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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549




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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, 2003

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|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.



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(Exact name of registrant as specified in charter)


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

|                                         |  |  |            | 
|---------------------------------------- |  |  | ---------- | 
|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: None

Securities registered pursuant to Section 12(g) of the act:

Common Stock, $.001 par value




(Title of Class)


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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
[  ]

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. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [  ] No [X]

The aggregate market value of the Common Stock held by non-affiliates of the
registrant as of June 30, 2003 was approximately $60,363,000.

The number of shares outstanding of the registrants Common Stock as of March
2, 2004 was 13,325,882



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DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive Proxy Statement for its Annual Meeting
of Stockholders to be held May 17, 2004 are incorporated by reference in Items
10, 11, 12, 13 and 14 of Part III of this Report.





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TABLE OF CONTENTS



|              |                                                                                                         |  |  |  |  |  |  | 
|------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                       
|              | Item 2. Properties                                                                                     
|              | Item 3. Legal Proceedings                                                                              
|              | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II      
|              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|              | Item 6. Selected Financial Data                                                                        
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|              | Item 8. Financial Statements and Supplementary Data                                                    
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|              | Item 9A. Controls and Procedures                                                                       
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                            
|              | Item 11. Executive Compensation                                                                        
|              | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|              | Item 13. Certain Relationships and Related Transactions                                                
|              | Item 14. Principal Accountant Fees and Services                                                        
|PART IV      
|              | Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K                             
|SIGNATURES   
|EXHIBIT-3(A) 
|EXHIBIT-10(K)
|EXHIBIT-14   
|EXHIBIT-21   
|EXHIBIT-23   
|EXHIBIT-31   
|EXHIBIT-32   



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##### Table of Contents



LCA-VISION INC.

FISCAL YEAR 2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

|          |  |                                                                                                |  |            |    |      |    | 
|--------- |  | ---------------------------------------------------------------------------------------------- |  | ---------- | -- | ---- | -- | 
|          |  |                                                                                                |  |            |    | Page
|          |  |                                                                                                |  |            |    |     
|Part I.   |  |                                                                                                |  |            |    |     
|Item 1.   |  | Business                                                                                       |  |            | 3  |     
|Item 2.   |  | Properties                                                                                     |  |            | 17 |     
|Item 3.   |  | Legal
Proceedings                                                                              |  |            | 17 |     
|Item 4.   |  | Submission of Matters to a Vote of Security
Holders                                            |  |            | 18 |     
|Part II. 
|Item 5.   |  | Market for Registrants Common Equity and Related Stockholder
Matters                          |  |            | 18 |     
|Item 6.   |  | Selected Financial Data                                                                        |  |            | 19 |     
|Item 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  |            | 20 |     
|Item 7A.  |  | Quantitative and Qualitative Disclosures About Market
Risk                                     |  |            | 26 |     
|Item 8.   |  | Financial Statements and Supplementary Data                                                    |  |            | 26 |     
|Item 9.   |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  |            | 44 |     
|Item 9A.  |  | Controls and
Procedures                                                                        |  |            | 44 |     
|Part III.
|Item 10.  |  | Directors and Executive Officers of the
Registrant                                             |  |            | 44 |     
|Item 11.  |  | Executive
Compensation                                                                         |  |            | 44 |     
|Item 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |  |            | 44 |     
|Item 13.  |  | Certain Relationships and Related
Transactions                                                 |  |            | 45 |     
|Item 14.  |  | Principal Accountant Fees and
Services                                                         |  |            | 45 |     
|Part IV. 
|Item 15.  |  | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                |  |            | 46 |     
|          |  |                                                                                                |  | Signatures |    |      | 51 | 

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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 1.
Business - Factors That May Affect Future Results and Market Price of Stock.




Item 1. Business.

Background and History of Company

LCA-Vision Inc. (the Company or LCA-Vision) is a leading developer and
operator of fixed-site laser vision correction centers under the brand name
LasikPlus. Our vision centers provide the staff, facilities, equipment and
support services for performing laser vision correction that employs advanced
laser technologies to help correct nearsightedness, farsightedness and
astigmatism. We currently utilize fixed-site excimer lasers manufactured by
Bausch & Lomb, VISX and Alcon. Our vision centers are supported mainly by
full-time credentialed board-certified ophthalmologists and 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 generally carry out the pre-procedure
evaluations and post-procedure follow-ups in-center. We have performed over
300,000 laser vision correction procedures in our vision centers in the United
States and Canada since 1991. Most of our patients currently receive a
procedure called LASIK, which we began performing in the United States in 1997.

We currently operate 40 laser vision correction centers, including 36
wholly-owned vision centers located in large metropolitan markets throughout
the United States, three joint ventures in Canada and one joint venture in
Europe.

LCA-Vision Inc., a Delaware corporation, is the successor to two businesses
which were founded and controlled by Stephen N. Joffe: Laser Centers of
America, Inc. and Toronto Laservision Centre, Inc. Laser Centers of America
was founded in 1985 to assist hospitals in establishing and managing laser
surgery centers, and Toronto Laservision was one of the earliest laser vision
surgery centers in Canada, which approved refractive laser surgery several
years prior to its introduction in the United States in 1995.

On August 18, 1997, we acquired all of the outstanding shares of Refractive
Centers International, Inc., an operator of laser vision correction centers and
a majority-owned subsidiary of the refractive laser manufacturer Summit
Technology, Inc., in exchange for 4,226,394 newly issued shares of LCA-Vision
common stock.

In 1998, we raised a total of $9,463,000 of equity capital through the issuance
of a new class of convertible preferred stock to fund the continued growth of
our business, and in July 1999 we raised an additional $37,300,000 of equity
capital, after expenses, through a public offering of 1,250,000 shares of our
common stock.

In 1996, our common stock began trading on the Nasdaq SmallCap Market, and
following our public offering in 1999, it began trading on the Nasdaq National
Market.

On November 12, 2002, stockholders of LCA-Vision Inc. approved a 1-for-4 stock
split. All share and per share amounts have been restated for the stock split.

In December 2002, the Company incorporated Lasik Insurance Company, Ltd. in
Georgetown, Grand Cayman to insure for medical professional liability.

In December 2003, we raised a total of $36,727,000 of equity capital, after
expenses, through a public offering of 2,400,000 shares of our common stock.

The Company derives all of its revenues from laser refractive surgery, our only
reported 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.

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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 corrective
lenses. Prior to the procedure, an assessment is made of the patients
candidacy for the procedure 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 process known as
ablation, which removes tissue and reshapes 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. In effect,
the change made in the middle or periphery of the cornea is translated to the
front surface of the cornea which results in helping correct vision. 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 laser vision
correction procedure. The typical procedure takes 15 to 30 minutes from set-up
to completion.

PRK.PRK has been approved by the U.S. Food and Drug Administration 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 to the
surface of the cornea. Following the PRK procedure, a contact lens bandage is
placed on the eye to protect it. The patient typically experiences discomfort
and blurred vision until the epithelium heals. An ophthalmologist generally
will prescribe certain topical pharmaceuticals for use by the patient
post-procedure to assist in alleviating discomfort and to promote corneal
healing. Although a patient generally experiences substantial improvement in
clarity of vision within a few days following the procedure, it can take one to
three months for the full benefits of the PRK procedure to be realized.
Patients usually have one eye treated in one visit and the second eye treated
at a later visit.

LASIK.We began performing LASIK, which now accounts for substantially all of
the procedures performed in our vision centers, in the United States in 1997.
In LASIK procedures, an automated microsurgical instrument called a
microkeratome is 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 allows an
ophthalmologist to treat both eyes of a patient during the same visit, involves
little patient discomfort and produces prompt results, frequently enabling
patients to see well postoperatively almost immediately.

Custom ablation.The newest advance in laser vision correction procedures
currently is LASIK using custom ablation. We provide custom ablation in all of
our markets using state-of-the-art technology, including VISX
CustomVueTM
technology, Alcons CustomcorneaTM technology and
Bausch & Lomb ZyoptixTM
technology.

To perform a custom ablation procedure, we use digital technology to identify
and measure imperfections in an individuals eyes more precisely than with
standard methods used for glasses and contact lenses and for non-custom LASIK
and non-custom PRK. This information in then transferred to the laser,
providing potentially greater precision and accuracy in the treatment.

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Prior to custom ablation, laser vision correction corrected only the visual
distortions caused by nearsightedness, farsightedness, and astigmatism.
However, these common types of vision distortions, called lower order
aberrations, are typically responsible for only 85% to 90% of the overall
quality of vision. There are other imperfections in the eyes optical system
that may affect the clarity of ones vision and how well one sees at night or
in low light. Doctors call these visual distortions higher order
aberrations and they can cause glare, shadows, halos and other visual
defects. Unless these higher order aberrations are addressed along with the
lower order aberrations, it is believed the quality of vision may be
compromised, even if it measures at 20/20.

With the new custom technology, it may now be possible to measure and, in some
cases, help correct both lower and higher order aberrations. Flat waves of
light are passed through the eye using a computerized wavefront-measuring
instrument. As the light waves travel through the eyes optical system, the
distortions in vision are measured and compared against the flat light waves
that would have been reflected if the optical system was perfect. A three
dimensional map is then generated representing the unique visual distortions,
including both lower and higher order aberrations. This map is a guide for the
laser, instructing it how and where to reshape the cornea to correct vision.
Other aspects of the custom LASIK procedure are similar to those described
above for LASIK.

The Laser Vision Correction Market

More than 150 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 4 million patients have been treated. Laser vision correction is
currently one of the most widely performed elective surgical procedures in the
United States, with approximately 1.2 million laser vision correction
procedures performed on approximately 600,000 patients in 2003. It is estimated
that there are approximately 57.5 million potential patients for laser vision
correction procedures in the United States, according to a report on the U.S.
refractive market published by Market Scope in November 2000.

Laser vision correction is typically an elective, private pay procedure
performed on an outpatient basis. The current demand for laser vision
correction procedures performed in the United States is widely believed to be
attributable to many factors, including:



| |  |  | Broader market acceptance - as the number of procedures performed
increases, so does the number of patients able to attest to the
perceived benefits of laser vision correction                                                                                  
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Improved technology - compared to earlier laser vision correction
procedures, the LASIK procedure typically results in less patient
discomfort and a shorter recovery period, and                                                                                
|
| |  |  | Expanded applications - FDA approval for the excimer laser used
in LASIK laser vision correction procedures has been extended to the
treatment of three of the most common types of refractive vision
disorders: nearsightedness, farsightedness and astigmatism.

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Number of Laser Vision Correction Procedures in United States

(BAR CHART)

* Source: Market Scope, February 11, 2004

Our Business Strategy

Our business strategy is to provide quality laser vision correction services at
an affordable price. In July 1999, we began converting our vision centers to
closed-access facilities from open-access facilities in order to obtain
increased control over the quality of care we provide to our patients and
greater operational and financial control of our business. Under the
open-access model, we allowed qualified ophthalmologists to use our equipment
and facilities in return for a facilities fee. Under our closed-access model,
in contrast, we either directly employ the ophthalmologist and the optometrist
or contract for their services, and are responsible for marketing and patient
acquisition. By the first quarter of 2000, we changed the names of the
majority of our vision centers to LasikPlusand began trying to build consumer
awareness of the brand name through media campaigns that generally include
newsprint, radio and direct mailings.

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 highly credentialed ophthalmologists and optometrists                                   
| | - |  | -----------------------------------------------------------------------------------------------------------------
|
| |  |  | Providing patients with a
Continuum of Care                                                                    
|
| |  |  | Opening and operating new laser vision correction centers                                                        
|
| |  |  | Providing attractive patient financing alternatives                                                              
|
| |  |  | Establishing relationships with leading managed care providers in the United States to source additional patients
|
| |  |  | Developing and implementing innovative direct marketing campaigns                                                

Recruiting and retaining highly credentialed ophthalmologists and optometrists.
We generally focus our recruiting efforts on leading ophthalmologists and
optometrists with a reputation for providing quality eye care within their
respective markets and who are experienced in laser vision correction
procedures. Our ophthalmologists generally have completed extensive
FDA-mandated training and also have met our qualification criteria, including a
review of state licensure, board certification, malpractice insurance,
historical procedure experience and clinical outcomes.

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 have access to both an ophthalmologist to address more
difficult inquiries and past patients to relate procedure experience. Once in
the vision center, potential patients can receive a free eye evaluation with
the local vision center 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 procedure
results and evaluate potentially providing enhancements to those patients who
do not

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receive the desired correction in the initial procedure. The vast majority of
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 expand
our business primarily through the development of new vision centers in
desirable 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 attempt to determine the number
of existing excimer lasers currently in that market. We also typically
interview local ophthalmologists and optometrists. We target markets with
potential to generate break-even procedure volume within the first six months
of opening, including the necessary ophthalmologist and optometrist staffing to
support such levels. We have developed what we believe to be cost-efficient
standardized vision center plans and designs to be used in building each new
vision center to efficiently 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 payors, we currently offer patients several financing alternatives. We
have entered into an arrangement with an unaffiliated finance company, pursuant
to which the finance company makes multiple payment plans available to
qualifying customers. These payment plans typically provide for payments over a
12-month to 48-month period. We generally bear no credit risk for loans made
under this program. For patients not qualifying for these plans, we also offer
our own direct financing to customers under which we charge an up-front fee
intended to cover some or all of our variable costs, with the remaining balance
paid by the customer through direct withdrawals from the customers bank
account in up to 36 equal monthly installments. We can also provide information
to customers regarding other financing options, such as installment plans, home
equity loans and payment through employer flexible benefit plans.

Establishing 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 hope to increase
our U.S. footprint and market share by developing contractual relationships
with managed care organizations, through which we offer discounted rates to
plan participants. Through our agreements with managed care providers to date,
we believe we currently have access to approximately 85 million covered lives
in over 100 major U.S. markets. The plan participant, and not the managed care
organization, is responsible for the payment of our fees under these
arrangements.

Developing and implementing innovative direct marketing campaigns.Our
marketing programs seek to reinforce the LasikPlusbrand name in addition to
raising awareness concerning laser vision correction and promoting our vision
centers. In each market, we target a specific demographic group of potential
patients through the use of print media, radio, direct mail campaigns, internet
marketing, brochures and videos. In most advertisements, prospective patients
are provided our web site address, www.lasikplus.com, and a toll-free number,
such as 1-888-529-2020, 1-800-LASIKPLUS or 1-800-243-EYES. Our call center
representatives screen prospective patients, record patient names and
information into our centralized computer system and attempt to schedule eye
evaluation appointments with the local vision center ophthalmologist or
optometrist to determine whether the prospective patient is a candidate for
laser vision correction. We generally keep a prospective patients name on file
if the patient elects not to proceed with a laser vision procedure following an
initial evaluation. We continuously evaluate the effectiveness of our marketing
programs and our marketing costs.

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Competition

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

In addition, 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.
Laser vision correction corporate providers, such as LCA-Vision, are a
specialized type of multi-site eye care center that primarily provides laser
vision correction. Among the laser vision correction center providers, we
believe we are one of the largest providers in terms of number of vision
centers in the United States.

The market for providing laser vision correction service is highly competitive
and fragmented. In most, if not all, of our markets, we compete with other
laser vision correction center chains, including TLC Vision Corporation, which
is also a public company, and Lasik Vision Institute, as well as with
hospitals, surgical clinics, local operators of vision centers and
ophthalmology practices, among others, that have purchased or rent their own
lasers. The market may become more competitive as it matures and laser vision
correction penetration increases.

In the past, certain competitors have utilized deeply-discounted pricing in an
effort to generate procedural volume. These practices have 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. While two of the larger
heavily-discounted providers of laser vision correction services have ceased
business, other competitors offer discounts 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.

Employees

As of March 2, 2004 we had 274 employees, 245 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 Laser Equipment

We are not directly involved in the research, development or manufacture of
ophthalmic laser systems, diagnostic equipment, microkeratomes or microkeratome
blades. There are at least five companies - Bausch & Lomb, VISX, Alcon, Nidek
and LaserSight - whose excimer laser systems have been approved by the FDA for
commercial sale in the United States. We currently use several suppliers,
including Bausch & Lomb, VISX and Alcon, for our excimer lasers and diagnostic
equipment in the United States. We currently rely primarily on Bausch & Lomb
to provide us with microkeratomes, microkeratome blades and other disposable
items required in LASIK procedures.

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 law.

Failure to comply with applicable FDA requirements could subject excimer 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 affect 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 a limitation on or
prohibition of our use of excimer lasers, 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

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adversely affect the manufacturers ability to obtain regulatory approval of
laser equipment. Furthermore, the failure of VISX, Bausch & Lomb and Alcon, or
any other manufacturers that supply or may supply excimer lasers to us, to
comply with applicable federal, state, or foreign regulatory requirements, or
any adverse regulatory action against such manufacturers, 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 lasers,
microkeratomes and certain 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 users such as us as well as manufacturers must comply.

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



| |  |  | Product seizures            
| | - |  | ----------------------------
|
| |  |  | Recalls,                    
|
| |  |  | Withdrawal of approvals     
|
| |  |  | Civil and criminal penalties

Noncompliance 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 services and could, therefore,
cause the total number of procedures we perform to decrease.

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 or
manufacture or failure to comply with manufacturing or labeling requirements
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.

Anti-kickback statutes

In the United States, the federal anti-kickback statute prohibits the knowing
and willful solicitation, receipt, offer or payment of any kickback in
connection with:



| |  |  | The referral of patients                                                                                                                 
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The ordering or purchasing of items or services payable in whole
or in part under Medicare, Medicaid or other federal healthcare
programs

Some courts have interpreted the federal anti-kickback statute broadly to
prohibit payments intended to induce the referral of Medicare or Medicaid
business, regardless of any other legitimate motives. Sanctions for violations
of the anti-kickback statute include:



| |  |  | Criminal penalties                                          
| | - |  | ------------------------------------------------------------
|
| |  |  | Civil penalties of up to $50,000 per violation              
|
| |  |  | Exclusion from Medicare, Medicaid and other federal programs

According to the U.S. Office of the Inspector General, ophthalmologists and
optometrists who engage in agreements to refer business may be violating the
anti-kickback statute. Further, violations may occur even with respect to
non-Medicare or Medicaid services if the arrangement has an impact on the
referral pattern for Medicare or Medicaid services.

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Some states have enacted statutes similar to the federal anti-kickback statute
which is applicable to all referrals of patients. Although we have endeavored
to structure our business operations to be in material compliance with such
laws, authorities could determine that our business practices are in violation
of such laws. This could have a material adverse effect on our business,
financial condition and results of operations.

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. 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. 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.

Self-referral laws

The U.S. federal self-referral law
(the Stark Law) prohibits physicians
(including optometrists) from referring their Medicare or Medicaid patients for
certain health services to any provider with which they (or their immediate
family members) have a financial relationship. Certain referrals, however, fit
within specific exceptions in the statute or regulations. The penalties for
violating the Stark Law include:



| |  |  | Denial of payment for the health services performed                                     
| | - |  | ----------------------------------------------------------------------------------------
|
| |  |  | Civil fines of up to $15,000 for each service provided pursuant to a prohibited referral
|
| |  |  | A fine of up to $100,000 for participation in a circumvention scheme                    
|
| |  |  | Possible exclusion from Medicare and Medicaid programs                                  

At this time it is unclear how ophthalmologists and optometrists are affected
under the law. While we believe that our present business practices materially
comply with the Stark Law and similar state laws to the extent we are subject
to such laws, we cannot assure you that our business practices will not be
challenged in the future. This could have a material adverse effect on our
business, financial condition and results of operations.

Other anti-fraud provisions

Certain federal and state laws impose penalties on healthcare providers and
those who provide services to such providers (including businesses such as us)
that fraudulently or wrongfully bill government or other third-party payors for
healthcare services. Such penalties include substantial civil and criminal
fines and imprisonment. In addition, the federal law prohibiting false
Medicare/Medicaid billings allows a private person to bring a civil action in
the name of the U.S. government for violations of its provisions. Such private
individuals can obtain a portion of the false claims recovery if the action is
successful. We believe that we operate in material compliance with these laws.
If any of our activities are challenged or reviewed by governmental authorities
or private parties asserting false claims, such actions 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 licensure
in states where licensure is

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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. This
could subject us to significant fines or penalties, result in our being
required to cease operations in that state and could otherwise have a material
adverse effect on our business, financial condition and results of operations.
We have no reason to believe that we will be unable to obtain necessary
licenses without unreasonable expense or delay, but there can be no assurance
that we will be able to obtain any required license.

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 to cover certain
interpretive issues. Therefore, it is possible that a state regulatory
authority could determine that we are improperly conducting business operations
without a CON. This could have a material adverse effect on our business,
financial condition and results of operations, and there can be no assurance
that we will be able to acquire a CON in all states where it is required.

Health information practices

We, along with the health care industry in general, are impacted by the federal
Health Insurance Portability and Accountability Act of 1996, or HIPAA, which
mandates, among other things, the adoption of standards for the exchange of
electronic health information in an effort to enhance the efficiency and
simplify the administration of the healthcare system. In addition, HIPAA
requires the Department of Health and Human Services to adopt standards for
electronic transmissions and code sets; unique identifiers for providers,
employers, health plans and individuals; security and electronic signatures;
privacy; and enforcement. While HIPAA ultimately is designed to reduce
administrative expenses within the healthcare system, the law likely will
initially require significant, and possibly costly, changes for the industry.
The Electronic Healthcare Transactions and Code Sets have gone into effect. On
February 20, 2003, the Department of Health and Human Services published
standards for the security of electronic health information. We must comply
with the requirements of the security standards by April 21, 2005. Based on
current information, we believe we will be able to fully comply with the HIPAA
requirements by such date; however, we cannot at this time estimate the cost of
compliance, whether in fact we will be successful in achieving such compliance
or if implementation of the HIPAA standards will result in an adverse effect on
our operations or profitability.

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, which could have a material adverse effect on our business, financial
condition and results of operations.

Factors That May Affect Future Results and Market Price of Stock

We have a history of operating losses.

We commenced operations in 1991 and have posted net losses in every year other
than 2003 and 1999. Our accumulated deficit as of December 31, 2003 was
$37,609,000. Our ability to remain profitable depends on, among other factors:



| |  |  | Continued market acceptance for laser vision correction services                            
| | - |  | --------------------------------------------------------------------------------------------
|
| |  |  | Our ability to execute our planned business strategy, including further growth and expansion
|
| |  |  | Our ability to manage equipment and operating costs                                         

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:



| |  |  | 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                                                                                                                    

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| |  |  | 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 weakest the fourth quarter. We
believe these fluctuations are due to several factors, including:



| |  |  | The availability to potential patients of funds under typical corporate medical flexible spending plans                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The general effect of the New Year season and New Years resolutions on the scheduling of procedures                           
|
| |  |  | Time constraints imposed by the holiday season and a desire by
some individuals not to schedule procedures at that time of year

The revenue growth and recent profitability we have achieved in prior quarters
might not continue, and revenues and net income in any particular quarter could
be lower, or our losses greater, than those of the preceding quarters,
including comparable quarters of prior fiscal years. Quarter-to-quarter
comparisons of our operating results are not necessarily meaningful and should
not be relied upon as indications of likely future performance or annual
operating results. Reductions in revenues or net income between quarters or our
failure to achieve expected quarterly earnings per share could result in a
decrease in the market price of our common stock.

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 payors such as health care insurance companies or government
programs. Accordingly, as we have experienced in prior fiscal periods, our
operating results may vary based upon the impact of changes in economic
conditions on the disposable income of consumers interested in laser vision
correction. 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,
weakening economic conditions may cause some of our customers to experience
financial distress or declare bankruptcy, which may negatively impact our
accounts receivable collection experience and adversely affect our results of
operations and cash flow.

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

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

If we are unable to attract and retain qualified ophthalmologists, our ability
to attract patients could be negatively affected.

Our revenues are generated by ophthalmologists who work with us, either as
employees or independent contractors, to perform surgeries. In states where the
corporate practice of medicine is prohibited, we may contract with professional
corporations for ophthalmologists to perform surgeries at our facilities. In
other states, we may directly hire ophthalmologists to work for us as our
employees. The retention of qualified ophthalmologists is a critical factor in
the success of our 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 attract
patients could be negatively affected.

If technological improvements occur which render our equipment or services
obsolete, we may need to make significant capital expenditures and might not
have the financial resources to do so.

Newer technologies, techniques or products for the treatment of refractive
vision disorders could be developed with better performance than the excimer
laser technology we currently use. If new and better ophthalmic laser
technology or other surgical or non-surgical methods for correcting refractive
vision disorders is introduced that we would like to use in our vision centers,
we may be unable to acquire such new technologies or may have to make
significant capital expenditures to do so. If we do not have access to
sufficient funds to acquire such new technologies, our ability to attract
patients could be negatively affected.

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 will come
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

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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 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 compete more effectively than us. Competition in the
market for laser vision correction could increase as excimer laser surgery
becomes more common and the number of ophthalmologists performing the procedure
increases. Additional competition may develop, particularly as 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, 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. These practices have 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. While two of the larger
heavily-discounted providers of laser vision correction services have ceased
business, other competitors offer discounts in some of the 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 recently expanded our direct financing program and as a result may
incur increased credit risk which could negatively affect our cash flow and
results of operations.

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, which is intended to cover some or all of
our variable costs, and pay the remaining balance in up to 36 equal monthly
installments through direct withdrawal from his or her bank account. As a
result of a recent expansion in the program, as of December 31, 2003, we had
$5.9 million in accounts receivable, compared to $0.6 million as of December
31, 2002. We are now exposed to significantly increased credit risk,
particularly given that some or all of the patients who participate in our
direct financing program 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 could decrease.

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

We derive substantially all of our revenues from laser vision correction. As a
result, 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 methods of treating refractive vision
disorders. 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 or
techniques such as custom ablation
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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                                                                                    
|
| |  |  | The lack of long-term follow-up data and the possibility of unknown side effects                                                                                    
|
| |  |  | 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 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.

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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                                  
|
| |  |  | Poor or reduced visual quality               
|
| |  |  | Overcorrection or under correction           
|
| |  |  | Regression                                   
|
| |  |  | Corneal flap or corneal healing complications

Laser vision correction may also
involve the removal of Bowmans membrane,
an intermediate layer between the outer corneal layer and the middle corneal
layer of the eye. The effect of the removal of Bowmans membrane on patients is
currently not clear.

We depend on limited sources for the excimer lasers, diagnostic equipment,
microkeratomes and disposable blades we use, and shortages of these items could
hinder our ability to increase our procedure volume.

We currently use several suppliers, including Bausch & Lomb, VISX and Alcon,
for our excimer lasers and diagnostic equipment in the United States. If one or
more of these companies becomes 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 could be restricted.

We currently rely primarily on Bausch & Lomb to provide us with 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.

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, 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:



| |  |  | Restrictions on the approval, distribution and use of medical devices
| | - |  | ---------------------------------------------------------------------
|
| |  |  | Anti-kickback statutes                                               
|
| |  |  | Fee-splitting laws                                                   
|
| |  |  | Corporate practice of medicine restrictions                          
|
| |  |  | Self-referral laws                                                   
|
| |  |  | Anti-fraud provisions                                                
|
| |  |  | Facility license requirements and certificates of need               
|
| |  |  | Privacy laws and regulations                                         
|
| |  |  | Conflict of interest regulations                                     
|
| |  |  | Rules and regulations regarding advertising and marketing practices  
|
| |  |  | Sales and use taxes                                                  

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 vary from jurisdiction to jurisdiction. As a result, some of our
activities could be challenged, sometimes successfully.

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, ophthalmologists who practice in our vision centers or those
manufacturers to enforcement actions, including product seizure, recalls,
withdrawal of approvals and

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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. 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
rather than incur the significant expense and distraction from our business
that would have resulted from prolonged litigation. On July 18, 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. We
cannot be certain that this order, to which we agreed, will not substantially
limit the nature and scope of our future marketing and advertising practices
which is an important part of our strategy to generate demand for our laser
vision correction services.

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 potential risk of injury to patients. Such risk could result in
professional liability, malpractice, product liability, or other claims brought
against us 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. The operation of any excimer laser, diagnostic equipment, microkeratome
or other equipment may result in substantial claims against us by patients who
allege they were injured as a result of vision correction procedures.
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 rely on ophthalmologists professional liability insurance policies and
manufacturers insurance policies for product liability coverage, although we
have limited umbrella product and professional liability insurance. We
generally require the ophthalmologists who use our vision centers to maintain
certain levels of professional liability insurance, although there can be no
guarantee that the ophthalmologists will be successful in obtaining or
maintaining such insurance coverage, particularly in the current insurance
market.

The availability of professional liability insurance has decreased and its cost
has increased significantly for a variety of reasons, including reasons outside
our control. 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 the doctors could result in increased exposure to liability.

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

Effective as of December 18, 2002, we established 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,
some of whom are currently insured by the captive. Our captive insurance
company is
managed by an independent insurance consulting and management firm and is
capitalized and funded by us based on actuarial studies performed by an
affiliate of the consulting and management firm. For the 12 months ending
December 17, 2003, our captive insurance company purchased excess liability
coverage for 80% of our losses in the year in excess of $1,000,000 per
occurrence, up to $11,000,000. Under that arrangement, the coverage providers
obligation arises only after our captive pays the first $1,000,000 of any loss
and the coverage providers are only obligated to pay an aggregate of $8,000,000
in a given policy year. Beginning December 18, 2003, the Company elected to
use the captive insurance company for both the primary insurance and the excess
liability coverage. The captive insurance company continues to be funded at a
rate determined by actuarial studies performed by an independent consulting
firm. A number of claims covered by our captive insurance company are now
pending. The payment of significant claims by our captive insurance company or
our assumption of incremental risk could negatively affect our profitability
and our financial condition.

We may have substantial future capital requirements, and our ability to obtain
additional funding is uncertain.

We are unable to predict with certainty the timing or the amount of our future
capital requirements. Operating losses or changes in our operations, expansion
plans or capital requirements may consume available cash and other resources
more rapidly than we anticipate and additional funding may be required. Our
capital needs depend on many factors, including:



| |  |  | The rate and cost of purchases of equipment and other assets               
| | - |  | ---------------------------------------------------------------------------
|
| |  |  | The rate of opening new vision centers or expanding existing vision centers
|
| |  |  | Market acceptance of laser vision correction                               
|
| |  |  | Any strategic transactions we may make in the future                       

15



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| |  |  | Actions by competitors
| | - |  | ----------------------

We may not have adequate resources to finance the growth in our business, and
we may not be able to obtain additional capital through subsequent equity or
debt financings on terms acceptable to us or at all. If we do not have adequate
resources and cannot obtain additional capital, we will not be able to
implement our expansion strategy successfully, our growth could be limited and
our results of operations could decline.

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

There has been substantial litigation in the United States, Canada and
elsewhere regarding the patents on ophthalmic lasers. If the use of an excimer
laser or other procedure performed at any our vision centers is deemed to
infringe a patent or other proprietary right, we may be named as a defendant in
ensuing litigation, prohibited from using the equipment or performing the
procedure that is the subject of the patent dispute, or required to obtain a
royalty-bearing license, which may involve substantial costs, including ongoing
royalty payments. If a license is not available on acceptable terms, we may be
required to seek the use of products that do not infringe the patent. The
unavailability of alternate products could cause us to cease operations in the
United States, Canada or elsewhere or delay our expansion. If we are prohibited
from performing laser vision correction at any of our vision centers, our
revenues and profitability could decrease.

We are dependent on a small number of senior managers.

Our success depends, to a significant extent, upon the efforts and abilities of
our Chairman and Chief Executive Officer, Stephen N. Joffe, and other members
of senior management. We currently do not have employment agreements with
senior key employees, other than short-term employment agreements with Kevin M.
Hassey, our President, and Alan H. Buckey, our Executive Vice President/Finance
and Chief Financial Officer. We do not carry key man insurance on any of these
key employees. The loss of the services of one or more of these key employees
could have a material adverse effect on our business.

Stephen N. Joffe, our Chairman and Chief Executive Officer, and members of his
family control a number of shares sufficient to influence corporate actions.

Members of the Joffe family together own or control approximately 21.3% of our
outstanding common stock. The interests of the Joffe family may differ from
those of our other stockholders, and they may take actions that advance their
interests to the detriment of our other stockholders. If these persons acted
together, they would have sufficient voting power to influence the outcome of
corporate actions submitted to the stockholders for approval and to influence
our management and affairs, including the election of our board of directors.
In addition, this concentration of ownership may prevent attempts to remove or
replace senior management. Stephen N. Joffe is the Chairman of our Board of
Directors and our Chief Executive Officer. Craig P.R. Joffe, his son, is our
Senior Vice President, General Counsel and Secretary and a director.

Anti-takeover provisions under Delaware law and certain provisions of our
certificate of incorporation may make a change in our management or an
acquisition of us, which may be beneficial to our stockholders, more difficult.

We are incorporated in Delaware. Certain anti-takeover provisions of Delaware
law, in addition to the control of a number of shares of our common stock by
the Joffe family, may make changes in the management and control of our company
more difficult, even if those changes would be beneficial to the stockholders.
Delaware law also prohibits corporations from engaging in a business
combination with any holders of 15% or more of their capital stock until the
holder has held the stock for three years unless our board of directors or
stockholders approve the transaction or certain other conditions are satisfied.
Our board of directors may use these provisions to prevent changes in the
management and control of our company. In addition, under applicable Delaware
law, our board of directors may adopt additional anti-takeover measures in the
future.

Pursuant to our certificate of incorporation, our board of directors is
authorized to issue, without stockholder approval, any or all of our authorized
but unissued shares of preferred stock with any dividend, redemption,
conversion or exchange provisions as the board may designate. The rights of
common stockholders would be subordinate and subject to and may be adversely
affected by the rights
of preferred stockholders. Issuance of preferred stock could have the effect of
entrenching our board of directors and making it more difficult or discouraging
for a third-party to acquire a majority of our outstanding voting stock.

Our stock price has been and is likely to continue to be highly volatile, and
an investment in our stock could suffer a decline in value.

The price of our common stock has been, and is likely to continue to be, highly
volatile. Our stock price may fluctuate substantially due to a number of
factors, including:



| |  |  | Actual or anticipated fluctuation in our results of operations
| | - |  | --------------------------------------------------------------
|
| |  |  | Technological innovations                                     

16



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| |  |  | Increased competition                                                                                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Conditions and trends in the laser refractive surgery industry                                                                           
|
| |  |  | The lack of diversification of our revenues                                                                                              
|
| |  |  | General market conditions of the US economy                                                                                              
|
| |  |  | Geopolitical risks that destabilize the world economy                                                                                    
|
| |  |  | Changes in or our failure to meet market or, to the extent
securities analysts follow our common stock, securities analysts
expectations

In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
securities of healthcare companies, including us. These broad market
fluctuations may result in a material decline in the market price of our common
stock, regardless of our operating performance.

Internet

The Companys website is www.lasikplus.com. The Company makes available free
of charge through a link provided at the website its Forms 10-K, 10-Q and 8-K
as well as any amendments thereto. These reports are available as soon as
reasonably practicable after they are filed or furnished to the Securities and
Exchange Commission. To obtain a copy of Form 10-K by mail, please send a
request to Investor Relations at LCA-Vision Inc., 7840 Montgomery Road,
Cincinnati, Ohio 45236.




Item 2. Properties.

Our corporate headquarters and one of our laser refractive surgery centers are
located in a 32,547 sq. ft. office building that we own in Cincinnati, Ohio.
Our other laser refractive surgery centers are in leased locations. The
typical location is in a professional office building and includes a laser
surgery room, private examination rooms, and patient waiting areas. The leased
space ranges in size from approximately 2,400 to 5,100 square feet with
expiration dates ranging from December 31, 2004 to July 31, 2010.




Item 3. Legal Proceedings.

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. Our captive
insurance company is managed by an independent insurance consulting and
management firm and is capitalized by us based on actuarial studies performed
by an affiliate of the consulting and management firm.

For the 12 months ending December 17, 2003, our captive insurance company
purchased excess liability coverage for 80% of our losses in the year in excess
of $1,000,000 per occurrence, up to $11,000,000. Under that arrangement, the
coverage providers obligation arises only after our captive pays the first
$1,000,000 of any loss and the coverage providers are only obligated to pay an
aggregate of $8,000,000 in a given policy year. Beginning December 18, 2003,
the Company elected to use the captive insurance company for both the primary
insurance and the excess liability coverage. The captive insurance company
continues to be funded at a rate determined by actuarial studies performed by
an independent consulting firm. A number of claims covered by our captive
insurance company are now pending.

We also are subject to other litigation from time to time, none of which we
currently consider to be material.

We do not believe that any of the legal proceedings to which we are currently
subject will have a material adverse effect on our business, financial position
or results of operations.

17



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##### Table of Contents






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

Not applicable.




PART II




Item 5. Market for Registrants Common Equity and Related Stockholder Matters.

Our common stock is quoted on the Nasdaq National Market under the symbol
LCAV. There were approximately 23,900 beneficial, brokerage and registered
owners of record of our Common Stock on March 2, 2004.

The following table sets forth the range of high and low bid prices of the
common stock as reported by the Nasdaq National Market for the specific
periods.

|               |  |      |       |      |  |      |       |     |  |   |      |  |  |   |      | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ---- |  |  | - | ---- | 
|               |  | 2003 |       | 2002
|               |  |      |       |     
|               |  | High |       | Low  |  | High |       | Low
|First Quarter  |  | $    | 3.74  |      |  | $    | 2.25  |     |  | $ | 7.96 |  |  | $ | 3.20 | 
|Second Quarter |  |      | 9.75  |      |  |      | 3.32  |     |  |   | 7.52 |  |  |   | 3.60 | 
|Third Quarter  |  |      | 19.50 |      |  |      | 8.57  |     |  |   | 5.08 |  |  |   | 2.40 | 
|Fourth Quarter |  |      | 22.19 |      |  |      | 13.36 |     |  |   | 3.40 |  |  |   | 1.86 | 

We have not declared or paid cash dividends on our common stock in the past and
currently do not anticipate doing so in the future. Any future determination
as to the declaration and payment of dividends will be at the discretion of our
Board of Directors and will depend on then-existing conditions.

18



---



##### Table of Contents






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.

|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|------------------------------------------------- | ------------------------------------- | - | --------------------------------------------- | ------ | ---- | - | ------ | ------ | ---- | - | ------- | ------ | - | - | ------ | ------ | - | - | ------ | ------ | -
|                                                  |                                       |   | Years Ended December 31,                     
|                                                  |                                       |   | 2003                                          |        | 2002 |   | 2001   |        | 2000 |   | 1999   
|                                                  |                                       |   | (amounts in thousands, except per share data)
|Consolidated Statements of Operations Data:       |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |       
|Revenues:                                         |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                  | Laser refractive surgery              |   | $                                             | 81,423 |      |   | $      | 61,838 |      |   | $       | 68,096 |   |   | $      | 63,450 |   |   | $      | 56,358 |  
|                                                  | Other                                 |   |                                               |       |      |   |        |       |      |   |         |       |   |   |        |       |   |   |        | 1,026  |  
|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|                                                  | Total revenues                        |   |                                               | 81,423 |      |   |        | 61,838 |      |   |         | 68,096 |   |   |        | 63,450 |   |   |        | 7,384  |  
|Operating costs and expenses:                     |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                  | Medical professional and license fees |   |                                               | 15,779 |      |   |        | 12,270 |      |   |         | 13,626 |   |   |        | 15,542 |   |   |        | 22,930 |  
|                                                  | Direct costs of services              |   |                                               | 31,507 |      |   |        | 28,796 |      |   |         | 33,616 |   |   |        | 27,218 |   |   |        | 16,113 |  
|                                                  | General and administrative expenses   |   |                                               | 8,043  |      |   |        | 8,327  |      |   |         | 8,727  |   |   |        | 9,394  |   |   |        | 6,036  |  
|                                                  | Marketing and advertising             |   |                                               | 12,566 |      |   |        | 12,823 |      |   |         | 12,732 |   |   |        | 14,565 |   |   |        | 5,671  |  
|                                                  | Depreciation and amortization         |   |                                               | 6,377  |      |   |        | 5,997  |      |   |         | 5,625  |   |   |        | 3,839  |   |   |        | 2,964  |  
|                                                  | Special charges                       |   |                                               |       |      |   |        | (174   | )    |   |         | 1,774  |   |   |        |       |   |   |        | (150   | )
|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|                                                  | Total expenses                        |   |                                               | 74,272 |      |   |        | 68,039 |      |   |         | 76,100 |   |   |        | 70,558 |   |   |        | 53,564 |  
|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|Operating income (loss):                          |                                       |   | 7,151                                         |        |      |   | (6,201 | )      |      |   | (8,004  | )      |   |   | (7,108 | )      |   |   | 3,820  |       
|Equity in earnings from unconsolidated
businesses |                                       |   | 317                                           |        |      |   | 241    |        |      |   | 372     |        |   |   | 49     |        |   |   | 316    |       
|Interest expense                                  |                                       |   | (18                                           | )      |      |   | (4     | )      |      |   | (17     | )      |   |   | (58    | )      |   |   | (169   | )     
|Interest income                                   |                                       |   | 540                                           |        |      |   | 225    |        |      |   | 924     |        |   |   | 2,713  |        |   |   | 1,633  |       
|Litigation settlement                             |                                       |   |                                              |        |      |   | 2,282  |        |      |   |        |        |   |   |       |        |   |   |       |       
|Other (expense) income                            |                                       |   | (130                                          | )      |      |   | (195   | )      |      |   | (61     | )      |   |   | 604    |        |   |   | 6      |       
|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|Income (loss) before taxes on income              |                                       |   | 7,860                                         |        |      |   | (3,652 | )      |      |   | (6,786  | )      |   |   | (3,800 | )      |   |   | 5,606  |       
|Income tax expense (benefit)                      |                                       |   | 591                                           |        |      |   | 174    |        |      |   | 16,589  |        |   |   | (1,434 | )      |   |   | (5,287 | )     
|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|Net income (loss)                                 |                                       |   | 7,269                                         |        |      |   | (3,826 | )      |      |   | (23,375 | )      |   |   | (2,366 | )      |   |   | 10,893 |       
|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|Dividends to preferred stockholders               |                                       |   |                                              |        |      |   |       |        |      |   |        |        |   |   |       |        |   |   | 140    |       
|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|Income (loss) available to common stockholders    |                                       | $ | 7,269                                         |        |      | $ | (3,826 | )      |      | $ | (23,375 | )      |   | $ | (2,366 | )      |   | $ | 10,753 |       
|                                                  |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |        |  
|Income (loss) per common share                    |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                  | Basic                                 |   | $                                             | 0.67   |      |   | $      | (0.35  | )    |   | $       | (2.01  | ) |   | $      | (0.19  | ) |   | $      | 0.89   |  
|                                                  | Diluted                               |   | $                                             | 0.66   |      |   | $      | (0.35  | )    |   | $       | (2.01  | ) |   | $      | (0.19  | ) |   | $      | 0.84   |  
|Weighted average shares used in computation       |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                  | Basic                                 |   |                                               | 10,927 |      |   |        | 10,794 |      |   |         | 11,643 |   |   |        | 12,741 |   |   |        | 11,998 |  
|                                                  | Diluted                               |   |                                               | 11,077 |      |   |        | 10,794 |      |   |         | 11,643 |   |   |        | 12,741 |   |   |        | 12,729 |  
|Selected Operating Data                           |                                       |   |                                               |        |      |   |        |        |      |   |         |        |   |   |        |        |   |   |        |       
|                                                  | Laser vision correction procedures    |   |                                               | 65,485 |      |   |        | 57,104 |      |   |         | 72,032 |   |   |        | 59,144 |   |   |        | 33,266 |  

|                   |                                       |  |                 |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------ | ------------------------------------- |  | --------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                   |                                       |  | At December 31,
|                   |                                       |  | 2003            |         | 2002 |  | 2001 |         | 2000 |  | 1999
|Balance Sheet Data |                                       |  |                 |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |        
|                   | Cash and cash equivalents             |  | $               | 64,908  |      |  | $    | 18,298  |      |  | $    | 16,609  |   |  | $ | 19,692  |   |  | $ | 11,981  |  
|                   | Short-term investments                |  |                 |        |      |  |      |        |      |  |      |        |   |  |   | 8,626   |   |  |   | 37,299  |  
|                   | Working capital                       |  |                 | 60,986  |      |  |      | 12,965  |      |  |      | 14,378  |   |  |   | 24,063  |   |  |   | 49,212  |  
|                   | Total assets                          |  |                 | 90,037  |      |  |      | 39,996  |      |  |      | 43,188  |   |  |   | 75,597  |   |  |   | 85,290  |  
|                   | Debt maturing in one year             |  |                 |        |      |  |      | 10      |      |  |      | 26      |   |  |   | 178     |   |  |   | 676     |  
|                   | Total debt, excluding current portion |  |                 |        |      |  |      |        |      |  |      | 4       |   |  |   | 48      |   |  |   | 250     |  
|                   | Accumulated deficit                   |  |                 | (37,069 | )    |  |      | (44,338 | )    |  |      | (40,512 | ) |  |   | (17,136 | ) |  |   | (14,771 | )
|                   | Total stockholders investment        |  |                 | 78,802  |      |  |      | 32,112  |      |  |      | 38,202  |   |  |   | 65,045  |   |  |   | 80,045  |  

19



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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 the
Selected Financial Data and the accompanying financial statements and
related notes included elsewhere in 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 1. Business, under Government Regulation and Factors That May Affect
Future Results and Market Price of Common Stock.

Overview

We are a leading developer and operator of fixed-site laser vision correction
centers under the brand name LasikPlus. Our vision centers provide the
facilities, equipment and support services for performing laser vision
correction that employ advanced laser technologies to help correct
nearsightedness, farsightedness and astigmatism. We currently utilize
fixed-site excimer lasers manufactured by Bausch & Lomb, VISX and Alcon. In
July 1999, we began converting our vision centers to closed-access facilities
from open- access facilities in order to obtain increased control over the
quality of care we provide to our patients and greater operational growth and
control of our business.

Substantially all of our revenues currently are derived from LASIK procedures
performed in our U.S. vision centers.

Our operating costs and expenses include:



| |  |  | Medical professional and license fees, including per procedure
fees for the ophthalmologists performing laser vision correction and
the license fees per procedure paid to equipment suppliers VISX,
Bausch & Lomb and Alcon
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Direct costs of services, including center rent and utilities,
equipment lease and maintenance costs, surgical supplies, center staff
expense and costs related to other revenues                                           
|
| |  |  | General and administrative costs, including headquarters staff expense and other overhead costs                                                                                                                             
|
| |  |  | Marketing and advertising costs                                                                                                                                                                                             
|
| |  |  | Depreciation of equipment                                                                                                                                                                                                   

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.

Results of Operations

Revenues

We derived substantially all of our revenues for the last three years from the
delivery of LASIK laser vision correction services. Our revenues in any period
are primarily a function of the number of laser vision correction procedures
performed and the pricing for these services.

Our revenues are impacted by a number of factors, including the following:



| |  |  | 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 used by us                                                                    
|
| |  |  | New vision center openings and our ability to increase procedure volume at existing vision centers                                                
|
| |  |  | The availability of patient financing                                                                                                             
|
| |  |  | General economic conditions and consumer confidence levels                                                                                        
|
| |  |  | The continued growth and increased acceptance of LASIK                                                                                            
|
| |  |  | The effect of competition and discounting practices in our industry                                                                               

Certain states prohibit us from practicing medicine, employing ophthalmologists
to practice medicine on our behalf or employing optometrists to render
optometry services on our behalf. In those states, we may contract with
professional corporations to provide these services. Beginning in September
2002, we started a process to amend our management agreements with professional
corporations. The new management agreements provide us with financial and
operational control of the professional corporations. Therefore, we now
consolidate the financial results for those professional corporations under the
new management agreements in accordance with EITF 97-2, application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Management Entities and
Certain Other Entities with Contractual Management Agreements. This change did
not have a material impact on our operating income (loss), as the increase in
revenue resulting from consolidation of these professional corporations is
offset by a corresponding increase in medical professional fees.

20



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##### Table of Contents



The following table details the number of laser vision correction procedures
performed at our consolidated vision centers.

|               |  |      |        |      |  |      |        |  |  |  |        | 
|-------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|               |  | 2003 |        | 2002 |  | 2001
|               |  |      |        |      |  |     
|First Quarter  |  |      | 17,028 |      |  |      | 17,592 |  |  |  | 25,061 | 
|Second Quarter |  |      | 16,432 |      |  |      | 14,797 |  |  |  | 22,940 | 
|Third Quarter  |  |      | 15,965 |      |  |      | 12,511 |  |  |  | 13,347 | 
|Fourth Quarter |  |      | 16,060 |      |  |      | 12,204 |  |  |  | 10,684 | 
|               |  |      |        |      |  |      |        |  |  |  |        | 
|Year           |  |      | 65,485 |      |  |      | 57,104 |  |  |  | 72,032 | 
|               |  |      |        |      |  |      |        |  |  |  |        | 

Procedure volume declined in the second half of 2001, which we believe was a
result of weakening consumer confidence and the tragedy of September 11th.
Procedure volume rebounded in the first quarter of 2002 in a manner consistent
with the seasonality experienced in prior years. We believe that falling
procedure volume for the balance of 2002 was due to further weakening in
consumer confidence and rising unemployment.

We believe that improved marketing and advertising effectiveness, together with
third-party patient financing, and our own patient financing plan helped to
grow procedure volume in 2003 over 2002.

In 2003, revenues increased by $19,585,000, or 32.7%, to $81,423,000 from
$61,838,000 in 2002. Approximately $10,509,000 of this increase in revenues in
2003 was a result of improved pricing, and approximately $9,076,000 was due to
higher procedure volumes. We believe that improved marketing and advertising
effectiveness, together with third-party patient financing and our own patient
financing plan, helped to grow procedure volume in 2003 over 2002.

In 2002, revenues declined by $6,528,000, or 10%, from $68,096,000 in 2001 to
$61,838,000 in 2002. In 2002, revenues decreased by $14,112,000 primarily as a
result of lower procedure volume as compared to 2001. The volume decrease more
than offset the increase in revenue of $7,854,000 associated with improved
price realization.

Although the market for laser vision correction remains highly competitive, we
have raised our average price per procedure over the last twelve quarters. Our
average price per procedure has increased from $877 in the fourth quarter of
2000 to $1,293 in the quarter ended December 31, 2003. In the third quarter of
2003, we introduced custom laser vision correction technology from Alcon in
five of our markets, and we later upgraded our VISX lasers in all our markets
to perform custom procedures. LASIK procedures using custom ablation accounted
for 6% of fiscal 2003 volume, and over 8% of fiscal 2003 revenues. We now offer
LASIK using custom ablation in all of our markets and believe we can charge a
premium for this more advanced technology.

Our strongest quarter in terms of number of procedures performed historically
has been the first quarter of the year. We believe this is related to a number
of factors, including the availability of funds under typical corporate medical
flexible spending programs and the general effect of the New Year season. In
2003, the effects of this seasonality were not as strong as we saw in prior
years, due to a number of factors, including an uptick in consumer confidence.

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Operating Costs and Expenses

2003 Compared to 2002

The following table shows the dollar amount of increase (decrease) in operating
expenses from 2002 to 2003 and the percent of revenues for each period (dollars
in thousands):

|                                      |  |      |        |      |  |            |        |      |  |          |       |              |  |  |      |   |  |  |      |  
|------------------------------------- |  | ---- | ------ | ---- |  | ---------- | ------ | ---- |  | -------- | ----- | ------------ |  |  | ---- | - |  |  | ---- | -
|                                      |  |      |        |      |  |            |        |      |  | Increase |       | % of Revenue
|                                      |  | 2003 |        | 2002 |  | (Decrease) |        | 2003 |  | 2002    
|Medical professional and license fees |  | $    | 15,779 |      |  | $          | 12,270 |      |  | $        | 3,509 |              |  |  | 19.4 | % |  |  | 19.8 | %
|Direct costs of services              |  |      | 31,507 |      |  |            | 28,796 |      |  |          | 2,711 |              |  |  | 38.7 |   |  |  | 46.6 |  
|General and administrative expenses   |  |      | 8,043  |      |  |            | 8,327  |      |  |          | (284  | )            |  |  | 9.9  |   |  |  | 13.5 |  
|Marketing and advertising             |  |      | 12,566 |      |  |            | 12,823 |      |  |          | (257  | )            |  |  | 15.4 |   |  |  | 20.7 |  
|Depreciation and amortization         |  |      | 6,377  |      |  |            | 5,997  |      |  |          | 380   |              |  |  | 7.8  |   |  |  | 9.7  |  

Medical professional expenses increased by approximately $3,534,000 in 2003
from 2002. Approximately $1,931,000 of this increase was due to higher revenues
and approximately $1,603,000 was due to the consolidation in 2003 for the first
time of some professional corporations with whom we contract to provide medical
services in those states where we cannot practice medicine. License fees
decreased by $25,000. Purchasing rebates from suppliers were almost entirely
offset by an increase in license fees of $1,312,000 due primarily to higher
procedure volumes.

Direct costs of services include the salary component of physician compensation
for those physicians employed by us, staffing, equipment, medical supplies, and
facility costs of operating laser vision correction centers. These direct costs
increased in 2003 by $2,711,000 compared to 2002, largely because of an
increase in provision for bad debt on patient financing of $1,357,000 due to
higher levels of accounts receivable, financing fees of $135,000 related to
third-party patient financing, rent and utilities expense of $242,000 and
salaries and benefits of $1,020,000. These increases in expenses were
partially offset by a decrease in insurance of $249,000.

General and administrative expenses decreased by $284,000 in 2003 as compared
to 2002, primarily as a result of the absence of warrant compensation expense
of $510,000, a decrease in expenditures on professional services in 2003 of
$352,000 and a decrease in insurance expenses of $146,000. Warrant
amortization relating to certain warrants granted to a former joint venture
partner in our managed care business was completed in 2002. These decreases
were partially offset by an increase in salaries and benefits of $611,000.

Marketing and advertising expenses decreased by $257,000 in 2003 from 2002,
primarily as a result of more cost-effective media buying.

Depreciation and amortization expense increased by $380,000 in 2003 from 2002,
primarily as a result of laser upgrades and the acquisition of diagnostic
equipment to support custom LASIK.

Interest income increased by $315,000 in 2003 from 2002, due both to income on
patient financing and to higher levels of invested cash.

Income tax expense of $591,000 was recorded in 2003. U.S. income tax was
accrued for the amount of $244,000. The current year income tax provision of
our Canadian facilities was $347,000.

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2002 compared to 2001

The following table shows the dollar amount of increase (decrease) in operating
expenses from 2001 to 2002 and the percent of revenues for each year (dollars
in thousands):

|                                      |  |      |        |      |  |            |        |      |  |          |         |              |  |  |      |   |  |  |      |  
|------------------------------------- |  | ---- | ------ | ---- |  | ---------- | ------ | ---- |  | -------- | ------- | ------------ |  |  | ---- | - |  |  | ---- | -
|                                      |  |      |        |      |  |            |        |      |  | Increase |         | % of Revenue
|                                      |  | 2002 |        | 2001 |  | (Decrease) |        | 2002 |  | 2001    
|Medical professional and license fees |  | $    | 12,270 |      |  | $          | 13,626 |      |  |          | ($1,356 | )            |  |  | 19.8 | % |  |  | 20.0 | %
|Direct costs of services              |  |      | 28,796 |      |  |            | 33,616 |      |  |          | (4,820  | )            |  |  | 46.6 |   |  |  | 49.4 |  
|General and administrative expenses   |  |      | 8,327  |      |  |            | 8,727  |      |  |          | (400    | )            |  |  | 13.5 |   |  |  | 12.8 |  
|Marketing and advertising             |  |      | 12,823 |      |  |            | 12,732 |      |  |          | 91      |              |  |  | 20.7 |   |  |  | 18.7 |  
|Depreciation and amortization         |  |      | 5,997  |      |  |            | 5,625  |      |  |          | 372     |              |  |  | 9.7  |   |  |  | 8.3  |  

Medical professional fees declined by $83,000 in 2002 as compared to 2001.
Lower procedural volume in the United States was partially offset by increased
procedural volume in Canada. License fees decreased by $1,457,000 in 2002 from
the amount spent in 2001. The decrease in license fees was due to lower
procedure volume in 2002 versus 2001. Enhancement expenses increased $123,000
as a result of a slightly higher enhancement rate.

Direct costs of services decreased $4,820,000 in 2002 versus 2001, because of
cost reduction plans implemented in 2001, lower procedure volume in 2002, and
decreased rent associated with formerly leased equipment purchased at the end
of 2001.

General and administrative expenses decreased by $400,000 in 2002 from the
amount expended in 2001. Salaries/benefits and travel and entertainment
expenses decreased $494,000 and $198,000, respectively, as a result of cost
reduction efforts started in the prior year. Warrant amortization was completed
in 2002, resulting in a decrease of $192,000. Office equipment costs were
reduced by $109,000 in 2002. State and local taxes were reduced by $98,000 in
2002. Offsetting these decreases were increases in insurance costs of $364,000
and stockholder communications of $290,000.

The increase in depreciation and amortization expense of $372,000 is primarily
the result of the purchase of lasers and other equipment that had been
previously leased.

During the third quarter of 2001, our management implemented a restructuring
plan to close unprofitable locations and to reduce operating expenses, in part
by reducing staffing levels in existing markets. We estimated the cost of the
plan to be $1,375,000, comprised of a $535,000 restructuring charge and an
$840,000 asset impairment charge for leasehold improvements, equipment and
goodwill associated with the locations to be closed. The restructuring charges
included $384,000 in lease termination costs and $151,000 in severance payments
for 71 employees. By the end of the first quarter of 2002, the restructuring
plan had been fully implemented and we released excess reserves of $174,000
relating to the restructuring plan.

Other

Investment income decreased by $699,000 in 2002 from 2001, primarily as a
result of lower interest rates and lower average invested cash.

In August 2002, we received a settlement payment of $2,282,000 from Pillar
Point Partners class action litigation. Pillar Point Partnersa joint entity
formed in 1995 by laser manufacturers VISX and Summit Technology Inc., now a
subsidiary of Alcon Corporationcollected per-use royalties from all laser
vision correction providers using their equipment. The manufacturers agreed to
settle the various lawsuits for $37.8 million. Pillar Point was dissolved in
July 1998 after the Federal Trade Commission filed an administrative complaint
challenging the joint entitys existence.

Liquidity And Capital Resources

Net cash provided by operating activities in 2003 was $12,480,000, exceeding
expenditures in investing activities during the period to open new facilities
and upgrade lasers to Custom LASIK technology. In addition, in December 2003,
we completed an offering of common stock in which we raised $36,727,000 of
equity capital. As a result, cash and cash equivalents increased to
$64,908,000 (including $0.5 million of cash maintained by our captive insurance
company pursuant to statutory requirements) as of December 31, 2003, compared
to $18,298,000 as of December 31, 2002. The major use of cash in 2003 was
capital expenditures in connection with opening new vision centers and
upgrading equipment.

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During the second quarter of 2000, our directors initiated a program to
encourage additional direct stock ownership by our senior management. We
offered loans to nine key managers and directors for the purpose of purchasing
shares in the open market. A total of $1,541,000 was loaned under this
program, all prior to June 30, 2002. All current directors and officers repaid
their loans in full in 2003.

We maintain a $10,000,000 revolving credit facility with The Provident Bank. In
addition, we have a $10,000,000 credit commitment for the purpose of funding
acquisitions. The revolving credit line has a variable interest rate equal to
the lenders prime rate and is secured by substantially all our assets,
including a mortgage on our headquarters building in Cincinnati, which we own.
As of December 31, 2003, no borrowings were outstanding under this credit
facility. The acquisition funding commitment has no set terms and its
availability is at the sole discretion of the lender. These credit arrangements
are scheduled to expire July 31, 2004.

Our contractual obligations for future cash payments as of December 31, 2003
are summarized in the following table.

|                            |  |       |           |                  |  |                        |           |             |  |                   |           |  |  |   |           |  |  |   |         | 
|--------------------------- |  | ----- | --------- | ---------------- |  | ---------------------- | --------- | ----------- |  | ----------------- | --------- |  |  | - | --------- |  |  | - | ------- | 
|                            |  |       |           |                  |  | Payments due by Period
|                            |  |       |           |                  |  |                       
|Contractual Obligations     |  | Total |           | Less than 1 year |  | 1 - 3 years            |           | 3 - 5 years |  | More than 5 years
|                            |  |       |           |                  |  |                        |           |             |  |                  
|Operating Lease Obligations |  | $     | 8,927,000 |                  |  | $                      | 3,408,000 |             |  | $                 | 4,044,000 |  |  | $ | 1,194,000 |  |  | $ | 281,000 | 
|Deferred Compensation       |  |       | 457,000   |                  |  |                        |          |             |  |                   |          |  |  |   |          |  |  |   | 457,000 | 
|                            |  |       |           |                  |  |                        |           |             |  |                   |           |  |  |   |           |  |  |   |         | 
|Total                       |  | $     | 9,384,000 |                  |  | $                      | 3,408,000 |             |  | $                 | 4,044,000 |  |  | $ | 1,194,000 |  |  | $ | 738,000 | 
|                            |  |       |           |                  |  |                        |           |             |  |                   |           |  |  |   |           |  |  |   |         | 

As of December 31, 2003, we had net operating loss carryforwards for federal
income tax purposes of $39,636,000. These expire in varying amounts from 2007
until 2022. Approximately $18,000,000 of federal net operating loss
carryforwards and $15,750,000 of state net operating loss carryforwards were
acquired through an acquisition we closed in 1997. Our ability to use these
acquired net operating loss carryforwards is limited to approximately
$2,500,000 per year under Code Section 382 of the Internal Revenue Code.
Because we could not be certain we would realize the full benefit of these loss
carryforwards, in 2001 we established a valuation reserve equal in amount to
the loss carryforwards. As discussed under Critical Accounting Policies 
Income Taxes, a future reduction in this reserve may favorably impact our
results of operations.

In December 2002, we purchased medical equipment that was being previously
leased for $672,000. This resulted in a reduction in leased equipment expense
of $734,000 and an increase in depreciation expense of $224,000 in 2003 as
compared to 2002.

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 $1.0 million and $1.5 million. Actual costs will vary from vision
center to vision center based upon the location of the market, the number of
lasers purchased for the vision center, the site of the vision center and the
level of leasehold improvements required. Our capital expenditures consist
primarily of investments incurred in connection with the opening of new vision
centers and equipment purchases or upgrades at existing facilities.

In January 2003, we opened a new vision center in Cleveland, Ohio; in June
2003, we opened a new vision center in Indianapolis, Indiana; in November 2003,
we opened a new vision center in Las Vegas, Nevada; in December 2003, we opened
a new vision center in Houston, Texas; and in January 2004, we opened a new
vision center in Orlando, Florida.

In the third quarter of 2003, we updated our VISX lasers and diagnostic
equipment to enable us to offer custom ablation in all our markets. In
addition, in the fourth quarter of 2003, we upgraded our Bausch & Lomb lasers
to offer their recently approved ZyoptixTM custom technology. The cost of our
laser and equipment upgrades and vision center expansion plans resulted in
capital expenditures of $5,231,000, which was funded by cash flow from
operations.

We recently expanded the use of our own sponsored patient financing. As of
December 31, 2003, we had $4.0 million in accounts receivable, net of allowance
for doubtful accounts, which is an increase of $3.6 million since December 31,
2002. Further growth in accounts receivable is expected.

Our consolidated cash and cash equivalents includes $0.5 million of cash
maintained by our consolidated captive insurance company pursuant to statutory
requirements as of December 31, 2003. These funds are not available for
general corporate purposes. We expect cash reserves in our captive insurance
company to grow over time.

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The ability to fund our marketing and advertising program, planned capital
expenditures and new vision center rollouts depends on our future performance,
which, to a certain extent, is subject to general economic, competitive,
legislative, regulatory and other factors that are beyond our control. We
believe that cash flow from operations, available cash (including that from our
December 2003 public offering) and short-term investments and available
borrowing under our credit facility provide sufficient cash reserves and
liquidity to fund our working capital needs, capital expenditures and debt
service requirements.

Critical Accounting Policies

Accounts Receivable

We provide patient financing to some of our customers, including those who
could not otherwise obtain third-party financing. The terms of the financing
require the patient to pay an up-front fee which is intended to cover some or
all of our variable costs, and the remainder is deducted automatically from the
patients checking account over a period of 12 to 36 months. We began our
patient financing program in May 2002. 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 discounted at a rate of 17.5 percent per year. 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.

As of December 31, 2003, the discount in receivables with an initial term over
12 months was $484,000.

Allowance for Doubtful Accounts

As a result of an expansion of the amount of patient financing provided in
2003, we are exposed to more credit risk than we have experienced in the past.
Based upon our own experience with patient financing and based upon the credit
experience of lenders that provide financing to customers similar to ours, we
have established bad debt reserves as of December 31, 2003 of $1,896,000
against accounts receivable of $5,900,000. To the extent that our actual bad
debt writeoffs are greater than our estimated bad debt reserve, it would
adversely impact our results of operations and cash flows and to the extent
that our actual bad debt write-offs are less than our estimated bad debt
reserve, it would favorably impact our results of operations and cash flows.

Captive insurance company reserves

Effective December 18, 2002, we established 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, some of
whom are currently insured by the captive. Our captive insurance company is
managed by an independent insurance consulting and management firm, and it is
capitalized and funded by us based on actuarial studies performed by an
affiliate of the consulting and management firm. For the 12 months ending
December 17, 2003, our captive insurance company purchased excess liability
coverage for 80% of our losses in the year in excess of $1,000,000 per
occurrence, up to $11,000,000. Our captive insurance company is responsible for
20% of our aggregate losses in excess of $1,000,000, up to $11,000,000. Under
that arrangement, the coverage providers obligation arises only after our
captive pays the first $1,000,000 of any loss and the coverage providers are
then only obligated to pay an aggregate of $8,000,000 in a given policy year.
Beginning December 18, 2003, the Company elected to use the captive insurance
company for both the primary insurance and the excess liability coverage. The
captive insurance company continues to be funded at a rate determined by
actuarial studies performed by an independent consulting firm. A number of
claims covered by our captive insurance company are now pending. 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, 2003, we
recorded an insurance reserve amount of $963,388, which primarily represents an
actuarially determined estimate of claims incurred but not yet reported. To the
extent that our actual claim experience is greater than our estimated insurance
reserve, it would adversely impact our results of operations and cash flows and
to the extent that our actual claim experience is less than our estimated
insurance reserve, it would favorably impact our results of operations and cash
flows.

Income taxes

As a result of our operating loss during the third quarter of 2001 and
throughout 2002, and continuing uncertainties regarding the general economic
conditions in the United States and the impact on our ongoing operations, we
continue to record a full valuation reserve for deferred tax assets. This
reserve was established according to the requirements of SFAS No. 109
Accounting for Income
Taxes. Favorable changes in our operating profitability, as a result of
improved general economic conditions in the United States or otherwise, could
impact our determination as to whether reduction, in whole or in part, to the
valuation reserve is necessary in the future. To the extent that such a
reduction in the valuation reserve is necessary, an income tax benefit would be
recorded in the consolidated statement of operations, which would favorably
impact our results of operations. In addition, future taxable income may be
absorbed by the net operating loss carryforwards that we maintain, which would
favorably impact our results of operations and cash flows. During the twelve
months ended December 31, 2003, we applied approximately $9,555,000 of our net
operating losses

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##### Table of Contents



against our taxable income for the period, which resulted in reduced federal
income tax expenses and tax payments of approximately $3,249,000. The valuation
reserve and net operating loss carryforwards were $16,807,000 and $39,636,000,
respectively, as of December 31, 2003.

Consolidation

We use the consolidation method to report our investment in our subsidiaries
and other companies when we own a majority of the voting stock of the
subsidiary. 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 No. 94 and APB Opinion No. 16 to Physician
Management Entities and Certain Other Entities with Contractual Management
Arrangements. Prior to September 2002, our contractual management arrangements
did not permit consolidation of our relationships with professional
corporations pursuant to EITF 97-2 because we did not maintain a ''controlling
financial interest in the professional corporations. Beginning in September
2002, we began a process of renewing our agreements with the professional
corporations and opening new vision centers with agreements that meet the
''controlling financial interest criteria of EITF 97-2.

As a result of the FASBs issuance of FIN 46, Consolidation of Variable
Interest Entities, an interpretation of ARB No. 51,in January 2003, we
evaluated the contractual management arrangements entered into with
professional corporations after January 1, 2003 and have determined that
consolidation of these entities was appropriate under the FIN 46 guidance. With
respect to the three remaining professional corporations with which we had a
contractual management arrangement prior to January 1, 2003, we began
consolidating these entities as of July 1, 2003, which did not have a material
impact on our consolidated financial statements. If modifications are made to
existing management agreements, or if new agreements are made under different
terms than existing management agreements, then the financial statements of the
professional corporations may not be consolidated in the future. The
professional corporations do not have any material assets or debt obligations
and do not materially increase our exposure to risk of loss.

Cautionary Statement Concerning Forward-Looking Statements

Information contained above in this Managements Discussion and Analysis and
elsewhere in this Annual Report on Form 10-K with respect to expected financial
results and future events and trends is forward-looking, based on our estimates
and assumptions and subject to risks and uncertainties. For those statements,
we claim the protection of the safe harbor for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995.




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

The carrying values of financial instruments including cash and cash
equivalents, accounts receivable, and accounts payable approximate fair value
because of the short maturity of these instruments.

We have a very low exposure to changes in foreign currency exchange rates and,
as such, have not used derivative financial instruments to manage foreign
currency fluctuation risk.




Item 8. Financial Statements and Supplementary Data.

Index to Financial Statements

|                                                                                                        |  |      |    | 
|------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                        |  | Page
|                                                                                                        |  |     
|Report of Management                                                                                    |  |      | 27 | 
|Report of Independent Auditors                                                                          |  |      | 28 | 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                            |  |      | 29 | 
|Consolidated Statements of Operations for each of the three years ended December 31, 2003               |  |      | 30 | 
|Consolidated Statements of Cash Flows for each of the three years ended December 31, 2003               |  |      | 31 | 
|Consolidated Statements of Stockholders Investment for each of the three years ended
December 31, 2003 |  |      | 32 | 
|Notes to Consolidated Financial Statements                                                              |  |      | 33 | 

26



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##### Table of Contents



REPORT OF MANAGEMENT

We, the management of LCA-Vision Inc., are responsible for the consolidated
financial statements and the information contained in this report, including
its accuracy. We prepared the accompanying consolidated financial statements in
accordance with 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
judgements of current conditions and circumstances.

We maintain an accounting system and related system of internal controls
designed to provide reasonable assurance that the financial records are
accurate and that the Companys assets are protected. Ernst & Young LLP,
independent accountants, audit the financial statements and express their
opinion on them. They perform their audit in accordance with generally accepted
auditing standards, which includes consideration of the internal control
structure.

The Audit Committee of the Board of Directors, which consists of our
independent Directors, meets periodically with management and Ernst & Young LLP
to review the activities of each in discharging their responsibilities. Ernst &
Young LLP has free access to the Audit Committee and to all Company records and
personnel in connection with its audits.

|                                               |  |                                                          
|---------------------------------------------- |  | ---------------------------------------------------------
|/s/ Stephen N. Joffe                           |  | /s/ Alan H. Buckey                                       
|                                               |  |                                                          
|Stephen N. Joffe                               |  | Alan H. Buckey                                           
|Chairman of the Board, Chief Executive Officer |  | Executive Vice President/Finance, Chief Financial Officer
|(Principal Executive Officer)                  |  | (Principal Financial and Accounting Officer)             

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REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and
Stockholders of LCA-Vision Inc.

We have audited the consolidated balance sheets of LCA-Vision Inc. as of
December 31, 2003 and 2002, and the related consolidated statements of
operations, stockholders investment, and cash flows for each of the three
years in the period ended December 31, 2003. 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 the Company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 auditing standards generally
accepted in the 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 2003 and 2002 financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of LCA-Vision Inc. at December 31, 2003 and 2002, and the consolidated results
of its operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted in the United
States. 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.



| |  | /s/ Ernst & Young LLP
    Cincinnati, Ohio
    February 13, 2004
| |  | ----------------------------------------------------------------

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LCA-VISION INC.
CONSOLIDATED BALANCE SHEETS

|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  
|----------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | - | ---------------------- | ------- | ---- | - | ------- | ------- | -
|                                                                        |                                                                                                                                            |   | At December 31,       
|                                                                        |                                                                                                                                            |   | 2003                   |         | 2002
|                                                                        |                                                                                                                                            |   | (Dollars in thousands)
|Assets                                                                  |                                                                                                                                            |   |                        |         |      |   |         |        
|Current assets                                                          |                                                                                                                                            |   |                        |         |      |   |         |        
|                                                                        | Cash and cash equivalents                                                                                                                  |   | $                      | 64,908  |      |   | $       | 18,298  |  
|                                                                        | Accounts receivable, net of allowance for doubtful accounts of $1,480,000 and $231,000                                                     |   |                        | 3,255   |      |   |         | 393     |  
|                                                                        | Receivables from vendors                                                                                                                   |   |                        | 802     |      |   |         | 337     |  
|                                                                        | Prepaid expenses, inventory and other                                                                                                      |   |                        | 1,422   |      |   |         | 1,462   |  
|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  
|Total current assets                                                    |                                                                                                                                            |   | 70,387                 |         |      |   | 20,490  |        
|Property and equipment                                                  |                                                                                                                                            |   | 41,967                 |         |      |   | 37,301  |        
|Accumulated depreciation and amortization                               |                                                                                                                                            |   | (24,622                | )       |      |   | (18,868 | )      
|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  
|Property and equipment, net                                             |                                                                                                                                            |   | 17,345                 |         |      |   | 18,433  |        
|Accounts receivable, net of allowance for doubtful accounts of $416,000 |                                                                                                                                            |   | 749                    |         |      |   |        |        
|Goodwill                                                                |                                                                                                                                            |   | 275                    |         |      |   | 275     |        
|Deferred compensation plan assets                                       |                                                                                                                                            |   | 461                    |         |      |   | 127     |        
|Investment in unconsolidated businesses                                 |                                                                                                                                            |   | 385                    |         |      |   | 263     |        
|Other assets                                                            |                                                                                                                                            |   | 435                    |         |      |   | 408     |        
|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  
|Total assets                                                            |                                                                                                                                            | $ | 90,037                 |         |      | $ | 39,996  |        
|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  
|Liabilities and Stockholders Investment                                |                                                                                                                                            |   |                        |         |      |   |         |        
|Current liabilities                                                     |                                                                                                                                            |   |                        |         |      |   |         |        
|                                                                        | Accounts payable                                                                                                                           |   | $                      | 4,883   |      |   | $       | 3,855   |  
|                                                                        | Accrued liabilities and other                                                                                                              |   |                        | 4,518   |      |   |         | 3,605   |  
|                                                                        | Debt maturing in one year                                                                                                                  |   |                        |        |      |   |         | 10      |  
|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  
|Total current liabilities                                               |                                                                                                                                            |   | 9,401                  |         |      |   | 7,470   |        
|Deferred compensation liability                                         |                                                                                                                                            |   | 457                    |         |      |   | 129     |        
|Insurance reserve                                                       |                                                                                                                                            |   | 963                    |         |      |   | 55      |        
|Minority equity interest                                                |                                                                                                                                            |   | 414                    |         |      |   | 230     |        
|Stockholders investment                                                |                                                                                                                                            |   |                        |         |      |   |         |        
|                                                                        | Common stock ($.001 par value; 15,643,561 and 13,110,306 shares and
13,276,364 and 10,743,109 shares issued and outstanding, respectively) |   |                        | 16      |      |   |         | 13      |  
|                                                                        | Contributed capital                                                                                                                        |   |                        | 131,203 |      |   |         | 91,474  |  
|                                                                        | Warrants                                                                                                                                   |   |                        |        |      |   |         | 1,982   |  
|                                                                        | Notes receivable from stockholders                                                                                                         |   |                        |        |      |   |         | (1,532  | )
|                                                                        | Common stock in treasury, at cost (2,367,197 shares and 2,367,197 shares)                                                                  |   |                        | (15,462 | )    |   |         | (15,462 | )
|                                                                        | Accumulated deficit                                                                                                                        |   |                        | (37,069 | )    |   |         | (44,338 | )
|                                                                        | Accumulated other comprehensive income (loss)                                                                                              |   |                        | 114     |      |   |         | (25     | )
|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  
|Total stockholders investment                                          |                                                                                                                                            |   | 78,802                 |         |      |   | 32,112  |        
|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  
|Total liabilities and stockholders investment                          |                                                                                                                                            | $ | 90,037                 |         |      | $ | 39,996  |        
|                                                                        |                                                                                                                                            |   |                        |         |      |   |         |         |  

See Notes to Consolidated Financial Statements

29



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##### Table of Contents



LCA-VISION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                  |                                       |   |                                                  |        |      |   |        |        |   |   |         |        |  
|------------------------------------------------- | ------------------------------------- | - | ------------------------------------------------ | ------ | ---- | - | ------ | ------ | - | - | ------- | ------ | -
|                                                  |                                       |   | Years Ended December 31,                        
|                                                  |                                       |   | 2003                                             |        | 2002 |   | 2001  
|                                                  |                                       |   | (Dollars in thousands, except per share amounts)
|Revenues - Laser refractive surgery               |                                       | $ | 81,423                                           |        |      | $ | 61,838 |        |   | $ | 68,096  |       
|Operating costs and expenses                      |                                       |   |                                                  |        |      |   |        |        |   |   |         |       
|                                                  | Medical professional and license fees |   |                                                  | 15,779 |      |   |        | 12,270 |   |   |         | 13,626 |  
|                                                  | Direct costs of services              |   |                                                  | 31,507 |      |   |        | 28,796 |   |   |         | 33,616 |  
|                                                  | General and administrative expenses   |   |                                                  | 8,043  |      |   |        | 8,327  |   |   |         | 8,727  |  
|                                                  | Marketing and advertising             |   |                                                  | 12,566 |      |   |        | 12,823 |   |   |         | 12,732 |  
|                                                  | Depreciation and amortization         |   |                                                  | 6,377  |      |   |        | 5,997  |   |   |         | 5,625  |  
|                                                  | Special charges (benefit)             |   |                                                  |       |      |   |        | (174   | ) |   |         | 1,774  |  
|                                                  |                                       |   |                                                  |        |      |   |        |        |   |   |         |       
|Operating income (loss)                           |                                       |   | 7,151                                            |        |      |   | (6,201 | )      |   |   | (8,004  | )     
|Equity in earnings from unconsolidated businesses |                                       |   | 317                                              |        |      |   | 241    |        |   |   | 372     |       
|Minority equity interest                          |                                       |   | (372                                             | )      |      |   | (189   | )      |   |   | (10     | )     
|Interest expense                                  |                                       |   | (18                                              | )      |      |   | (4     | )      |   |   | (17     | )     
|Interest income                                   |                                       |   | 540                                              |        |      |   | 225    |        |   |   | 924     |       
|Other income (expense), net                       |                                       |   | 242                                              |        |      |   | (6     | )      |   |   | (51     | )     
|Litigation settlement                             |                                       |   |                                                 |        |      |   | 2,282  |        |   |   |        |       
|                                                  |                                       |   |                                                  |        |      |   |        |        |   |   |         |       
|Income (loss) before taxes                        |                                       |   | 7,860                                            |        |      |   | (3,652 | )      |   |   | (6,786  | )     
|Income tax expense                                |                                       |   | 591                                              |        |      |   | 174    |        |   |   | 16,589  |       
|                                                  |                                       |   |                                                  |        |      |   |        |        |   |   |         |       
|Net income (loss)                                 |                                       | $ | 7,269                                            |        |      | $ | (3,826 | )      |   | $ | (23,375 | )     
|                                                  |                                       |   |                                                  |        |      |   |        |        |   |   |         |       
|Income (loss) per common share                    |                                       |   |                                                  |        |      |   |        |        |   |   |         |       
|                                                  | Basic                                 |   | $                                                | 0.67   |      |   | $      | (0.35  | ) |   | $       | (2.01  | )
|                                                  | Diluted                               |   | $                                                | 0.66   |      |   | $      | (0.35  | ) |   | $       | (2.01  | )
|Weighted average shares outstanding               |                                       |   |                                                  |        |      |   |        |        |   |   |         |       
|                                                  | Basic                                 |   |                                                  | 10,927 |      |   |        | 10,794 |   |   |         | 11,643 |  
|                                                  | Diluted                               |   |                                                  | 11,077 |      |   |        | 10,794 |   |   |         | 11,643 |  

See Notes to Consolidated Financial Statements

30



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##### Table of Contents



LCA-VISION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |        |        |  
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ------------------------------------- | ------ | ------------------------ | ------ | ---- | ------ | ------ | ----- | - | ------- | ------ | ------ | -
|                                                                                                   |                                                                    |                                       |        | Years Ended December 31,
|                                                                                                   |                                                                    |                                       |        | 2003                     |        | 2002 |        | 2001  
|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |       
|                                                                                                   |                                                                    |                                       |        | (dollars in thousands)  
|Cash flow from operating activities                                                                |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|Net income (loss)                                                                                  |                                                                    | $                                     | 7,269  |                          |        | $    | (3,826 | )      |       | $ | (23,375 | )     
|Adjustments to reconcile net income (loss) to net cash provided by
(used in)
operating activities: |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|                                                                                                   | Depreciation and amortization                                      |                                       |        | 6,377                    |        |      |        | 5,997  |       |   |         | 5,625  |       
|                                                                                                   | Warrant amortization                                               |                                       |        |                         |        |      |        | 510    |       |   |         | 701    |       
|                                                                                                   | Provision for loss on doubtful accounts                            |                                       |        | 1,781                    |        |      |        |       |       |   |         |       |       
|                                                                                                   | Gain on disposal of assets                                         |                                       |        | (190                     | )      |      |        |       |       |   |         |       |       
|                                                                                                   | Deferred compensation                                              |                                       |        | 328                      |        |      |        | 129    |       |   |         |       |       
|                                                                                                   | Insurance reserve                                                  |                                       |        | 908                      |        |      |        |       |       |   |         |       |       
|                                                                                                   | Deferred income taxes                                              |                                       |        |                         |        |      |        |       |       |   |         | 16,606 |       
|                                                                                                   | Restructuring/impairment provision                                 |                                       |        |                         |        |      |        | (174   | )     |   |         | 1,774  |       
|                                                                                                   | Equity in earnings from unconsolidated businesses                  |                                       |        | (317                     | )      |      |        | (241   | )     |   |         | (372   | )     
|                                                                                                   | Other, net                                                         |                                       |        |                         |        |      |        | 6      |       |   |         | 39     |       
|                                                                                                   | Changes in assets and liabilities:                                 |                                       |        |                          |        |      |        |        |       |   |         |        |       
|                                                                                                   |                                                                    | Accounts receivables                  |        |                          | (5,191 | )    |        |        | 124   |   |         |        | 900    |  
|                                                                                                   |                                                                    | Receivables from vendors              |        |                          | (465   | )    |        |        | (103  | ) |         |        | 2,046  |  
|                                                                                                   |                                                                    | Prepaid expenses, inventory and other |        |                          | 40     |      |        |        | 497   |   |         |        | 29     |  
|                                                                                                   |                                                                    | Accounts payable                      |        |                          | 1,028  |      |        |        | 1,210 |   |         |        | (4,942 | )
|                                                                                                   |                                                                    | Accrued liabilities and other         |        |                          | 912    |      |        |        | 1,564 |   |         |        | (1,024 | )
|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|Net cash provided by (used in) operating activities                                                |                                                                    |                                       | 12,480 |                          |        |      | 5,693  |        |       |   | (1,993  | )     
|Cash flows from investing activities                                                               |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|                                                                                                   | Purchase of property and equipment                                 |                                       |        | (5,231                   | )      |      |        | (1,789 | )     |   |         | (7,061 | )     
|                                                                                                   | Proceeds from sale of property and equipment                       |                                       |        | 225                      |        |      |        | 8      |       |   |         | 5      |       
|                                                                                                   | Purchase of held-to-maturity investments                           |                                       |        |                         |        |      |        |       |       |   |         | (4,378 | )     
|                                                                                                   | Maturities of held-to-maturity investments                         |                                       |        |                         |        |      |        |       |       |   |         | 13,004 |       
|                                                                                                   | Deferred compensation plan                                         |                                       |        | (334                     | )      |      |        | (127   | )     |   |         |       |       
|                                                                                                   | Other, net                                                         |                                       |        | 204                      |        |      |        | (83    | )     |   |         | 610    |       
|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|Net cash (used in) provided by investing activities                                                |                                                                    |                                       | (5,136 | )                        |        |      | (1,991 | )      |       |   | 2,180   |       
|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|Cash flows from financing activities                                                               |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|                                                                                                   | Principal payments of long-term debt and capital lease obligations |                                       |        | (10                      | )      |      |        | (20    | )     |   |         | (196   | )     
|                                                                                                   | Loan payments made by stockholders                                 |                                       |        | 1,353                    |        |      |        |       |       |   |         |       |       
|                                                                                                   | Loans to stockholders                                              |                                       |        | (22                      | )      |      |        | (44    | )     |   |         | (475   | )     
|                                                                                                   | Shares repurchased for treasury stock                              |                                       |        |                         |        |      |        | (2,449 | )     |   |         | (3,138 | )     
|                                                                                                   | Stock offering                                                     |                                       |        | 36,727                   |        |      |        |       |       |   |         |       |       
|                                                                                                   | Exercise of stock options and warrants                             |                                       |        | 1,023                    |        |      |        | 232    |       |   |         | 162    |       
|                                                                                                   | Distribution from minority equity investees                        |                                       |        | 195                      |        |      |        | 268    |       |   |         | 377    |       
|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|Net cash provided by (used in) financing activities                                                |                                                                    |                                       | 39,266 |                          |        |      | (2,013 | )      |       |   | (3,270  | )     
|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|Increase (decrease) in cash and cash equivalents                                                   |                                                                    |                                       | 46,610 |                          |        |      | 1,689  |        |       |   | (3,083  | )     
|Cash and cash equivalents at beginning of year                                                     |                                                                    |                                       | 18,298 |                          |        |      | 16,609 |        |       |   | 19,692  |       
|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       
|Cash and cash equivalents at end of year                                                           |                                                                    | $                                     | 64,908 |                          |        | $    | 18,298 |        |       | $ | 16,609  |       
|                                                                                                   |                                                                    |                                       |        |                          |        |      |        |        |       |   |         |       

See Notes to Consolidated Financial Statements

31



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##### Table of Contents



LCA-VISION INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS INVESTMENT

|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |   | 
|--------------------------------------------- | ------------------------------ | ------------------------------ | ---------- | ------------------------ | --------- | ------ | ------ | ------- | - | ------ | ---------- | ---------- | ------ | ------ | ------ | ------- | --- | - | ---------- | ---------- | ------ | - | ------ | ------- | - | 
|                                              |                                |                                |            | Years Ended December 31,
|                                              |                                |                                |            | 2003                     |           | 2002   |        | 2001   
|                                              |                                |                                |            | Shares                   |           | Amount |        | Shares  |   | Amount |            | Shares     |        | Amount
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |       
|                                              |                                |                                |            | (dollars in thousands)  
|Common Stock                                  |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at beginning of year   |                                |            | 3,110,306                |           |        | $      | 13      |   |        |            | 13,064,056 |        |        | $      | 52      |     |   |            | 13,030,019 |        |   | $      | 52      |  
|                                              |                                | Employee plans                 |            |                          | 133,255   |        |        |         |  |        |            |            | 46,250 |        |        |         |    |   |            |            | 34,037 |   |        |         |  | 
|                                              |                                | Stock offering                 |            |                          | 2,400,000 |        |        |         | 3 |        |            |            |       |        |        |         |    |   |            |            |       |   |        |         |  | 
|                                              |                                | Stock split - par value effect |            |                          |          |        |        |         |  |        |            |            |       |        |        |         | (39 | ) |            |            |       |   |        |         |  | 
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |  
|Balance at end of year                        |                                |                                | 15,643,561 |                          |           |        | 16     |         |   |        | 13,110,306 |            |        |        | 13     |         |     |   | 13,064,056 |            |        |   | 52     |        
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |  
|Warrants                                      |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at beginning of year   |                                |            | 100,000                  |           |        |        | 1,982   |   |        |            | 127,734    |        |        |        | 2,105   |     |   |            | 127,734    |        |   |        | 2,105   |  
|                                              | Expired warrants               |                                |            | (100,000                 | )         |        |        | (1,982  | ) |        |            | (27,734    | )      |        |        | (123    | )   |   |            |           |        |   |        |        |  
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |  
|                                              | Balance at end of year         |                                |            |                         |           |        |        |        |   |        |            | 100,000    |        |        |        | 1,982   |     |   |            | 127,734    |        |   |        | 2,105   |  
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |  
|Notes Receivable from Stockholders            |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at beginning of year   |                                |            |                          |           |        |        | (1,532  | ) |        |            |            |        |        |        | (1,488  | )   |   |            |            |        |   |        | (1,013  | )
|                                              | Decrease in notes outstanding  |                                |            |                          |           |        |        | 1,554   |   |        |            |            |        |        |        |        |     |   |            |            |        |   |        |        |  
|                                              | Increase in notes outstanding  |                                |            |                          |           |        |        | (22     | ) |        |            |            |        |        |        | (44     | )   |   |            |            |        |   |        | (475    | )
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |  
|                                              | Balance at end of year         |                                |            |                          |           |        |        |        |   |        |            |            |        |        |        | (1,532  | )   |   |            |            |        |   |        | (1,488  | )
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |  
|Treasury Stock                                |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at beginning of year   |                                |            | (2,367,197               | )         |        |        | (15,462 | ) |        |            | (1,550,757 | )      |        |        | (13,013 | )   |   |            | (1,179,724 | )      |   |        | (9,875  | )
|                                              | Shares repurchased             |                                |            |                         |           |        |        |        |   |        |            | (816,440   | )      |        |        | (2,449  | )   |   |            | (371,033   | )      |   |        | (3,138  | )
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |  
|                                              | Balance at end of year         |                                |            | (2,367,197               | )         |        |        | (15,462 | ) |        |            | (2,367,197 | )      |        |        | (15,462 | )   |   |            | (1,550,757 | )      |   |        | (13,013 | )
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |         |  
|Contributed Capital                           |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at beginning of year   |                                |            |                          |           |        |        | 91,474  |   |        |            |            |        |        |        | 91,080  |     |   |            |            |        |   |        | 90,918  |  
|                                              | Stock split - par value effect |                                |            |                          |           |        |        |        |   |        |            |            |        |        |        | 39      |     |   |            |            |        |   |        |        |  
|                                              | Employee plans                 |                                |            |                          |           |        |        | 1,022   |   |        |            |            |        |        |        | 235     |     |   |            |            |        |   |        | 161     |  
|                                              | Stock offering                 |                                |            |                          |           |        |        | 36,725  |   |        |            |            |        |        |        |        |     |   |            |            |        |   |        |        |  
|                                              | Stock Split fractional shares  |                                |            |                          |           |        |        |        |   |        |            |            |        |        |        | (3      | )   |   |            |            |        |   |        |        |  
|                                              | Expired warrants               |                                |            |                          |           |        |        | 1,982   |   |        |            |            |        |        |        | 123     |     |   |            |            |        |   |        |        |  
|                                              | Other                          |                                |            |                          |           |        |        |        |   |        |            |            |        |        |        |        |     |   |            |            |        |   |        | 1       |  
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at end of year         |                                |            |                          |           |        |        | 131,203 |   |        |            |            |        |        |        | 91,474  |     |   |            |            |        |   |        | 91,080  |  
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|Accumulated deficit                           |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at beginning of year   |                                |            |                          |           |        |        | (44,338 | ) |        |            |            |        |        |        | (40,512 | )   |   |            |            |        |   |        | (17,137 | )
|                                              | Net income (loss)              |                                |            |                          |           |        |        | 7,269   |   |        |            |            |        |        |        | (3,826  | )   |   |            |            |        |   |        | (23,375 | )
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at end of year         |                                |            |                          |           |        |        | (37,069 | ) |        |            |            |        |        |        | (44,338 | )   |   |            |            |        |   |        | (40,512 | )
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|Accumulated Other Comprehensive
Loss (Income) |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at beginning of year   |                                |            |                          |           |        |        | (25     | ) |        |            |            |        |        |        | (22     | )   |   |            |            |        |   |        | (5      | )
|                                              | Translation adjustments        |                                |            |                          |           |        |        | 139     |   |        |            |            |        |        |        | (3      | )   |   |            |            |        |   |        | (17     | )
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|                                              | Balance at end of year         |                                |            |                          |           |        |        | 114     |   |        |            |            |        |        |        | (25     | )   |   |            |            |        |   |        | (22     | )
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        
|Total Stockholders Investment                |                                |                                |            |                          |           | $      | 78,802 |         |   |        |            |            |        | $      | 32,112 |         |     |   |            |            |        | $ | 38,202 |        
|                                              |                                |                                |            |                          |           |        |        |         |   |        |            |            |        |        |        |         |     |   |            |            |        |   |        |        

See Notes to Consolidated Financial Statements

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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 under the brand name LasikPlus. Our vision centers provide the staff,
facilities, equipment and support services for performing laser vision
correction that employs advanced laser technologies to help correct
nearsightedness, farsightedness and astigmatism. We currently utilize
fixed-site excimer lasers manufactured by Bausch & Lomb, VISX and Alcon. Our
vision centers are supported mainly by full-time credentialed board-certified
ophthalmologists and 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 generally carry out
the pre-procedure evaluations and post-procedure follow-ups in-center. We have
performed over 300,000 laser vision correction procedures in our vision
centers, in the United States and Canada, since 1991.

We currently operate 40 laser vision correction centers, including 36
wholly-owned vision centers located in large metropolitan markets throughout
the United States, three joint ventures in Canada and one joint venture in
Europe.

Consolidation Policy

We use two different methods to report our investments in our subsidiaries and
other companies  consolidation and the equity method.

Consolidation

We use the consolidation method to report our investment in our subsidiaries
and other companies when we own a majority of the voting stock of the
subsidiary. 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 No. 94 and APB Opinion No. 16 to Physician
Management Entities and Certain Other Entities with Contractual Management
Agreements.Prior to September 2002, our contractual management arrangements
did not permit consolidation of our relationships with professional
corporations pursuant to EITF 97-2 because we did not maintain a
controlling
financial interest in the professional corporations. Beginning in September
2002, we began a process of renewing our agreements with the professional
corporations and opening new vision centers with agreements that meet the
controlling financial interest criteria of EITF 97-2.

As a result of the FASBs issuance of Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,
in January 2003, we evaluated the contractual management arrangements entered
into with professional corporations after January 1, 2003 and determined that
consolidation of these entities was appropriate under the FIN 46 guidance. With
respect to the three remaining professional corporations with which we had a
contractual management arrangement prior to January 1, 2003, we began
consolidating these entities as of July 1, 2003, which did not have a material
impact on our consolidated financial statement. Our condensed consolidated
financial statements include the accounts
of:



| |  |  | LCA-Vision Inc.                                                      
| | - |  | ---------------------------------------------------------------------
|
| |  |  | LCA-Vision (Canada) Inc. and Subsidiaries                            
|
| |  |  | The Baltimore Laser Sight Center, Ltd                                
|
| |  |  | Columbus Eye Associates, Inc. (effective September 1, 2002)          
|
| |  |  | LasikPlus Medical Associates, Inc. (effective January 1, 2003)       
|
| |  |  | LasikPlus Medical Associates, S.C. (effective March 1, 2003)         
|
| |  |  | Lasik Insurance Company Ltd.                                         
|
| |  |  | LasikPlus Medical Associates, P.C. (effective July 1, 2003)          
|
| |  |  | LasikPlus Medical Associates, P.A. (effective July 1, 2003)          
|
| |  |  | Capital Region Vision Laser Associates, P.C. (effective July 1, 2003)

Equity method

We use the equity method to report investments in businesses where we hold a
20% to 50% voting interest, giving us the ability to exercise significant
influence, but not control, over operating and financial policies. Under the
equity method, we report:



| |  |  | Our interest in the entity as an investment in our Consolidated Balance Sheets, and        
| | - |  | -------------------------------------------------------------------------------------------
|
| |  |  | Our percentage share of the earnings (losses) in our Consolidated Statements of Operations.

We own 43% of Silmalaseri Oy, our joint venture in Europe, and 50% of both Cole
LCA Vision LLC (through June 30, 2002) and Eyemed LCA Vision LLC and report our
investments under the equity method.

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Use of estimates

Management makes estimates and assumptions when preparing financial statements
under accounting principles generally accepted in the United States. Certain
estimates are particularly sensitive due to their significance to the financial
statements and the possibility that future events may differ significantly from
managements expectations. These estimates and assumptions affect various
matters including:



| |  |  | Allowance for doubtful accounts  patient financing
| | - |  | ---------------------------------------------------
|
| |  |  | Deferred income taxes  valuation allowance        
|
| |  |  | Loss reserves  insurance captive                  

Cash and Cash Equivalents

For the purpose of reporting our cash flows, we consider highly liquid
investments with an original maturity of 90 days or less when purchased to be
cash equivalents. Cash equivalents are stated at cost, which approximates
market value.

Trade Receivables

Trade receivables are comprised primarily of amounts owed to the Company from
patients and from professional corporations - $5,900,000 at December 31, 2003
and $624,000 at December 31, 2002. Trade receivables are presented net of
allowances for doubtful accounts of $1,896,000 and $231,000 at December 31,
2003 and 2002 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 discounted at a rate of 17.5% per year.

Allowance for doubtful accounts

We provide patient financing to some of our customers, including those who
could not otherwise obtain third-party financing. The terms of the financing
require the patient to pay an up-front fee which is intended to cover some or
all of our variable costs, and the remainder is deducted automatically from the
patients checking account over a period of 12 to 36 months. We began our
patient financing program in May 2002. As a result of a recent expansion of
this program, we are currently exposed to more credit risk than we have
experienced in the past. Based upon our own experience with patient financing
and based upon the credit experience of centers who provide financing to
customers similar to ours, we have established bad debt reserves as of December
31, 2003 of $1,896,000 against accounts receivable of $5,900,000. To the extent
that our actual bad debt writeoffs are greater than our estimated bad debt
reserve, it would adversely impact our results of operations and cash flows and
to the extent that our actual bad debt write-offs are less than our estimated
bad debt reserve, it would favorably impact our results of operations and cash
flows.

Property and Equipment, Goodwill, and Depreciation and Amortization

Property and Equipment

We show 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 or amortization are
deducted from the amounts reported in the Consolidated Balance Sheet and any
gains or losses on disposition are recognized in the Consolidated Statements of
Operations. We expense repair and maintenance costs as incurred.

Goodwill and Other Intangible Assets

Goodwill is the excess of the acquisition cost of the business over the fair
value of the identifiable net assets acquired. Through December 31, 2001, we
amortized goodwill using the straight-line method over the estimated useful
life. The Company adopted Financial Accounting Standards (SFAS) No. 142,
Goodwill and other Intangible Assetseffective January 1, 2002. SFAS No. 142
discontinued the amortization of goodwill and requires companies to perform an
annual impairment test of goodwill. Application of the non-amortization
provision of the SFAS No. 142 resulted in a decrease in annual operating
expenses of $76,000 in 2002. Based on the impairment tests of goodwill as of
December 31, 2003, the Company believes there was no goodwill impairment.

Depreciation and Amortization

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
using the straight-line method based on the lesser of the useful life of the
improvement or the lease term.

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We assess the impairment of property and equipment whenever events or
circumstances indicate that the carrying value might not be recoverable.
Estimates of future cash flows are used to determine if there is impairment;
discounted cash flows are used to determine the amount of impairment.

Depreciation Expense

The amount of depreciation expense recorded in the consolidated statements of
operations is as follows (dollars in thousands):

|     |  |              |       | 
|---- |  | ------------ | ----- | 
|Year |  | Depreciation
|2001 |  | $            | 5,497 | 
|2002 |  |              | 5,997 | 
|2003 |  |              | 6,377 | 

Financial Instruments

Concentration of Credit Risk

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

Fair Values of Financial Instruments

The cost basis of our cash and cash equivalents, trade receivables with an
initial term within 12 months and accounts payable approximate their fair
values due to their short term maturities. For trade receivables with an
initial term in excess of 12 months, we record the present value of the
expected payments discounted at a rate of 17.5 percent per year.

Captive insurance company reserves

Effective December 18, 2002, we established 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, some of
whom are currently insured by the captive. Our captive insurance company is
managed by an independent insurance consulting and management firm, and it is
capitalized and funded by us based on actuarial studies performed by an
affiliate of the consulting and management firm. For the 12 months ending
December 17, 2003, our captive insurance company purchased excess liability
coverage for 80% of our losses in the year in excess of $1,000,000 per
occurrence, up to $11,000,000. Our captive insurance company is responsible for
20% of our aggregate losses in excess of $1,000,000 per claim, up to
$11,000,000. Under that arrangement, the coverage providers obligation arises
only after our captive pays the first $1,000,000 of any loss and the coverage
providers are then only obligated to pay an aggregate of $8,000,000 in a given
policy year. Beginning December 18, 2003, the Company elected to use the
captive insurance company for both the primary insurance and the excess
liability coverage. The captive insurance company continues to be funded at a
rate determined by actuarial studies performed by an independent consulting
firm. A number of claims covered by our captive insurance company are now
pending. 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, 2003, we recorded an insurance reserve amount of
$963,000 which primarily represents an actuarially determined estimate of
claims incurred but not yet reported. To the extent that our actual claim
experience is greater than our estimated insurance reserve, it would adversely
impact our results of operations and cash flows and to the extent that our
actual claim experience is less than our estimated insurance reserve, it would
favorably impact our results of operations and cash flows.

Income taxes

As a result of our operating loss during the third quarter of 2001 and
throughout 2002, and continuing uncertainties regarding the general economic
conditions in the United States and the impact on our ongoing operations, we
continue to record a full valuation reserve for deferred tax assets. This
reserve was established according to the requirements of SFAS No. 109
Accounting for Income
Taxes. Favorable changes in our operating profitability, as a result of
improved general economic conditions in the United States or otherwise, could
impact our determination as to whether reduction, in whole or in part, to the
valuation reserve is necessary in the future. To the extent that such a
reduction in the valuation reserve is necessary, an income tax benefit would be
recorded in the consolidated statement of operations, which would favorably
impact our results of operations. In addition, future taxable income may be
absorbed by the net operating loss carryforwards that we maintain, which would
favorably impact our results of operations and cash flows. During the year
ended December 31, 2003, we applied approximately $9,555,000 of our net
operating losses against our taxable income for the period, which resulted in
reduced federal income tax expenses and tax payments of approximately
$3,249,000. The valuation reserve and net operating loss carryforwards were
$16,807,000 and $39,636,000, respectively, as of December 31, 2003.

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Revenue Recognition

Other than for patients for whom we provide financing with an initial term over
12 months, we recognize revenues as services are performed.

Stock-Based Compensation

In December 2002, SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure, which amends SFAS No. 123, Accounting for
Stock-Based Compensation, was issued. SFAS No. 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and requires more prominent
and more frequent disclosures in the financial statements of the effects of
stock-based compensation. The provisions of SFAS No. 148 are effective for
fiscal years ending after December 15, 2002.

We apply APB No. 25 and related interpretations utilizing the intrinsic value
method in accounting for our stock option plans. We have adopted the
disclosure-only provisions of SFAS No. 123. We recognize no compensation
expense for our stock options granted to employees or directors. If we had
elected to recognize compensation expense based on the fair value at the grant
dates consistent with the provisions of SFAS No. 123, net income (loss) and net
income (loss) per share would have been changed to the pro forma amounts
indicated below (dollars in thousands, except per share amounts):

|                                    |  |             |  |   |       |                          |  |      |        |      |  |   |         |   |  | 
|----------------------------------- |  | ----------- |  | - | ----- | ------------------------ |  | ---- | ------ | ---- |  | - | ------- | - |  | 
|                                    |  |             |  |   |       | Years ended December 31,
|                                    |  |             |  |   |       | 2003                     |  | 2002 |        | 2001
|                                    |  |             |  |   |       |                          |  |      |        |     
|Net income (loss)                   |  | As reported |  | $ | 7,269 |                          |  | $    | (3,826 | )    |  | $ | (23,375 | )
|                                    |  | Pro forma   |  |   | 6,231 |                          |  |      | (5,676 | )    |  |   | (25,690 | )
|Basic net income (loss) per share   |  | As reported |  | $ | 0.67  |                          |  | $    | (0.35  | )    |  | $ | (2.01   | )
|                                    |  | Pro forma   |  |   | 0.57  |                          |  |      | (0.53  | )    |  |   | (2.21   | )
|Diluted net income (loss) per share |  | As reported |  | $ | 0.66  |                          |  | $    | (0.35  | )    |  | $ | (2.01   | )
|                                    |  | Pro forma   |  |   | 0.56  |                          |  |      | (0.53  | )    |  |   | (2.21   | )

These results may not be representative of the effects on pro forma amounts for
future years.

We determined the pro forma amounts using the Black-Scholes option-pricing
model based on the following assumptions:

|
|
|
|
|
|
|
|
|

Additional information on options is included in Note 8, and additional
information on warrants is included in Note 2.

Marketing and Advertising Expenditures

Marketing and advertising expenditures are expensed as incurred, except for the
costs associated with direct mail. Direct mail costs are expensed upon
mailing.

New Accounting Pronouncements

FIN 46 was issued in January 2003. This interpretation addresses consolidation
by business enterprises of variable interest entities. The interpretation
requires existing unconsolidated variable interest entities to be consolidated
by their primary beneficiary. See Consolidation above for a description of
the impact of this new standard on the Company.

In December 2002, the FASB issued SFAS No. 148. SFAS No. 148 provides
transitional guidance for a voluntary change to the fair value-based method of
accounting for stock-based employee compensation. See Stock-Based
Compensation above for a description of the impact of this new standard on the
Company.

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Per share data

Basic per share data is earnings or loss applicable to common stockholders
divided by weighted average common shares outstanding. Diluted per share data
is earnings or loss applicable to common stockholders divided by weighted
average common shares outstanding plus potential common shares from dilutive
securities such as options and convertible securities. The table shows how we
calculated basic and diluted earnings per share and diluted shares outstanding
for the year ended December 31, 2003, 2002 and 2001 (amounts in thousands,
except per share amounts).

|                                                             |  |      |        |      |  |      |        |   |  |    |         |  
|------------------------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | -- | ------- | -
|                                                             |  | 2003 |        | 2002 |  | 2001
|                                                             |  |      |        |      |  |     
|Basic EPS                                                    |  |      |        |      |  |      |        |   |  |    |         |  
|Net income (loss) applicable to common stock                 |  | $    | 7,269  |      |  | ($   | 3,826  | ) |  | ($ | 23,375  | )
|Weighted average shares outstanding                          |  |      | 10,927 |      |  |      | 10,794 |   |  |    | 11,643  |  
|Basic net income (loss) per share                            |  | $    | 0.67   |      |  | $    | (0.35  | ) |  | $  | (2.01   | )
|Diluted EPS                                                  |  |      |        |      |  |      |        |   |  |    |         |  
|Net income (loss) applicable to common stock                 |  | $    | 7,269  |      |  | $    | (3,826 | ) |  | $  | (23,375 | )
|Weighted average common shares and potential dilutive shares |  |      | 11,077 |      |  |      | 10,794 |   |  |    | 11,643  |  
|Diluted net income (loss) per share                          |  | $    | 0.66   |      |  | $    | (0.35  | ) |  | $  | (2.01   | )

The weighted average shares for the years ended December 31, 2002 and 2001
diluted calculations do not assume exercise of any stock options or conversion
of other securities since they would have resulted in a reduced loss per share.
The number of unexercised options and warrants as of December 31, 2003, 2002
and 2001 was:

|         |  |      |           |      |  |      |           |  |  |  |           | 
|-------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|         |  | 2003 |           | 2002 |  | 2001
|         |  |      |           |      |  |     
|Options  |  |      | 1,109,251 |      |  |      | 915,201   |  |  |  | 914,819   | 
|Warrants |  |      |          |      |  |      | 100,000   |  |  |  | 127,734   | 
|         |  |      |           |      |  |      |           |  |  |  |           | 
|         |  |      | 1,109,251 |      |  |      | 1,015,201 |  |  |  | 1,042,553 | 
|         |  |      |           |      |  |      |           |  |  |  |           | 

2.     Stockholders Investment

Common Stock

We are authorized to issue up to 27.5 million shares of common stock. The
number of shares reserved for future issuance is 1,981,652 shares under stock
option plans.

Preferred stock

At December 31, 2003, there are no shares of preferred stock issued and
outstanding.

Treasury stock

At December 31, 2003, there were 2,367,197 shares of common stock held in
treasury. The Board of Directors previously authorized management to buy back
1,250,000 shares of common stock. As of December 31, 2003, 135,530 shares still
could be purchased pursuant to this authorization.

On January 31, 2002, 1,632,881 shares of LCA-Vision common stock were purchased
from Summit Autonomous, a subsidiary of Alcon Holdings Inc., for approximately
$4,898,000. The transaction was split equally between the Company share
repurchase program and members of LCA-Visions senior management and Board of
Directors.

Notes receivable from stockholders

During the second quarter of 2000, the directors initiated a program to
encourage additional direct stock ownership by senior management of the
Company. The Company offered loans to nine key managers and directors for the
purpose of purchasing shares in the open market. Each loan was a personal
obligation of the borrower, and was evidenced by a promissory note. The
interest rate on the notes was prime less one and one-half percent. Interest
was accrued and added to the outstanding principal balance. The notes had a
maximum term of three years, and contain provisions for early repayment. All
current directors and officers repaid these loans in full in 2003.

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Warrants

During 1999, we issued warrants to purchase a total of 231,250 shares of common
stock at prices ranging from $8 to $48 per share. The warrants were issued to
an investment banking firm and to Cole National Corporation, a joint venture
partner of ours at the time.

Warrants for 3,516 shares have been exercised. Warrants to purchase 27,734
shares expired in 2002. Warrants to purchase 200,000 shares at $48 per share
were issued during the third quarter of 1999 of which 100,000 expired as of
June 30, 2003; remaining warrants were repurchased in the third quarter of 2000
for $310,000.

The vested warrants issued to Cole National Corporation resulted in prepaid
expense for book purposes, using the Black-Scholes method, of $2,105,000. This
amount was amortized over the three-year term of the agreement with Cole
National Corporation to market laser vision correction as a managed care
benefit.

Amortization of $510,000 is recorded in our 2002 Consolidated Statement of
Operations and $701,001 of amortization is recorded in our 2001 Consolidated
Statement of Operations.

3.     Special Charges

During the third quarter of 2001, management implemented a restructuring plan
to close unprofitable locations and to reduce operating expenses. The cost of
the plan was $1,375,000, which was comprised of a $535,000 restructuring charge
and an $840,000 asset impairment charge for leasehold improvements, equipment
and goodwill associated with the locations closed. The restructuring charges
included $384,000 in lease termination costs and $151,000 in severance payments
for 71 employees.

As of December 31, 2001, the balance of the restructuring accrual was $262,000
which related to future facility rent payments and is included in accrued
liabilities and other in the Consolidated Balance Sheet. During the first
quarter 2002, $88,000 was expended to buy out the remainder of a facility
lease. With the restructuring plan fully implemented, the remaining reserve of
$174,000 was reversed in the first quarter 2002.

Also during the third quarter of 2001, the Company provided a reserve of
$399,000 on a loan made to REI Corporation which operated a licensed facility
in Tokyo, Japan. During the quarter, management determined that the loan may
not be recoverable.

4.     Credit Arrangements

We have a $10,000,000 credit facility with The Provident Bank (Provident) and
a $10,000,000 line of credit for the purpose of funding acquisitions subject to
Providents sole and absolute discretion.

The Provident facility matures on July 31, 2004. The facility can be used to
support up to $2,000,000 of letters of credit issued by Provident. Borrowings
under the working capital portion of the facility bear interest at Providents
prime rate. Substantially all of our assets at December 31, 2003, including a
mortgage on our headquarters building in Cincinnati which we own, are pledged
as collateral.

The credit facility, for which there is no formal compensating balance,
requires us to pay an annual commitment fee of 0.25% based on the unused
portion. At December 31, 2003 we had $10,000,000 available to us under the
credit facility.

The credit facility requires us to maintain tangible net worth of at least
$30,000,000.

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5.     Investment in Unconsolidated Businesses

Our investment in unconsolidated businesses was $385,000 and $263,000 at
December 31, 2003 and December 31, 2002, respectively. At December 31, 2003,
we had investments in Silmalaseri Oy in Helsinki (43%), our joint venture in
Europe, and Eyemed/LCA-Vision LLC (50%).

Combined summary financial information for these entities is as follows
(dollars in thousands):

|                    |                   |  |              |       |      |  |   |       | 
|------------------- | ----------------- |  | ------------ | ----- | ---- |  | - | ----- | 
|                    |                   |  | December 31, |       |      |  |  
|                    |                   |  | 2003         |       | 2002
|                    |                   |  |              |       |     
|Financial Position: |                   |  |              |       |      |  |   |      
|                    | Current assets    |  | $            | 427   |      |  | $ | 377   | 
|                    | Total assets      |  |              | 762   |      |  |   | 545   | 
|                    | Total liabilities |  |              | 249   |      |  |   | 267   | 
|                    | Members equity   |  |              | 513   |      |  |   | 278   | 
|Operating Results:  |                   |  |              |       |      |  |   |      
|                    | Revenue           |  | $            | 1,695 |      |  | $ | 1,559 | 
|                    | Net income        |  |              | 626   |      |  |   | 497   | 

6.     Income Taxes

The components of income tax expense (benefit) for the three years ended
December 31, 2003 are presented in the following table (dollars in thousands):

|                                        |                 |   |        |       |      |   |      |      |   |   |        |        |  
|--------------------------------------- | --------------- | - | ------ | ----- | ---- | - | ---- | ---- | - | - | ------ | ------ | -
|                                        |                 |   | 2003   |       | 2002 |   | 2001
|                                        |                 |   |        |       |      |   |     
|Current:                                |                 |   |        |       |      |   |      |      |   |   |        |       
|                                        | Federal         |   | $      | 193   |      |   | $    |     |   |   | $      |       |  
|                                        | State and local |   |        | 51    |      |   |      |     |   |   |        |       |  
|                                        | Foreign         |   |        | 347   |      |   |      | 174  |   |   |        |       |  
|                                        |                 |   |        |       |      |   |      |      |   |   |        |       
|Total                                   |                 |   | 591    |       |      |   | 174  |      |   |   |       |       
|                                        |                 |   |        |       |      |   |      |      |   |   |        |       
|Deferred:                               |                 |   |        |       |      |   |      |      |   |   |        |       
|                                        | Federal         |   |        | 1,864 |      |   |      | (880 | ) |   |        | (1,393 | )
|                                        | State and local |   |        | 190   |      |   |      | 8    |   |   |        | (7     | )
|                                        |                 |   |        |       |      |   |      |      |   |   |        |       
|Total                                   |                 |   | 2,054  |       |      |   | (872 | )    |   |   | (1,400 | )     
|                                        |                 |   |        |       |      |   |      |      |   |   |        |       
|Income tax (benefit) expense            |                 |   | 2,645  |       |      |   | (698 | )    |   |   | (1,400 | )     
|Valuation allowance increase
(decrease) |                 |   | (2,054 | )     |      |   | 872  |      |   |   | 17,989 |       
|                                        |                 |   |        |       |      |   |      |      |   |   |        |       
|Net income tax (benefit) expense        |                 | $ | 591    |       |      | $ | 174  |      |   | $ | 16,589 |       
|                                        |                 |   |        |       |      |   |      |      |   |   |        |       

As a result of the Companys operating loss during the third quarter of 2001,
and continuing uncertainties regarding the general economic conditions in the
United States and the impact on ongoing operations, the Company recorded a
$15,345,000 valuation reserve for deferred tax assets as of September 30, 2001.
The Companys operating losses continued in 2002 and the uncertainties
continue to exist, such that it is not more-likely-than-not that the deferred
tax assets will be realized at this time. This valuation reserve was
established according to the requirements of SFAS No. 109, Accounting for
Income Taxes.

We are required to pay franchise taxes in most of the states in which we have
operations due to our net operating loss carryforwards. We have included the
franchise taxes paid in general and administrative expenses in our Consolidated
Statements of Operations.

The foreign tax provisions consist primarily of Canadian income taxes. We have
made no provision for U.S. income taxes on undistributed earnings from our
international businesses because it is our intention to reinvest those earnings
in those operations. 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.

39



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Pretax income (loss) for the last three years has been:

|         |  |      |       |      |  |      |        |   |  |   |        |  
|-------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------ | -
|         |  | 2003 |       | 2002 |  | 2001
|         |  |      |       |      |  |     
|Domestic |  | $    | 6,761 |      |  | $    | (3,925 | ) |  | $ | (6,224 | )
|Foreign  |  |      | 1,099 |      |  |      | 273    |   |  |   | (563   | )
|         |  |      |       |      |  |      |        |   |  |   |        |  
|Total    |  | $    | 7,860 |      |  | $    | (3,652 | ) |  | $ | (6,787 | )
|         |  |      |       |      |  |      |        |   |  |   |        |  

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

|                                                  |                                 |   |                                                 |         |             |        |      |         |   |        | 
|------------------------------------------------- | ------------------------------- | - | ----------------------------------------------- | ------- | ----------- | ------ | ---- | ------- | - | ------ | 
|                                                  |                                 |   |                                                 |         | December 31
|                                                  |                                 |   |                                                 |         | 2003        |        | 2002
|                                                  |                                 |   |                                                 |         |             |        |     
|Deferred tax assets:                              |                                 |   |                                                 |         |             |        |      |        
|                                                  | Net operating loss carryforward |   | $                                               | 15,324  |             |        | $    | 18,772  |  
|                                                  | Accounts receivable             |   |                                                 | 645     |             |        |      | 90      |  
|                                                  | Equity investments              |   |                                                 | 84      |             |        |      | 293     |  
|                                                  | Deferred compensation           |   |                                                 | 155     |             |        |      | 44      |  
|                                                  | Captive insurance               |   |                                                 | 215     |             |        |      |        |  
|                                                  | Alternate minimum tax           |   |                                                 | 193     |             |        |      |         |  
|                                                  | Other                           |   |                                                 | 191     |             |        |      | 207     |  
|                                                  |                                 |   |                                                 |         |             |        |      |        
|                                                  |                                 |   | Total deferred tax assets                       |         |             | 16,807 |      |         |   | 19,406 | 
|                                                  | Valuation allowance             |   |                                                 | (16,807 | )           |        |      | (18,861 | )
|                                                  |                                 |   |                                                 |         |             |        |      |        
|                                                  |                                 |   | Deferred tax assets, net of valuation allowance |         |             |       |      |         |   | 545    | 
|Deferred tax liabilities  property and equipment |                                 |   |                                                |         |             |        | (545 | )      
|                                                  |                                 |   |                                                 |         |             |        |      |        
|Net deferred tax assets                           |                                 | $ |                                                |         |             | $      |     |        
|                                                  |                                 |   |                                                 |         |             |        |      |        

The following table shows the principal reasons for the difference between the
statutory federal income tax rate of 34% and the tax benefit shown in our
Consolidated Statements of Operations (dollars in thousands):

|                                           |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------ |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                           |  | 2003 |        | 2002 |  | 2001
|                                           |  |      |        |      |  |     
|Tax at statutory federal rate              |  | $    | 2,673  |      |  | $    | (1,242 | ) |  | $ | (2,307 | )
|State income taxes, net of federal benefit |  |      | 159    |      |  |      | 5      |   |  |   | (4     | )
|Permanent differences                      |  |      | 21     |      |  |      | 201    |   |  |   | 401    |  
|Foreign income tax                         |  |      | 347    |      |  |      | 174    |   |  |   |       |  
|Change in valuation allowance              |  |      | (2,054 | )    |  |      | 872    |   |  |   | 17,989 |  
|Other                                      |  |      | (555   | )    |  |      | 164    |   |  |   | 510    |  
|                                           |  |      |        |      |  |      |        |   |  |   |        |  
|Income tax provision (benefit)             |  | $    | 591    |      |  | $    | 174    |   |  | $ | 16,589 |  
|                                           |  |      |        |      |  |      |        |   |  |   |        |  

At December 31, 2003 and 2002 we had federal net operating loss carryforwards
for income tax purposes of $39,636,000 and $48,765,000, respectively. These
expire in varying amounts from 2007 until 2022. Approximately $18,000,000 of
federal net operating loss carryforwards and $15,750,000 state net operating
loss carryforwards were acquired in 1997 when we bought Refractive Centers
International, Inc. Our ability to use these acquired net operating loss
carryforwards is limited to approximately $2,500,000 per year under Code
Section 382 of the Internal Revenue Code.

7. Leasing Arrangements

We lease office space for our vision centers.

40



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

|                                |  |                   |       | 
|------------------------------- |  | ----------------- | ----- | 
|                                |  | December 31, 2003
|                                |  | Operating        
|Year                            |  | Leases           
|                                |  |                  
|2004                            |  |                   | 3,408 | 
|2005                            |  |                   | 2,557 | 
|2006                            |  |                   | 1,487 | 
|2007                            |  |                   | 719   | 
|2008                            |  |                   | 475   | 
|Beyond 2008                     |  |                   | 281   | 
|                                |  |                   |       | 
|Total minimum rental commitment |  | $                 | 8,927 | 

Total rent expense under operating leases amounted to $4,428,000 in 2003;
$4,352,000 in 2002; and $6,770,000 in 2001.

8.     Employee Benefits

Savings Plan

We sponsor a savings plan under Internal Revenue Code Section 401(k) to provide
an opportunity for eligible employees to save for retirement on a tax-deferred
basis. Under this plan, we may make discretionary contributions to the
participants accounts. We made contributions of $0 in 2003; $0 in 2002; and
$18,066 in 2001.

Stock Option Plans

We have three stock incentive plans, the 1995 Long Term Stock Incentive Plan
(1995 Plan), the 1998 Long Term Stock Incentive Plan (1998 Plan) and the
2001 Long Term Stock Incentive Plan (2001 Plan). A maximum of 625,000 shares
are reserved for the 1995 Plan, 1,250,000 shares are reserved for the 1998 Plan
and 625,000 shares are reserved for the 2001 Plan. The Compensation Committee
of the Board of Directors administers all Stock Option Plans.

The Plans permit us to issue incentive and/or nonqualified stock options to
purchase shares of common stock, stock appreciation rights, and stock awards to
employees and consultants. The 1998 Plan is used to grant stock options to our
non-employee directors. Non-employee directors receive an option to purchase
18,750 shares of our common stock upon initial election or appointment and an
automatic option grant of 3,125 shares upon reelection. Prior to our
stockholders approving the 1998 Plan, we granted our non-employee directors
stock options under the LCA-Vision Inc. Directors Nondiscretionary Stock
Option Plan, which was discontinued in 1998.

Stock options are granted with an exercise price not less than fair market
value on the date of grant. Stock options granted generally become exercisable
over 3 to 5 years after their date of grant; the maximum term is 10 years from
the date of grant.

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The following table summarizes the status of our 1995, 1998 and 2001 Plans:

|                                  |  |               |           |                |  |   |       | 
|--------------------------------- |  | ------------- | --------- | -------------- |  | - | ----- | 
|                                  |  | Stock Options |           | Exercise Price
|                                  |  |               |           |               
|Outstanding at 12/31/00           |  |               | 972,394   |                |  | $ | 13.92 | 
|Granted                           |  |               | 138,875   |                |  |   | 10.76 | 
|Exercised                         |  |               | (33,788   | )              |  |   | 4.72  | 
|Cancelled/forfeited               |  |               | (238,909  | )              |  |   | 12.84 | 
|                                  |  |               |           |                |  |   |       | 
|Outstanding at 12/31/01           |  |               | 838,572   |                |  |   | 14.08 | 
|Granted                           |  |               | 164,375   |                |  |   | 5.25  | 
|Exercised                         |  |               | (46,250   | )              |  |   | 5.09  | 
|Cancelled/forfeited               |  |               | (117,746  | )              |  |   | 14.47 | 
|                                  |  |               |           |                |  |   |       | 
|Outstanding at 12/31/02           |  |               | 838,951   |                |  |   | 12.80 | 
|Granted                           |  |               | 598,875   |                |  |   | 13.11 | 
|Exercised                         |  |               | (133,255  | )              |  |   | 7.68  | 
|Cancelled/forfeited               |  |               | (195,320  | )              |  |   | 15.95 | 
|                                  |  |               |           |                |  |   |       | 
|Outstanding at 12/31/03           |  |               | 1,109,251 |                |  |   | 12.96 | 
|Options exercisable,
December 31, |  |               |           |                |  |   |       | 
|2001                              |  |               | 405,941   |                |  |   | 13.76 | 
|2002                              |  |               | 502,406   |                |  |   | 14.37 | 
|2003                              |  |               | 425,094   |                |  |   | 13.77 | 

The following table summarizes information about the stock options granted
under the 1995, 1998 and 2001 Plans that were outstanding at December 31, 2003:

|                  |  |                           |           |                  |  |                  |      |                           |  |                  |       |  |  |  |         |  |  |   |       | 
|----------------- |  | ------------------------- | --------- | ---------------- |  | ---------------- | ---- | ------------------------- |  | ---------------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                  |  | Stock Options Outstanding |           |                  |  |                  |      | Stock Options Exercisable
|                  |  |                           |           |                  |  |                  |      |                          
|                  |  |                           |           |                  |  | Weighted-average |      |                           |  |                  |       |  |  |  |         |  |  |  
|Range of exercise |  | # outstanding as of       |           | remaining        |  | Weighted-average |      | # Exercisable as of       |  | Weighted-average
|prices            |  | 12/31/03                  |           | contractual life |  | exercise price   |      | 12/31/03                  |  | exercise price  
|                  |  |                           |           |                  |  |                  |      |                           |  |                 
|$2.40 - 5.32      |  |                           | 147,205   |                  |  |                  | 7.37 |                           |  | $                | 4.62  |  |  |  | 58,608  |  |  | $ | 4.87  | 
|5.38 - 8.75       |  |                           | 75,146    |                  |  |                  | 5.81 |                           |  |                  | 5.91  |  |  |  | 40,889  |  |  |   | 5.89  | 
|8.88 - 8.88       |  |                           | 149,875   |                  |  |                  | 9.49 |                           |  |                  | 8.88  |  |  |  | 0       |  |  |   | 0.00  | 
|8.98 - 10.02      |  |                           | 129,500   |                  |  |                  | 9.27 |                           |  |                  | 9.89  |  |  |  | 36,082  |  |  |   | 9.95  | 
|10.88 - 13.75     |  |                           | 119,312   |                  |  |                  | 5.93 |                           |  |                  | 11.55 |  |  |  | 107,376 |  |  |   | 11.60 | 
|15.98 - 17.76     |  |                           | 111,838   |                  |  |                  | 6.73 |                           |  |                  | 16.55 |  |  |  | 72,814  |  |  |   | 16.55 | 
|18.29 - 18.29     |  |                           | 256,250   |                  |  |                  | 9.94 |                           |  |                  | 18.29 |  |  |  | 0       |  |  |   | 0.00  | 
|18.75 - 23.88     |  |                           | 98,250    |                  |  |                  | 6.09 |                           |  |                  | 19.44 |  |  |  | 87,450  |  |  |   | 19.46 | 
|27.75 - 27.75     |  |                           | 9,375     |                  |  |                  | 0.36 |                           |  |                  | 22.75 |  |  |  | 9,375   |  |  |   | 22.75 | 
|44.50 - 44.50     |  |                           | 12,500    |                  |  |                  | 5.52 |                           |  |                  | 44.50 |  |  |  | 12,500  |  |  |   | 44.50 | 
|                  |  |                           |           |                  |  |                  |      |                           |  |                  |       |  |  |  |         |  |  |   |       | 
|$2.40 - 44.50     |  |                           | 1,109,251 |                  |  |                  | 7.95 |                           |  | $                | 12.96 |  |  |  | 425,094 |  |  | $ | 13.77 | 
|                  |  |                           |           |                  |  |                  |      |                           |  |                  |       |  |  |  |         |  |  |   |       | 

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At December 31, 2003 a total of 872,401 shares are available for awards under
the 1995, 1998 and 2001 Plans.

The weighted-average fair value of options granted was $13.11 per option during
2003; $5.25 per option during 2002; and $10.76 per option during 2001.

9.     Commitments and Contingencies

In the opinion of management there are currently no commitments or
contingencies that will have a material adverse effect on our financial
position or results of operations.

10.     Litigation Settlement

In August 2002, a settlement of $2,282,000 was received from Pillar Point
Partners class-action litigation. Pillar Point Partners  a joint entity
formed in 1995 by laser manufacturers VISX and Summit Technology Inc., now a
subsidiary of Alcon Corporation  collected per-use royalties from all laser
vision correction providers using their equipment. The manufacturers agreed to
settle the various lawsuits for $37.8 million. Pillar Point was dissolved in
July 1998 after the Federal Trade Commission filed an administrative complaint
challenging the partnerships existence.

11.     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,
|                       |                                |   | 2003   |         | 2002
|                       |                                |   |        |         |     
|Property and Equipment |                                |   |        |         |      |   |                 |        
|                       | Land                           |   | $      | 354     |      |   | $               | 375     |  
|                       | Building and improvements      |   |        | 5,660   |      |   |                 | 5,660   |  
|                       | Leasehold improvements         |   |        | 5,589   |      |   |                 | 5,385   |  
|                       | Furniture and fixtures         |   |        | 2,805   |      |   |                 | 2,841   |  
|                       | Equipment                      |   |        | 25,844  |      |   |                 | 22,517  |  
|                       | Equipment under capital leases |   |        | 146     |      |   |                 | 494     |  
|                       |                                |   |        |         |      |   |                 |         |  
|                       |                                |   | 40,398 |         |      |   | 37,272          |        
|                       | Accumulated depreciation       |   |        | (24,622 | )    |   |                 | (18,868 | )
|                       | Construction in progress       |   |        | 1,569   |      |   |                 | 29      |  
|                       |                                |   |        |         |      |   |                 |         |  
|                       |                                | $ | 17,345 |         |      | $ | 18,433          |        
|                       |                                |   |        |         |      |   |                 |         |  

Cash Flow Information

|                                              |                                                                                         |   |                                 |       |      |   |        |        |   |   |         |         |  
|--------------------------------------------- | --------------------------------------------------------------------------------------- | - | ------------------------------- | ----- | ---- | - | ------ | ------ | - | - | ------- | ------- | -
|                                              |                                                                                         |   | For the Year Ended December 31,
|                                              |                                                                                         |   | 2003                            |       | 2002 |   | 2001  
|                                              |                                                                                         |   |                                 |       |      |   |       
|Cash paid during the year for                 |                                                                                         |   |                                 |       |      |   |        |        |   |   |         |        
|                                              | Interest                                                                                |   | $                               | (18   | )    |   | $      | 4      |   |   | $       | 17      |  
|                                              | Income taxes                                                                            |   |                                 | 608   |      |   |        | 23     |   |   |         |        |  
|Other comprehensive income (loss) information |                                                                                         |   |                                 |       |      |   |        |        |   |   |         |        
|Comprehensive income (loss):                  |                                                                                         |   |                                 |       |      |   |        |        |   |   |         |        
|                                              | Income (loss) applicable to common stock                                                |   | $                               | 7,269 |      |   | $      | (3,826 | ) |   | $       | (23,375 | )
|                                              | Other comprehensive income (loss), net of
income tax  currency translation
adjustments |   |                                 | 139   |      |   |        | (3     | ) |   |         | (17     | )
|                                              |                                                                                         |   |                                 |       |      |   |        |        |   |   |         |         |  
|Total comprehensive income (loss)             |                                                                                         | $ | 7,408                           |       |      | $ | (3,829 | )      |   | $ | (23,392 | )      
|                                              |                                                                                         |   |                                 |       |      |   |        |        |   |   |         |         |  

Segment Information

We operate in one segment  laser refractive surgery.

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12.     Quarterly Financial Data (unaudited)(1)

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

|                          |            |   |               |     |               |   |        |     |           |   |        |     |        |   |        |     |        |   |        |      |  |   |        |       |   |   |        |       |   |   |        |       |  
|------------------------- | ---------- | - | ------------- | --- | ------------- | - | ------ | --- | --------- | - | ------ | --- | ------ | - | ------ | --- | ------ | - | ------ | ---- |  | - | ------ | ----- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                          |            |   | 2003 Quarters |     | 2002 Quarters
|                          |            |   |               |     |              
|                          |            |   | First         |     | Second        |   | Third  |     | Fourth(2) |   | First  |     | Second |   | Third  |     | Fourth
|                          |            |   |               |     |               |   |        |     |           |   |        |     |        |   |        |     |       
|Revenues                  |            | $ | 19,982        |     |               | $ | 20,224 |     |           | $ | 20,455 |     |        | $ | 20,762 |     |        | $ | 18,808 |      |  | $ | 16,268 |       |   | $ | 13,462 |       |   | $ | 13,300 |      
|Operating (loss) income   |            |   | 1,639         |     |               |   | 1,796  |     |           |   | 1,468  |     |        |   | 2,247  |     |        |   | 966    |      |  |   | (2,447 | )     |   |   | (2,814 | )     |   |   | (1,905 | )    
|Net Income (loss)         |            |   | 1,757         |     |               |   | 1,793  |     |           |   | 1,517  |     |        |   | 2,201  |     |        |   | 1,151  |      |  |   | (2,278 | )     |   |   | (810   | )     |   |   | (1,888 | )    
|Earnings (loss) per share |            |   |               |     |               |   |        |     |           |   |        |     |        |   |        |     |        |   |        |      |  |   |        |       |   |   |        |       |   |   |        |      
|                          | Basic(1)   |   |               | .16 |               |   |        | .17 |           |   |        | .14 |        |   |        | .19 |        |   | $      | 0.11 |  |   | $      | (0.21 | ) |   | $      | (0.08 | ) |   | $      | (0.18 | )
|                          | Diluted(1) |   |               | .16 |               |   |        | .17 |           |   |        | .14 |        |   |        | .19 |        |   | $      | 0.11 |  |   | $      | (0.21 | ) |   | $      | (0.08 | ) |   | $      | (0.18 | )



|(1) |  | The quarterly amounts are not additive due to rounding.                 
|--- |  | ------------------------------------------------------------------------
|   
|(2) |  | In the fourth quarter of 2003, insurance reserves decreased by
$421,000.




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

None.




Item 9A. Controls and Procedures.

(a) Evaluation Of Disclosure Controls And Procedures

Within 90 days prior to the filing of this report, under the supervision and
with the participation of the Companys management, including the Companys
Chief Executive Officer (CEO) and Chief Financial Officer (CFO), an evaluation
of the effectiveness of the Companys disclosure controls and procedures was
performed. Based on this evaluation, the CEO and CFO have concluded that the
Companys disclosure controls and procedures are effective to ensure that
material information is recorded, processed, summarized and reported by
management of the Company on a timely basis in order to comply with the
Companys disclosure obligations under the Securities Exchange Act of 1934 and
the SEC rules thereunder.

(b) Changes In Internal Controls

There have been no significant changes in the Companys internal controls or in
other factors that could have significantly affected those controls subsequent
to the date of our most recent evaluation of internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.




PART III




Item 10. Directors and Executive Officers of the Registrant.

The information required by this Item 10 is incorporated by reference from
Election of Directors, Executive Officers and Board of Directors Meetings
and Committees to be included in our definitive Proxy Statement which will be
filed with the Securities and Exchange Commission (SEC) in connection with the
2004 Annual Meeting of Stockholders.




Item 11. Executive Compensation.

The information required by this Item 11 is incorporated by reference from
Executive Compensation to be included in our definitive Proxy Statement which
will be filed with the SEC in connection with the 2004 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 definite Proxy
Statement to be filed with the SEC in connection with the 2004 Annual Meeting
of Stockholders.

The information called for by item 201(d) of Regulation S-K is presented below.

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Equity Compensation Plan Information

|                                                           |  |                         |           |                      |  |                                |       |                                |  |                      |         | 
|---------------------------------------------------------- |  | ----------------------- | --------- | -------------------- |  | ------------------------------ | ----- | ------------------------------ |  | -------------------- | ------- | 
|                                                           |  |                         |           |                      |  |                                |       |                                |  | Number of securities
|                                                           |  |                         |           |                      |  | Weighted-average               |       | remaining available for future
|                                                           |  | Number of securities to |           | exercise price of    |  | issuance under equity         
|                                                           |  | be issued upon exercise |           | outstanding options, |  | compensation plans (excluding 
|                                                           |  | of outstanding options, |           | warrants and rights  |  | securities reflected in column
|Plan Category                                              |  | warrants and rights (a) |           | (b)                  |  | (a))                          
|                                                           |  |                         |           |                      |  |                               
|Equity compensation
plans approved by
security holders     |  |                         | 1,109,251 |                      |  | $                              | 12.96 |                                |  |                      | 872,401 | 
|                                                           |  |                         |           |                      |  |                                |       |                                |  |                      |         | 
|Equity compensation
plans not approved
by security holders |  |                         |          |                      |  |                                |      |                                |  |                      |        | 
|                                                           |  |                         |           |                      |  |                                |       |                                |  |                      |         | 
|Total                                                      |  |                         | 1,109,251 |                      |  | $                              | 12.96 |                                |  |                      | 872,401 | 
|                                                           |  |                         |           |                      |  |                                |       |                                |  |                      |         | 




Item 13. Certain Relationships and Related Transactions.

The information required by this Item 13 is incorporated by reference from
Certain Transactions to be included in our definitive Proxy Statement which
will be filed with the SEC in connection with the 2004 Annual Meeting of
Stockholders.




Item 14. Principal Accountant Fees and Services.

The information required by this Item 14 is incorporated from Independent
Auditors to be included in our definitive Proxy Statement which will be filed
with the SEC in connection with our 2004 Annual Meeting of Stockholders.

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PART IV




Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.

(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 Independent Auditors                                                                         
| |  | -------------------------------------------------------------------------------------------------------
| |  | Consolidated Balance Sheets as of December 31, 2003 and 2002                                           
| |  | Consolidated Statements of Operations for each of the three years ended December 31, 2003              
| |  | Consolidated Statements of Cash Flows for each of the three years
ended December 31, 2003              
| |  | Consolidated Statements of Stockholders Investment for each of the three years ended December 31, 2003

(a)(2) List of Schedules



| |  | All other financial statement schedules have been omitted because the
required information is either inapplicable or presented in the
consolidated financial statements.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Schedule IIValuation and Qualifying Accounts and Revenues                                                                                                               

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| |  | Schedule II Valuation and Qualifying Accounts and Reserves
| |  | ----------------------------------------------------------

LCA-Vision Inc.

For the three years ended December 31, 2003
(in thousands)


|                            |                                 |           |            |          |         |            |         |        |  |  |           |     |  |  |   |       | 
|--------------------------- | ------------------------------- | --------- | ---------- | -------- | ------- | ---------- | ------- | ------ |  |  | --------- | --- |  |  | - | ----- | 
|                            |                                 |           |            |          |         |            | Charges |        |  |  |           |     |  |  |  
|                            |                                 |           | Balance at |          | to Cost |            |         |        |  |  | Balance  
|                            |                                 |           | Beginning  |          | and     |            |         |        |  |  | at End of
|Description                 |                                 | of Period |            | Expenses |         | Deductions |         | Period
|                            |                                 |           |            |          |         |            |         |       
|Year end December 31, 2003: |                                 |           |            |          |         |            |         |        |  |  |           |     |  |  |   |      
|                            | Allowance for doubtful accounts |           | $          | 231      |         |            | $       | 1,807  |  |  | $         | 142 |  |  | $ | 1,896 | 
|                            | Enhancement Reserve             |           |            | 266      |         |            |         | 802    |  |  |           | 707 |  |  |   | 361   | 
|Year end December 31, 2002  |                                 |           |            |          |         |            |         |        |  |  |           |     |  |  |   |      
|                            | Allowance for doubtful accounts |           | $          | 77       |         |            | $       | 332    |  |  | $         | 178 |  |  | $ | 231   | 
|                            | Enhancement Reserve             |           |            | 186      |         |            |         | 893    |  |  |           | 813 |  |  |   | 266   | 
|Year end December 31, 2002  |                                 |           |            |          |         |            |         |        |  |  |           |     |  |  |   |      
|                            | Allowance for doubtful accounts |           | $          | 965      |         |            | $       | 25     |  |  | $         | 913 |  |  | $ | 77    | 
|                            | Enhancement Reserve             |           |            | 353      |         |            |         | 572    |  |  |           | 739 |  |  |   | 186   | 

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(a)(3)List of Exhibits

|          |  |                                                                              |  |       
|--------- |  | ---------------------------------------------------------------------------- |  | ------
|Exhibit # |  | Description of Exhibit                                                       |  |       
|          |  |                                                                              |  |       
|3(a)      |  | Restated Certificate of Incorporation, as amended, of
Registrant             |  |       
|          |  |                                                                              |  |       
|3(b)      |  | Amended Bylaws of Registrant                                                 |  | Note A
|          |  |                                                                              |  |       
|10(a)     |  | LCA-Vision Inc. 1995 Long-Term Stock
Incentive Plan                          |  | Note B
|          |  |                                                                              |  |       
|10(b)     |  | LCA-Vision Inc. Directors Non-Discretionary
Stock Option Plan               |  | Note B
|          |  |                                                                              |  |       
|10(c)     |  | LCA-Vision Inc. 1998 Long-Term
Stock Incentive Plan                          |  | Note C
|          |  |                                                                              |  |       
|10(d)     |  | 2001 Long-Term Stock Incentive Plan                                          |  | Note D
|          |  |                                                                              |  |       
|10(e)     |  | Employment Agreement of Kevin M. Hassey                                      |  | Note E
|          |  |                                                                              |  |       
|10(f)     |  | Employment Agreement of Alan H. Buckey                                       |  | Note E
|          |  |                                                                              |  |       
|10(g)     |  | Loan Agreement dated June 29, 1998
between Registrant and The Provident Bank |  | Note F
|          |  |                                                                              |  |       
|10(h)     |  | Amendment to Loan Agreement dated September 30, 1999                         |  | Note G
|          |  |                                                                              |  |       
|10(i)     |  | Second Amendment to Loan Agreement dated November 30, 2001                   |  | Note G
|          |  |                                                                              |  |       
|10(j)     |  | Fourth Amendment to Loan Agreement Dated December 31, 2002                   |  | Note G
|          |  |                                                                              |  |       
|10(k)     |  | Fifth Amendment to Loan Agreement Dated July 31, 2003                        |  |       
|          |  |                                                                              |  |       
|10(l)     |  | Promissory Note between the Registrant
and its major stockholders            |  | Note H
|          |  |                                                                              |  |       
|14        |  | Code of Business Conduct and Ethics                                          |  |       
|          |  |                                                                              |  |       
|21        |  | Subsidiaries of the Registrant                                               |  |       
|          |  |                                                                              |  |       
|23        |  | Consent of Ernst & Young LLP                                                 |  |       
|          |  |                                                                              |  |       
|24        |  | Powers of Attorney (contained on the signature page)                         |  |       
|          |  |                                                                              |  |       
|31        |  | Rule 13a-14(a)/15d-14(a) Certifications                                      |  |       
|          |  |                                                                              |  |       
|32        |  | Section 1350 Certifications                                                  |  |       

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##### Table of Contents



NOTE REFERENCES  The document referenced has been filed as an exhibit to and
is incorporated by reference from:

A.     The Companys Registration Statement on Form 10-SB, No. 0-27610, which
became effective on January 25, 1996.

B.     The Companys annual report on Form 10-KSB for the year ended December
31, 1995.

C.     The Companys Proxy Statement for its Special Meeting of Stockholders
held on October 16, 1998.

D.     The Companys Proxy Statement for its 2001 Annual Meeting of
Stockholders.

E.     The Companys Registration Statement on Form S-3, No. 333-109034.

F.     The Companys Current Report on Form 8-K filed July 2, 1998.

G.     The Companys annual report on Form 10-K for the year ended December 31,
2002.

H.     The Companys quarterly report on Form 10-QSB for the quarter ended September 30, 1998

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##### Table of Contents



(b)  Reports on Form 8-K

The Company has filed the following reports on Form 8-K since September
30, 2003:



| | 1)  |  | Form 8-K, dated and filed October 7, 2003 under Items 5
and 7, containing a press release announcing the release of
Companys 2003 third quarter financial results before market open
on Wednesday, October 22, 2003.                                                                                                                                        
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2)  |  | Form 8-K, dated and filed October 21, 2003 under Items
5 and 7, containing a press release announcing that the Company
is opening a new LasikPlusfacility in Las Vegas, Nevada on
October 28, 2003.                                                                                                                                                          
|
| | 3)  |  | Form 8-K, dated and filed October 22, 2003 under Items
5, 7, 9 and 12, reporting 2003 third quarter financial results
including unaudited financial statements.                                                                                                                                                                                              
|
| | 4)  |  | Form 8-K, dated and filed December 4, 2003 under Items
5 and 7, containing a press release announcing the pricing of the
Companys previously announced public offering of 3,000,000
common shares, representing 2,400,000 newly issued shares to be
sold by the Company, and 600,000 shares to be sold by the
Companys CEO, at a price of $16.50 per share.
|
| | 5)  |  | Form 8-K, dated and filed December 9, 2003 under Item
9, containing a press release announcing that the Company has
successfully closed its previously announced public offering of
3,000,000 common shares, representing 2,400,000 newly issued
shares sold by the Company, and 600,000 shares sold by the
Companys CEO, at a price of $16.50 per share.   
|
| | 6)  |  | Form 8-K, dated and filed December 17, 2003 under Item
9, containing a press release announcing plans to open LasikPlus
vision facilities in Houston, Texas in late December and Orlando,
Florida in early January.                                                                                                                                          
|
| | 7)  |  | Form 8-K, dated January 12, 2004 and filed January 13,
2004 under Item 9, containing a press release providing guidance
on the Companys financial and operational performance in fiscal
2004.                                                                                                                                                               
|
| | 8)  |  | Form 8-K, dated January 28, 2004 and filed January 29,
2004 under Item 9, containing a press release announcing the
Companys presentation at UBS Warburg Global Healthcare
Conference on February 2, 2004 at 11:00 a.m. Eastern Time.                                                                                                                       
|
| | 9)  |  | Form 8-K, dated and filed February 2, 2004 under Item
9, containing a press release announcing the Company expects
fourth quarter revenue growth of 56% over prior year.                                                                                                                                                                                     
|
| | 10) |  | Form 8-K, dated and filed February 18, 2004 under Item
12, furnishing a press release reporting the Companys 2003
fourth quarter and year-end results and including unaudited
financial statements.                                                                                                                                                         

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##### Table of Contents






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.

|                    |  |                                                                                
|------------------- |  | -------------------------------------------------------------------------------
|                    |  | LCA-Vision Inc.                                                                
|                   
|Date: March 2, 2004 |  | By: /s/ Stephen N. Joffe
Stephen N. Joffe, Chairman and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints 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, 2003, 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 and on the dates indicated.

|                                           |  |                                                                                                           |  |              
|------------------------------------------ |  | --------------------------------------------------------------------------------------------------------- |  | -------------
|/s/ Stephen N. Joffe

Stephen N. Joffe     |  | Chairman of the Board, Chief Executive Officer 
(Principal Executive Officer)                             |  | March 2, 2004
|                                           |  |                                                                                                           |  |              
|/s/ Alan H. Buckey

Alan H. Buckey         |  | Executive Vice President/Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer) |  | March 2, 2004
|                                           |  |                                                                                                           |  |              
|/s/ William O. Coleman

William O. Coleman |  | Director                                                                                                  |  | March 2, 2004
|                                           |  |                                                                                                           |  |              
|/s/ John H. Gutfreund

John H. Gutfreund   |  | Director                                                                                                  |  | March 2, 2004
|                                           |  |                                                                                                           |  |              
|/s/ John C. Hassan

John C. Hassan         |  | Director                                                                                                  |  | March 2, 2004

51