              27.05
              
              
              120,337
              
              
              7.01
              
              
              27.05
              
              
              61,225
              
              
              27.0528.59
              
              
              30.59
              
              
              78,334
              
              
              2.26
              
              
              30.28
              
              
              76,667
              
              
              30.3233.45
              
              
              42.56
              
              
              28,684
              
              
              5.18
              
              
              37.42
              
              
              23,516
              
              
              37.6644.60
              
              
              44.60
              
              
              5,000
              
              
              7.56
              
              
              44.60
              
              
              3,333
              
              
              44.6048.25
              
              
              48.25
              
              
              5,000
              
              
              7.50
              
              
              48.25
              
              
              3,333
              
              
              48.25$
              2.33
              
              $
              48.25
              
              
              639,598
              
              
              5.17
              
              $
              19.73
              
              
              506,666
              
              $
              18.87


The
      weighted-average fair value of options granted was $18.43 per share during
      2007
      and $28.99 per share during 2005.




**Restricted
      Stock**





Our
      stock
      incentive plans permit certain employees and non-employee directors to be
      granted restricted share unit awards in common stock. Awards of restricted
      share
      units are valued by reference to shares of common stock and 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.




43




Restricted
      stock awards granted to employees and non-employee directors during 2007 totaled
      95,507 shares. There were no restricted stock awards prior to January 1, 2006.
      The fair value of the awards at the grant date is expensed over the applicable
      vesting periods.





As
      of
      December 31, 2007, there was $4,870,000 of total unrecognized pre-tax
      compensation cost related to non-vested restricted stock. This cost is expected
      to be recognized over a weighted-average period of approximately 1.7
      years.





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




**Number
                of**
              **Share
                Unit**
              **Awards**
            
            **Weighted**
              **Average
                Grant**
              **Date
                Fair Value**Outstanding
                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
            
            
            41.10




**7.**  **Commitments
      and Contingencies**





On
      September 13, 2007, and October 1, 2007, two complaints were filed against
      LCA-Vision and certain of its 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 shareholders who purchased our
      common stock between February 12, 2007, and July 30, 2007.  On November 8,
      2007, an additional complaint was filed against LCA-Vision and certain of its
      current and former directors and officers in the United States District Court
      for the Southern District of Ohio (Western Division).  This action was
      filed purportedly on behalf of a class of shareholders who purchased our common
      stock between February 12, 2007, and November 2, 2007.  The plaintiffs in
      each complaint assert claims under Sections 10(b) and 20(a) of the Securities
      Exchange Act of 1934, alleging that certain of LCA-Vision's public disclosures
      regarding its financial performance and prospects were false or misleading.
      The
      plaintiffs seek to recover damages on behalf of the class members.  These
      cases have been consolidated into one action; the consolidated complaint is
      due
      on March 11, 2008.  LCA-Vision is in the process of evaluating these
      claims. We strongly believe that these actions lack merit, and we intend to
      defend against the claims vigorously. However, 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 current and former officers and directors of
      LCA-Vision, derivatively on behalf of the Company.  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.  LCA-Vision 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 to be filed in
      the
      consolidated class action, discussed above. LCA-Vision is 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.
      Due
      to substantial increases in insurance premiums, effective as of December 18,
      2002, we established a captive insurance company to provide coverage for claims
      brought against us after December 17, 2002. The Company uses the captive
      insurance company for both primary insurance and excess liability coverage.
      A
      number of claims are now pending with our captive insurance company. As of
      December 31, 2007 and 2006, we maintain an insurance reserve amount of
      $8,493,000 and $6,163,000, respectively, which primarily represents an
      actuarially determined estimate of future costs associated with claims filed
      as
      well as claims incurred but not reported.





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.




44




**8.
      Additional Financial Information**





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




*Balance
        Sheet Information*
 
 **At December 31,****2007**
              
              **2006**Property
                  and Equipment is comprised of the following:Land
              
              $
              354
              
              $
              354Building
                  and improvements
              
              
              5,513
              
              
              6,351Leasehold
                  improvements
              
              
              19,840
              
              
              12,929Furniture
                  and fixtures
              
              
              5,403
              
              
              4,804Equipment
              
              
              51,581
              
              
              40,913Equipment
                  under capital leases
              
              
              13,944
              
              
              7,83496,635
              
              
              73,185Accumulated
                  depreciation
              
              
              (52,872
              )
              
              (46,399
              )Construction
                  in progress
              
              
              10,153
              
              
              4,138$
              53,916
              
              $
              30,924Accrued
                  Liabilities and Other is comprised of the following:Accrued
                  payroll and related benefits
              
              
              4,595
              
              
              2,851Accrued
                  financing fees
              
              
              2,047
              
              
              1,257Accrued
                  enhancement expense
              
              
              1,372
              
              
              1,314Invoices
                  and other expenses accrued at year-end
              
              
              5,847
              
              
              4,378$
              13,861
              
              $
              9,800
  *Cash
        Flow Information*
  **For the Year Ended December 31,****2007**
              
              **2006**
              
              **2005**Cash
                  paid during the year for:Interest
              
              $
              507
              
              $
              302
              
              $
              104Income
                  taxes
              
              
              15,928
              
              
              18,961
              
              
              15,348Non-cash
                  investing activities:Capital
                  leases
              
              $
              5,944
              
              $
              5,030
              
              $
              3,778*Other
                  Comprehensive Income (Loss) Information*Comprehensive
                  income (loss)Net
                  income
              
              $
              32,504
              
              $
              28,370
              
              $
              22,981Unrealized
                  investment gain (loss), net of tax
              
              
              59
              
              
              5
              
              
              (6
              )Foreign
                  currency translation adjustments
              
              
              367
              
              
              1
              
              
              (286
              )Total
                  comprehensive income
              
              $
              32,930
              
              $
              28,376
              
              $
              22,689


45




**9.
      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):





**2007 Quarters**
            
            **2006 Quarters****First**
            
            **Second**
            
            **Third**
            
            **Fourth**
            
            **First**
            
            **Second**
            
            **Third**
            
            **Fourth**Revenues
            
            $
            78,663
            
            $
            69,685
            
            $
            74,584
            
            $
            69,703
            
            $
            66,750
            
            $
            60,297
            
            $
            55,841
            
            $
            56,037Operating
                income
            
            
            15,543
            
            
            10,039
            
            
            14,130
            
            
            5,853
            
            
            14,710
            
            
            12,400
            
            
            6,818
            
            
            6,851Income
                before taxes
            
            
            17,298
            
            
            12,033
            
            
            15,848
            
            
            6,546
            
            
            16,282
            
            
            13,992
            
            
            8,518
            
            
            8,888Net
                income
            
            
            10,926
            
            
            7,414
            
            
            10,018
            
            
            4,146
            
            
            9,427
            
            
            8,033
            
            
            5,337
            
            
            5,573Earnings
                per shareBasic
            
            $
            0.55
            
            $
            0.37
            
            $
            0.51
            
            $
            0.22
            
            $
            0.45
            
            $
            0.39
            
            $
            0.26
            
            $
            0.27Diluted
            
            $
            0.54
            
            $
            0.36
            
            $
            0.51
            
            $
            0.22
            
            $
            0.44
            
            $
            0.37
            
            $
            0.25
            
            $
            0.27




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





None.





**Item
      9A. Controls and Procedures.**





***Disclosure
      controls and procedures***




LCA-Vision
      Inc. maintains 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 to the company’s 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, 2007, an
      evaluation was carried out by the company’s management, with the participation
      of the company’s Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of its disclosure controls and procedures as defined in Exchange
      Act Rule 13a-15(e). Based upon that evaluation, the company’s 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, the Chief Executive Officer and Chief Financial Officer concluded
      that, during the quarter ended December 31, 2007, there were no changes in
      the
      company’s 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 the Company’s 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.




46




**PART
      III**





**Item
      10. Directors, Executive Officers and Corporate Governance.**





The
      information required by this Item 10 is incorporated by reference from “Section
      16(a) Beneficial Ownership Reporting Compliance,” “Election of Directors,”
“Executive Officers” and “Information About the Board of Directors and Its
      Committees” to be included in our definitive Proxy Statement which will be filed
      with the Securities and Exchange Commission (SEC) in connection with the 2008
      Annual Meeting of Stockholders.





**Item
      11. Executive Compensation.**





The
      information required by this Item 11 is incorporated by reference from
“Compensation Committee Report on Executive Compensation,” “Compensation
      Discussion and Analysis” and “Executive Compensation” to be included in our
      definitive Proxy Statement which will be filed with the SEC in connection with
      the 2008 Annual Meeting of Stockholders.





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





The
      information called for by Item 403 of Regulation S-K and required by this Item
      12 is incorporated by reference from “Security Ownership of Certain Beneficial
      Owners and Management” to be included in our definitive Proxy Statement to be
      filed with the SEC in connection with the 2008 Annual Meeting of
      Stockholders.





The
      information called for by Item 201(d) of Regulation S-K is presented below
      as of
      December 31, 2007.




**Equity
                Compensation Plan Information****Plan
                Category**
            
            **Number of securities to**
              **be issued upon exercise**
              **of
                outstanding awards,**
              **options,
                warrants and**
              **rights**
            
            **Weighted-average**
              **exercise
                price of**
              **outstanding options,**
              **warrants and rights**
            
            **Number of securities**
              **remaining for future**
              **issuance under equity**
              **compensation plans**
              **(excluding securities**
              **reflected in
                column (a)****(
                a )**
            
            **(
                b )**
            
            **(
                c )**Equity
                compensation plans approved by security holders
            
            
            780,822
            
            $
            19.37
            
            
            1,633,414Equity
                compensation plans not approved by security holders
            
            
            -
            
            
            -
            
            
            -Total
            
            
            780,822
            
            $
            19.37
            
            
            1,633,414




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





The
      information required by this Item 13 is incorporated by reference from
“Information About the Board of Directors and Its Committees” and “Certain
      Transactions” to be included in our definitive Proxy Statement which will be
      filed with the SEC in connection with the 2008 Annual Meeting of
      Stockholders.





**Item
      14. Principal Accountant Fees and Services.**





The
      information required by this Item 14 is incorporated from “Ratification of
      Appointment of Independent Auditors” to be included in our definitive Proxy
      Statement which will be filed with the SEC in connection with our 2008 Annual
      Meeting of Stockholders.




47




**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 Reporting


Reports
      of Independent Registered Public Accounting Firm


Consolidated
      Balance Sheets as of December 31, 2007 and 2006


Consolidated
      Statements of Operations for the years ended December 31, 2007, 2006, and
      2005


Consolidated
      Statements of Cash Flows for the years ended December 31, 2007, 2006, and
      2005


Consolidated
      Statements of Stockholders' Investment for years ended December 31, 2007, 2006,
      and 2005


Notes
      to
      Consolidated Financial Statements





**(a)(2)**  **List
      of Schedules**




**Schedule
      II** Valuation
      and Qualifying Accounts and Reserves





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




**Schedule
      II Valuation and Qualifying Accounts and Reserves**




**LCA-Vision
                Inc.****For
                the years ended December 31, 2007, 2006 and 2005****(in
                thousands)****Description**
            
            **Balance at
                Beginning of**
              **Period**
            
            **Charges to**
              **Cost and**
              **Expenses**
            
            **Deductions**
            
            **Balance at**
              **End of Period**Year
                ended December 31, 2007:Allowance
                for doubtful accounts
            
            $
            2,842
            
            $
            7,675
            
            $
            5,400
            
            $
            5,117Insurance
                reserve
            
            
            6,163
            
            
            2,697
            
            
            367
            
            
            8,493Year
                ended December 31, 2006:Allowance
                for doubtful accounts
            
            $
            3,145
            
            $
            1,855
            
            $
            2,158
            
            $
            2,842Insurance
                reserve
            
            
            3,840
            
            
            2,530
            
            
            207
            
            
            6,163Year
                ended December 31, 2005:Allowance
                for doubtful accounts
            
            $
            2,865
            
            $
            1,778
            
            $
            1,498
            
            $
            3,145Insurance
                reserve
            
            
            2,568
            
            
            1,466
            
            
            194
            
            
            3,840




48


**(a)(3)**  **List
      of Exhibits**




Exhibit
                #
            
            Description
                of Exhibit*3(a)
            
            Restated
                Certificate of Incorporation, as amended, of Registrant (Exhibit
                3(a) to
                Annual Report on Form 10-K for the year ended December 31,
                2003)*3(b)
            
            Amended
                Bylaws of Registrant (Exhibit 3 (b) to Current Report on Form 8-K
                filed
                June 15, 2007)*10(a)
            
            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(b)
            
            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(c)
            
            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(d)
            
            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(e)
            
            Executive
                Cash Bonus Plan (as amended February 21, 2006) (Exhibit 10.1 to Current
                Report on Form 8-K filed February 24, 2006)*10(f)
            
            Form
                of Restricted Stock Award Agreement with all employees, including
                named
                executive officers (Exhibit 10.2 to Current Report on Form 8-K filed
                February 24, 2006)*10(g)
            
            Form
                of Stock Option Agreement with outside directors (Exhibit 10.3 to
                Current
                Report on Form 8-K filed February 24, 2006)*10(h)
            
            Form
                of Stock Option Agreement with all employees, including named executive
                officers (Exhibit 10.4 to Current Report on Form 8-K filed February
                24,
                2006)*10(i)
            
            LCA-Vision
                Inc. 2006 Stock Incentive Plan (definitive Proxy Statement for 2006
                Annual
                Meeting of Stockholders, filed April 28, 2006)*10(j)
            
            Form
                of Notice of Grant of Award and Award Agreement for Restricted Stock
                Units
                (Exhibit 10.2 to Current Report on Form 8-K filed June 16,
                2006)*10(k)
            
            Employment
                Agreement of Steven C. Straus (Exhibit 99.1 to Current Report on
                Form 8-K
                filed November 6, 2006)*14
            
            Code
                of Business Conduct and Ethics (Exhibit 14 to Annual Report on Form
                10-K
                for the year ended December 31, 2003)21
            
            Subsidiaries
                of the Registrant23
            
            Consent
                of Ernst & Young LLP24
            
            Powers
                of Attorney (contained on signature page)31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Executive
                Officer31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of Chief Financial
                Officer32
            
            Section
                1350 Certifications





*
      Incorporated by reference.




49




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 27th day of February,
      2008.





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 Alan H. Buckey 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, 2007, 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 27th day of February, 2008.





/s/
                Steven C. Straus
            
            Chief
                Executive OfficerSteven
                C. Straus
            
            (Principal
                Executive Officer)/s/
                Alan H. Buckey
            
            Executive
                  Vice President/Finance and Chief Financial
                  OfficerAlan
                H. Buckey
            
            (Principal
                Financial and Accounting Officer)/s/
                E. Anthony Woods
            
            Chairman
                of the BoardE.
                Anthony Woods/s/
                William F. Bahl
            
            DirectorWilliam
                F. Bahl/s/
                Thomas G. Cody
            
            DirectorThomas
                G. Cody/s/
                John H. Gutfreund
            
            DirectorJohn
                H. Gutfreund/s/
                John C. Hassan
            
            DirectorJohn
                C. Hassan




50