U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010.

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

For the transition period from __________ to __________

Commission file number 0-27610

LCA-Vision Inc.

(Exact name of registrant as specified in its charter)

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

7840 Montgomery Road, Cincinnati, Ohio 45236

(Address of principal executive offices)

(513) 792-9292

(Registrant's telephone number, including area code)

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

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 18,702,525 shares as of July 23, 2010.

LCA-Vision Inc

TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets (Unaudited)
	June 30, 2010 and December 31, 2009	3

	Condensed Consolidated Statements of Operations (Unaudited)
	Three Months and Six Months Ended June 30, 2010 and 2009	4

	Condensed Consolidated Statements of Cash Flows (Unaudited)
	Six Months Ended June 30, 2010 and 2009	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	6

Item 2.	Management's Discussion and Analysis of Financial Condition and
	Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	23

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	(Removed and Reserved)	24

Item 5.	Other Information	24

Item 6.	Exhibits	24

	Signatures	25

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

LCA-Vision Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands)

	June 30, 2010			December 31, 2009
Assets
Current assets
Cash and cash equivalents	$	26,303		$	24,049
Short-term investments		31,467			28,455
Patient receivables, net of allowance for doubtful accounts of $1,972 and $1,645		3,032			4,562
Other accounts receivable, net		2,508			2,002
Assets held for sale		405			1,031
Prepaid professional fees		526			615
Prepaid income taxes		694			12,270
Deferred compensation plan assets		-			400
Prepaid expenses and other		4,878			5,582

Total current assets		69,813			78,966

Property and equipment		79,898			79,993
Accumulated depreciation and amortization		(58,835	)		(53,995	)
Property and equipment, net		21,063			25,998

Long-term investments		1,981			2,090
Patient receivables, net of allowance for doubtful accounts of $494 and $674		575			854
Investment in unconsolidated businesses		160			137
Other assets		3,975			4,590

Total assets	$	97,567		$	112,635

Liabilities and Stockholders' Investment
Current liabilities
Accounts payable	$	5,350		$	6,504
Accrued liabilities and other		11,372			11,581
Deferred revenue		5,262			6,151
Deferred compensation liability		-			400
Debt obligations maturing in one year		3,696			3,998

Total current liabilities		25,680			28,634

Long-term rent obligations and other		2,244			2,395
Long-term debt obligations (less current portion)		6,353			9,145
Insurance reserve		8,102			9,154
Deferred license fee		3,747			4,428
Deferred revenue		5,445			7,852

Stockholders' investment
Common stock ($.001 par value; 25,291,637 and 25,287,387 shares and
18,702,525 and 18,619,185 shares issued and outstanding, respectively)		25			25
Contributed capital		174,940			174,325
Common stock in treasury, at cost (6,589,112 shares and 6,668,202 shares)		(114,099	)		(114,668	)
Retained deficit		(15,342	)		(9,729	)
Accumulated other comprehensive income		472			1,074
Total stockholders' investment		45,996			51,027

Total liabilities and stockholders' investment	$	97,567		$	112,635

The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.

LCA-Vision Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(Amounts in thousands except per share data)

	Three months ended June 30,						Six months ended June 30,
	2010			2009			2010			2009

Revenues - Laser refractive surgery	$	26,290		$	31,681		$	60,303		$	79,602

Operating costs and expenses
Medical professional and license fees		6,102			6,987			14,440			17,762
Direct costs of services		12,777			17,269			25,891			35,085
General and administrative expenses		3,643			4,452			7,432			8,869
Marketing and advertising		6,330			9,485			14,197			22,511
Depreciation		2,454			3,768			4,996			8,127
Consent revocation solicitation charges		-			-			-			804
Impairment charges		87			1,203			87			1,189
Restructuring charges		311			351			648			1,266
		31,704			43,515			67,691			95,613
Gain on sale of assets		18			20			1,311			22

Operating loss		(5,396	)		(11,814	)		(6,077	)		(15,989	)

Equity in earnings from unconsolidated businesses		-			48			25			75
Net investment income		1,145			633			1,296			455

Loss before taxes on income		(4,251	)		(11,133	)		(4,756	)		(15,459	)

Income tax expense (benefit)		36			(4,246	)		96			(5,728	)

Net loss	$	(4,287	)	$	(6,887	)	$	(4,852	)	$	(9,731	)

Loss per common share
Basic	$	(0.23	)	$	(0.37	)	$	(0.26	)	$	(0.52	)
Diluted	$	(0.23	)	$	(0.37	)	$	(0.26	)	$	(0.52	)

Weighted average shares outstanding
Basic		18,678			18,590			18,656			18,576
Diluted		18,678			18,590			18,656			18,576

The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.

LCA-Vision Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

	Six months ended June 30,
	2010			2009

Cash flow from operating activities:
Net loss	$	(4,852	)	$	(9,731	)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		4,996			8,127
Provision for loss on doubtful accounts		1,136			1,957
(Gain) loss on sale of investments		(994	)		365
Impairment charges		87			1,103
Gain on sale of assets		(1,311	)		(19	)
Non cash restructuring charge		377			774
Deferred income taxes		368			(265	)
Stock-based compensation		602			568
Insurance reserve		(1,052	)		425
Equity in earnings of unconsolidated affiliates		(25	)		(75	)
Changes in operating assets and liabilities:
Patient accounts receivable		831			1,394
Other accounts receivable		(111	)		413
Prepaid income taxes		11,576			3,094
Prepaid expenses and other		704			880
Accounts payable		(1,154	)		146
Deferred revenue, net of professional fees		(2,966	)		(4,818	)
Accrued liabilities and other		(769	)		8,184

Net cash provided by operations		7,443			12,522

Cash flow from investing activities:
Purchases of property and equipment		(144	)		(178	)
Proceeds from sale of assets		1,234			20
Purchases of investment securities		(203,256	)		(153,617	)
Proceeds from sale of investment securities		200,313			153,900
Other, net		(7	)		34

Net cash (used in) provided by investing activities		(1,860	)		159

Cash flow from financing activities:
Principal payments of capital lease obligations and loan		(3,094	)		(5,237	)
Shares repurchased for treasury stock		(192	)		(36	)
Exercise of stock options		13			2

Net cash used in financing activities		(3,273	)		(5,271	)

Net effect of exchange rate changes on cash and cash equivalents		(56	)		209

Increase in cash and cash equivalents		2,254			7,619

Cash and cash equivalents at beginning of period		24,049			23,648

Cash and cash equivalents at end of period	$	26,303		$	31,267

The notes to the Condensed Consolidated Financial Statements are an integral part of this statement.

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Description of Business and Accounting Policies

Description of Business

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

As of June 30, 2010, we operated 62 LasikPlus® fixed-site laser vision correction centers in the United States. Included in the 62 vision centers are two vision centers licensed to ophthalmologists who use our trademarks. Due to the nature of our operations and organization, we operate in only one business segment.

Basis of Presentation

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

We derived the Condensed Consolidated Balance Sheet as of December 31, 2009 from audited financial statements, but did not include all disclosures required by U.S. generally accepted accounting principles (“U.S. GAAP”). These Condensed Consolidated Financial Statements should be read in conjunction with our 2009 Annual Report on Form 10-K. Operating results for the three and six month periods ended June 30, 2010 are not necessarily indicative of the results expected in subsequent quarters or for the year ending December 31, 2010.

Use of Estimates

The preparation of our Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include investments, patient financing receivables and reserves, insurance reserves, income taxes and enhancement accruals. Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.

Reclassifications

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

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

2. Investments

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

We have classified certain of our investments in auction rate securities as non-current assets within the accompanying Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009. Short-term and long-term investments, designated as available-for-sale, consist of the following (dollars in thousands):

	June 30,		December 31,
	2010		2009
Short-term investments:
Corporate obligations	$	20,486	$	13,818
U.S. governmental notes and agencies		5,631		3,728
Municipal securities		5,250		8,544
Auction rate municipal debt		100		2,365
Total short-term investments		31,467		28,455

Long-term investments:
Auction rate municipal debt	$	970	$	1,062
Auction rate preferred securities		1,011		1,028
Total long-term investments		1,981		2,090

Total investments	$	33,448	$	30,545

The following table shows the net carrying value (amortized cost) and estimated fair value of debt and equity securities at June 30, 2010 by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because the issuers of the securities may have the right or obligation to prepay obligations without prepayment penalties.

	Amortized Cost		Estimated Fair Value

Due in one year or less	$	30,324	$	30,350
Due after one year through three years		1,005		1,017
Due after three years		1,987		2,081
Total investments	$	33,316	$	33,448

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

	June 30, 2010
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Corporate obligations	$	20,486	$	-	$	-		$	20,486
U.S. governmental notes and agencies		5,631		-		-			5,631
Municipal securities		5,212		39		(1	)		5,250
Auction rate municipal securities		1,010		60		-			1,070
Auction rate preferred securities		977		34		-			1,011
Total investments	$	33,316	$	133	$	(1	)	$	33,448

	December 31, 2009
	Adjusted Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Corporate obligations	$	13,818	$	-	$	-	$	13,818
U. S. governmental notes and agencies		3,728		-		-		3,728
Municipal securities		8,459		85		-		8,544
Equities		1,487		878		-		2,365
Auction rate municipal securities		1,010		52		-		1,062
Auction rate preferred securities		999		29		-		1,028
Total investments	$	29,501	$	1,044	$	-	$	30,545

We realized gains of $1.0 million and losses of $43,000 primarily on the sale of our equity securities for the three months ended June 30, 2010 and realized gains of $1.0 million and losses of $50,000 for the six months ended June 30, 2010. We had realized gains of $6,000 and no realized losses on the sale of marketable securities for the three and six months ended June 30, 2009.

We recognized unrealized gains of $133,000 and unrealized losses of $1,000 in accumulated other comprehensive income during the three and six months ended June 30, 2010. For the three and six months ended June 30, 2009, we recognized unrealized gains of $861,000 and no unrealized losses. We recognized $29,000, before tax, in other-than-temporary impairments to certain of our auction rate securities during the three and six months ended June 30, 2009. There were no other-than-temporary impairments to auction rate securities for the three and six months ended June 30, 2010. Given the duration and extent of the decline in fair values associated with our equity securities (comprised primarily of various equity mutual funds), we recognized an other-than-temporary impairment of $336,000, before tax, during the three and six months ended June 30, 2009. There were no other-than-temporary impairment of our equity securities during the three and six months ended June 30, 2010. When evaluating investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer of the investment securities and any changes thereto, and our intent to sell, or whether it is more-likely-than-not we would be required to sell the investment before recovery of the investment’s amortized cost basis.

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following table presents gross unrealized losses and fair values for those investments that were in an unrealized loss position as of June 30, 2010, aggregated by investment category and the length of time that the individual securities have been in a continuous loss position (dollars in thousands):

	As of June 30, 2010
	Less than 12 Months
Security Description	Fair Value		Unrealized Losses

Municipal securities	$	1,005	$	(1	)

As of June 30, 2010, we did not have any investments in marketable securities that were in an unrealized loss position for 12 months or greater. As of December 31, 2009, we did not have any investments in marketable securities that were in an unrealized loss position.

Auction Rate Securities

At June 30, 2010 and December 31, 2009, we held $2.3 million and $2.4 million par value, respectively, of various auction rate securities. The assets underlying the auction rate instruments are primarily municipal bonds, and preferred closed end funds. Maturity dates for our auction rate securities range from 2016 to 2036. In the first two quarters of 2010, $25,000 of the related securities was called at par by their issuers. In the full year of 2009, $1.0 million of the securities were called at par by their issuers and we redeemed an additional $2.3 million in auction rate securities at 46.9% of original par value.

Our auction rate instruments are not currently liquid. Due to the continuation of the unstable credit environment, we believe the recovery period for our auction rate instruments will exceed 12 months. Accordingly, we have classified the fair value of the auction rate instruments that have not been redeemed prior to June 30, 2010 as long-term. Auction rate municipal debt of $100,000 was redeemed in July 2010 at par. At June 30, 2010, the fair value and par value of our long-term auction rate instruments were $2.0 million and $2.2 million, respectively.

3. Fair Values of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset and liability in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:

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

Level 2		Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.

Level 3		Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

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

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

The following tables summarize fair value measurements by level at June 30, 2010 and December 31, 2009 for assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

	Fair Value Measurements as of June 30, 2010 Using
	Quoted Prices in				Significant
	Active Markets for		Significant Other		Unobservable
	Identical Assets		Observable Inputs		Inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Assets:
Cash and cash equivalents	$	26,303	$	-	$	-	$	26,303
Investments		-		31,467		1,981		33,448
Total	$	26,303	$	31,467	$	1,981	$	59,751

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

Liabilities:
Deferred compensation liabilities	$	400	$	-	$	-	$	400

Cash and cash equivalents are comprised of either bank deposits or amounts invested in money market funds, the fair value of which is based on quoted market prices. The fair values of some investment securities included within our investment portfolio are based on quoted market prices from various stock and bond exchanges. Certain of our debt securities are classified at fair value utilizing Level 2 inputs. For these securities, fair value is measured using observable market data that includes dealer quotes, live trading levels, trade execution data, credit information and the bond’s terms and conditions. The fair values of our auction rate instruments are classified in Level 3 because they are valued using a trinomial discount model as there is insufficient observable auction rate market information available to determine the fair value of these investments. The determination of the fair value of the auction rate instruments employs assumptions included financial standing of the issuer of the instruments, final stated maturities, estimates of the probability of the issue being called prior to final maturity, estimates of the probability of defaults and recoveries, expected changes in interest rates paid on the securities, interest rates paid on similar instruments, and an estimated illiquidity discount due to extended redemption periods. We previously maintained a self-directed deferred compensation plan structured as a rabbi trust for certain highly compensated individuals. The investment assets of the rabbi trust were valued using quoted market prices. The related deferred compensation liability represented the fair value of the participants’ investment elections, determined using quoted market prices. The deferred compensation plan was terminated as of December 31, 2009. Distributions were made to all participants in January 2010.

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

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

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Balance at beginning of period	$	2,078		$	3,155		$	2,090		$	3,126
Assets acquired		-			-			-			-
Assets sold		-			(44	)		(22	)		(44	)
Transfers in (out) of Level 3		(100	)		(258	)		(100	)		(258	)
Gains included in other comprehensive loss		3			255			13			313
Gains (losses) included in earnings		-			-			-			(29	)
Balance as of June 30	$	1,981		$	3,108		$	1,981		$	3,108

4. Assets Held For Sale

We had assets held for sale of $405,000 and $1.0 million at June 30, 2010 and December 31, 2009, respectively, comprised of excimer and femtosecond lasers. During the three months ended March 31, 2010, we were able to sell some of our excimer and femtosecond lasers held for sale with a combined net book value of $626,000 for total cash proceeds of approximately $1.1 million and notes receivable of $836,000, resulting in a gain of approximately $1.3 million, before tax. No assets were sold during the three months ended June 30, 2010.

5. Income Taxes

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Current:
Federal	$	(353	)	$	(4,115	)	$	(328	)	$	(5,409	)
State and local		21			(1	)		56			(54	)
Total current		(332	)		(4,116	)		(272	)		(5,463	)

Deferred:
Federal	$	322		$	514		$	322		$	550
State and local		46			(644	)		46			(815	)
Total deferred		368			(130	)		368			(265	)

Income tax expense (benefit)	$	36		$	(4,246	)	$	96		$	(5,728	)

Effective income tax rate		0.9	%		38.1	%		2.0	%		37.1	%

Our effective tax rate for the three and six month periods ended June 30, 2010 was impacted by a full valuation allowance against all of our deferred tax assets, net of deferred tax liabilities.

As of June 30, 2010 and December 31, 2009, deferred tax assets net of deferred tax liabilities totaled $15.5 million and $13.3 million, respectively, offset by full valuation allowances. Due to the lack of positive evidence that the deferred tax assets will be realized as required by U.S. GAAP, we were unable to record tax benefits with respect to our losses in the United States and state jurisdictions during the three and six month periods ended June 30, 2010. Income tax expense for the three and six month periods ended June 30, 2010 includes interest on unrecognized tax benefits and state taxes in certain jurisdictions.

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

At December 31, 2009, we had recorded a tax refund receivable related to the tax benefit of those federal and state net operating losses generated, where we could carryback the net operating loss to prior tax years. In the second quarter of 2010, we received our 2009 federal income tax refund.

During the three and six month periods ended June 30, 2010, there were no significant changes to the liability for unrecognized tax benefits or potential interest and penalties recorded as a component of income tax. The total amount of unrecognized tax benefits at each of June 30, 2010 and December 31, 2009 was approximately $555,000. It is reasonably possible that the amount of the total unrecognized tax benefits may change in the next 12 months. However, we do not believe that any anticipated change will be material to the Condensed Consolidated Financial Statements. In 2009, the Internal Revenue Service began an audit of our 2008 tax year. Based on the early status of the audit and the protocol of finalizing audits by the relevant authority, it is not possible to estimate the impact of the changes, if any, to the previously recorded liability for unrecognized tax benefits.

6. Per Common Share Data

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Basic Loss
Net loss	$	(4,287	)	$	(6,887	)	$	(4,852	)	$	(9,731	)
Weighted average shares outstanding		18,678			18,590			18,656			18,576
Basic loss	$	(0.23	)	$	(0.37	)	$	(0.26	)	$	(0.52	)

Diluted Loss
Net loss	$	(4,287	)	$	(6,887	)	$	(4,852	)	$	(9,731	)
Weighted average shares outstanding		18,678			18,590			18,656			18,576
Effect of dilutive securities
Stock options		-			-			-			-
Restricted stock		-			-			-			-
Weighted average common shares and potential dilutive shares		18,678			18,590			18,656			18,576
Diluted loss per common share	$	(0.23	)	$	(0.37	)	$	(0.26	)	$	(0.52	)

For the three and six month periods ended June 30, 2010 and 2009, we did not include outstanding stock options and restricted stock awards having a grant price greater than the average market price of the common shares for the period in the computation of diluted earnings per share because the effect of these share-based awards would be antidilutive. For the three and six months ended June 30, 2010, the total number of outstanding options and restricted stock awards that were antidilutive was 614,228 and 505,771, respectively. We excluded all outstanding stock options and restricted stock awards from the computation of our diluted earnings per share because the effect of these share-based awards was antidilutive due to our net loss.

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

7. Stock-Based Compensation

We have four stock incentive plans through which employees and directors have been or are granted stock-based compensation. We recognize compensation expense for the grant date fair value of stock-based awards over the applicable vesting period. The components of our pre-tax stock-based compensation expense, net of forfeitures, and associated income tax effect were as follows for the following periods (dollars in thousands):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
Stock options	$	24	$	106	$	11	$	247
Restricted stock		402		470		591		321
		426		576		602		568
Income tax effect		165		242		233		231
	$	261	$	334	$	369	$	337

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

8. Consent Revocation Expense

For the six months ended June 30, 2009, we incurred $804,000 in expenses related to our successful defense of a consent solicitation initiated by a dissident stockholder group.

9. Impairment Charges

In the second quarter of 2010, we recorded an impairment charge to reduce the carrying amount of long-lived assets by $87,000 for one vision center. This impairment charge reflects our decision to close the vision center. In the six months ended June 30, 2009, we recorded impairment charges of $1.2 million. These charges were primarily for closed centers and asset disposals. We assess the impairment of property and equipment whenever events or circumstances indicate that the carrying value might not be recoverable. We write down to fair value, which is generally determined from estimated discounted cash flows for assets held for use, recorded values of property and equipment that we do not expect to recover through undiscounted future net cash flows. The use of discounted cash flows represents a Level 3 fair value input under U.S. GAAP. The closures of the vision centers do not qualify for classification as a discontinued operation due to continuing cash flows. We will continue to incur cash expenditures related to these vision centers in the form of future facility lease payments, excimer laser lease payments and costs associated with post-operative and post-surgical enhancements. For vision centers where we will license an ophthalmologist to operate using our trademarks, we will generate future cash in-flows in the form of license fees.

10. Restructuring Charges

For the three months ended June 30, 2010, we incurred a net restructuring charge of $311,000, which consisted of contract termination costs associated with the closure of one of our licensed facilities.

For the six months ended June 30, 2010, we incurred a net restructuring charge of $648,000. The charges were $271,000 for exit and disposal costs associated with the closing of vision centers and $377,000 for contract termination costs. Contract termination costs resulted primarily from the closure of one of our licensed operations and the termination of the related license agreement. Other exit and disposal costs incurred in 2010 were primarily expenses related to the closures of facilities and the relocation of various medical equipment. We incurred restructuring charges totaling $1.3 million for the six months ended June 30, 2009, which included $725,000 of contract termination costs and $541,000 of employee separation benefits.

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

At June 30, 2010 and December 31, 2009, we included restructuring reserves of $410,000 and $1.1 million, respectively, in “Accrued liabilities and other” in the Condensed Consolidated Balance Sheets. Long-term restructuring reserves were $401,000 and $267,000 at June 30, 2010 and December 31, 2009, respectively, and were included in “Long-term rent obligations and other.” The fair value measurements in all periods utilized internal discounted cash flow analysis in determining fair value, which is a Level 3 input under U.S. GAAP.

The following table summarizes the restructuring reserve activities for the six months ended June 30, 2010 (dollars in thousands):

	Employee			Contract
	Separation			Termination
	Costs			Costs			Total
Balance at December 31, 2009	$	237		$	1,092		$	1,329
Liabilities recognized		4			333			337
Utilized		(109	)		(889	)		(998	)
Balance at March 31, 2010		132			536			668
Liabilities recognized		-			311			311
Utilized		(89	)		(79	)		(168	)
Balance as of June 30, 2010	$	43		$	768		$	811

11. Debt and Leasing Arrangements

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

	June 30, 2010			December 31, 2009
Capitalized lease obligations	$	30		$	390
Bank loan		10,019			12,753
Total long-term debt obligations	$	10,049		$	13,143
Debt obligations maturing in one year		(3,696	)		(3,998	)
Long-term obligations (less current portion)	$	6,353		$	9,145

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

In April 2008, we entered into a five-year bank loan agreement for $19.2 million to finance medical equipment at a fixed interest rate of 4.96%. The loan agreement contains no financial covenants. Loan repayments increased approximately $965,000 for the six months ended June 30, 2010 compared to the same period in 2009 due primarily to early payoffs of excimer lasers that were sold as a result of previously closed vision centers.

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

The estimated fair value of our long-term debt and capital lease obligations is $9.8 million based on the present value of the underlying cash flows discounted at our incremental borrowing rate. Within the hierarchy of fair value measurements, this is Level 3 fair value measurement.

LCA-Vision Inc.

Notes to Condensed Consolidated Financial Statements (Unaudited)

12. Comprehensive Income (Loss)

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

	June 30,		December 31,
	2010		2009
Unrealized investment gain, net of tax of $55 and $417	$	83	$	626
Foreign currency translation adjustment		389		448
Accumulated other comprehensive income	$	472	$	1,074

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009
Net loss	$	(4,287	)	$	(6,887	)	$	(4,852	)	$	(9,731	)
Unrealized investment (loss) gain, net of tax of ($411), $288, ($362) and $308		(616	)		342			(544	)		463
Foreign currency translation		(187	)		302			(59	)		220
Comprehensive loss	$	(5,090	)	$	(6,243	)	$	(5,455	)	$	(9,048	)

13. Commitments and Contingencies

Our business results in medical malpractice lawsuits. Claims reported to us prior to December 18, 2002 were generally covered by external insurance policies and to date have not had a material financial impact on our business other than the cost of insurance and our deductibles under these policies. Effective in December 2002, we established a captive insurance company to provide coverage for claims brought against us after December 17, 2002. We use the captive insurance company for both primary insurance and excess liability coverage. A number of claims are now pending with our captive insurance company. At June 30, 2010, our insurance reserve balance was $8.1 million.

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

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

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

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

The financial results for the three and six months ended June 30, 2010 and 2009 referred to in this discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the accompanying Notes in this Quarterly Report on Form 10-Q. Results of interim periods may not be indicative of the results for subsequent periods or the full year.

Overview

Key financial highlights for the three months ended June 30, 2010 include (all comparisons are with the same period of 2009):

Revenues were $26.3 million compared with $31.7 million; adjusted revenues were $24.7 million compared with $29.4 million.

Procedure volume was 15,266 procedures (62 vision centers) compared with 17,864 procedures (71 vision centers) and 16,144 same-store procedures.

Same-store revenues (62 vision centers) decreased 9.2%; adjusted same-store revenues decreased 7.3%.

Operating loss was $5.4 million compared with operating loss of $11.8 million; adjusted operating loss was $6.8 million compared with adjusted operating loss of $13.9 million. The significant improvement in operating loss and adjusted operating loss for the second quarter of 2010 reflected the impact from the closure of under-performing vision centers, a reduction in direct costs per vision center, and lower marketing and general and administrative expenses. Included in the second quarter of 2010 results was $0.4 million in restructuring and impairment charges, compared with $1.6 million in restructuring and impairment charges in the second quarter of 2009.

Net loss was $4.3 million, or $0.23 per share, compared with net loss of $6.9 million, or $0.37 per share.

Key financial highlights for the six months ended June 30, 2010 include (all comparisons are with the same period of 2009):

Revenues were $60.3 million compared with $79.6 million; adjusted revenues were $57.0 million compared with $74.2 million.

Procedure volume was 34,332 procedures compared with 45,723 procedures and 41,635 same-store procedures.

Operating loss was $6.1 million compared with operating loss of $16.0 million; adjusted operating loss was $9.0 million compared with adjusted operating loss of $20.8 million. The $9.9 million improvement in operating loss for the first half of 2010 was a result of the closure of under-performing vision centers, lower direct costs per vision center, lower marketing expense, lower general and administrative expense, and less restructuring, impairment and consent revocation charges. Direct costs per center were $70,000 per month for the first half of 2010 compared with $80,000 per month for the same period of 2009. Marketing cost per eye decreased to $413 for the first half of 2010 from $492 for the same period last year.

Net loss was $4.9 million, or $0.26 per share, compared with net loss of $9.7 million, or $0.52 per share.

Cash and investments were $59.8 million at June 30, 2010, compared with $54.6 million as of December 31, 2009.

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

General economic conditions and consumer confidence and discretionary spending levels,

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

The availability of patient financing,

The level of consumer acceptance of laser vision correction, and

The effect of competition and discounting practices in our industry.

Other factors that may impact our revenues include:

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

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

Because our revenues are a function of the number of laser vision correction procedures performed and the pricing for these services, and many of our costs are fixed, our vision centers have a relatively high degree of operating leverage. As a result, our level of procedure volume can have a significant impact on our level of profitability. The following table details the number of laser vision correction procedures performed at our consolidated vision centers.

	2010		2009
First quarter		19,066		27,859
Second Quarter		15,266		17,864
Third Quarter				15,335
Fourth Quarter				11,718
Year		34,332		72,776

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

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2010			2009			2010			2009
Revenues
Reported U.S. GAAP	$	26,290		$	31,681		$	60,303		$	79,602
Adjustments
Amortization of prior deferred revenue		(1,582	)		(2,294	)		(3,295	)		(5,353	)
Adjusted revenues	$	24,708		$	29,387		$	57,008		$	74,249

Operating Loss
Reported U.S. GAAP	$	(5,396	)	$	(11,814	)	$	(6,077	)	$	(15,989	)
Adjustments
Amortization of prior deferred revenue		(1,582	)		(2,294	)		(3,295	)		(5,353	)
Amortization of prior professional fees		158			229			329			535
Adjusted operating loss	$	(6,820	)	$	(13,879	)	$	(9,043	)	$	(20,807	)

Results of Operations for the Three Months Ended June 30, 2010 Compared to the Same Period in 2009

Revenues

In the second quarter of 2010, revenues decreased by $5.4 million, or 17.0%, to $26.3 million from $31.7 million in the second quarter of 2009. Procedure volume decreased 14.5% to 15,266 in the second quarter of 2010 from 17,864 in the second quarter of 2009. The components of the revenue change include (dollars in thousands):

Decrease in revenue from lower procedure volume	$	(4,274	)
Impact from decrease in average selling price, before revenue deferral		(405	)
Change in deferred revenue		(712	)
Decrease in revenues	$	(5,391	)

The adjusted average reported revenue per procedure, which excludes the impact of deferring revenue from separately priced extended warranties, decreased to $1,619 in the second quarter of 2010 from $1,645 in the second quarter of 2009 and $1,694 in the first quarter of 2010. In an effort to increase traffic at our vision centers, we offered a network-wide 15% discount on procedure pricing in the second quarter of 2010.

We experienced an increase in both appointment show rates and treatment show rates in the second quarter of 2010 compared to the same period in 2009, as well as over the first quarter of 2010. We attribute these improvements to significant efforts to improve patient interactions, the second quarter price discount promotion, and organizational effectiveness. Although candidacy rates remained flat quarter over quarter, we have seen an increase in conversion rates compared to second quarter of 2009 and first quarter of 2010. Patient activity in regards to inquiries remains down as a result of economic and other factors which results in lower procedure volumes. We believe this is due to the continued economic uncertainty and other macroeconomic factors. Industry sources indicate that the entire laser vision correction industry continues to be impacted negatively.

Operating costs and expenses

Our operating costs and expenses include:

Medical professional and license fees, including per procedure fees for the ophthalmologists performing laser vision correction, and per procedure license fees paid to certain equipment suppliers of our excimer and femtosecond lasers,

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

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

Marketing and advertising costs, and

Depreciation of equipment.

Medical professional and license fees

Medical professional and license fees in the second quarter of 2010 decreased by $885,000, or 12.7%, from the second quarter of 2009. The decrease was due to lower license fees of $471,000 and physician fees of $467,000 associated with decreased procedure volumes, partially offset by an increase in our enhancement expense. The amortization of the deferred medical professional fees attributable to prior years was $158,000 in the second quarter of 2010 and $229,000 in the second quarter of 2009.

Direct costs of services

Direct costs of services decreased $4.5 million, or 26.0%, in the second quarter of 2010 to $12.8 million from $17.3 million in the second quarter of 2009. Lower salaries, fringe benefits, and rent and utilities as a result of closed vision centers and other cost reduction efforts drove much of the decrease in direct costs of services this quarter compared to the same period in 2009. This decrease was also the result of lower procedure volumes, which caused lower laser maintenance costs, financing fees, and bad debt expense.

General and administrative

General and administrative expenses in the second quarter of 2010 decreased by $809,000, or 18.2%, from the second quarter of 2009, due primarily to workforce reductions which resulted in reduced salaries and fringe benefits, and savings in contract services, professional services, travel and entertainment, and stock-based compensation expense.

Marketing and advertising

Marketing and advertising expenses in the second quarter of 2010 decreased by $3.2 million, or 33.3%, from the second quarter of 2009. These expenses were 24.1% of revenues in the second quarter of 2010 compared to 29.9% during the second quarter of 2009. Marketing cost per eye decreased to $415 for the second quarter of 2010 from $531 in the same period of 2009. In the second quarter of 2010, we reduced our marketing spend levels to continue to align spending levels with consumer demand. We are continuing to work to develop more efficient marketing techniques and expand local initiatives as a means to attract customers. Our future operating profitability will depend in large part on the success of our efforts in this regard.

Impairment charges

The impairment charge in the second quarter of 2010 was $87,000 for impairment of fixed assets in one vision center, which was the result of our decision to close the Birmingham, Alabama vision center. In the three months ended June 30, 2009, we recorded impairment charges of $1.2 million. These charges were primarily for closed centers and asset disposals.

Restructuring charges

The net restructuring charges in the second quarter of 2010 were $311,000, which consisted of contract termination costs associated with the closure of our Savannah, Georgia vision center. In the second quarter of 2009, net restructuring charges were $351,000, primarily for employee separation benefits for vision centers closed.

Non-operating income and expenses

Net investment income in the second quarter of 2010 increased $512,000, or 80.9%. This is due primarily to a $993,000 gain on the sale of investments. Interest income decreased by $562,000, primarily due to lower patient financing interest income of $214,000 on lower procedure volume and lower investment income of $348,000 on lower yielding debt investments.

Income taxes

Due to the lack of positive evidence that the deferred tax assets will be realized as required by U.S. GAAP, we were unable to record tax benefits with respect to our losses in the United States and state jurisdictions in the three months ended June 30, 2010. Income tax expense for the three months ended June 30, 2010 includes the interest on unrecognized tax benefits and state taxes in certain jurisdictions.

Results of Operations for the Six Months Ended June 30, 2010 Compared to the Same Period in 2009

Revenues

In the six months ending June 30, 2010, revenues decreased by $19.3 million, or 24.2%, to $60.3 million, from $79.6 million in the six months ended June 30, 2009. Procedure volume decreased 24.9% to 34,332 in the second quarter of 2010 from 45,723 in the second quarter of 2009. For vision centers open at least 12 months, procedure volume decreased by approximately 17.5% in the six months ended June 30, 2010 to 34,332, as compared to 41,635 in the six months ended June 30, 2009. The components of the revenue change include (dollars in thousands):

Decrease in revenue from lower procedure volume	$	(18,498	)
Impact from increase in average selling price, before revenue deferral		1,257
Change in deferred revenue		(2,058	)
Decrease in revenues	$	(19,299	)

The adjusted average reported revenue per procedure, which excludes the impact of deferring revenue from separately priced extended warranties, increased 2.2% to $1,660 for the six months ended June 30, 2010 from $1,624 in the six months ended June 30, 2009.

We experienced increases in both appointment show rates and treatment show rates in the six months ended June 30, 2010 compared to the same period in 2009. We attribute these improvements in operational metrics primarily to patient acquisition and organizational effectiveness measures. Although candidacy rates remained flat year over year, we have seen an increase in conversion rates. Patient activity in regards to inquiries remains down as a result of economic and other factors which results in lower procedure volumes. We believe this is due to the continued economic uncertainty and other macroeconomic factors. Industry sources indicate that the entire laser vision correction industry continues to be impacted negatively.

Medical professional and license fees

Medical professional and license fees in the six months ended June 30, 2010 decreased by $3.3 million, or 18.7%, from the six months ended June 30, 2009. The decrease was due to decreased license fees of $1.5 million and physician fees of $1.8 million associated with decreased procedure volumes, partially offset by an increase in our enhancement expense. The amortization of the deferred medical professional fees attributable to prior years was $329,000 in the six months ended June 30, 2010 and $535,000 in the same period of 2009.

Direct costs of services

Direct costs of services in the six months ended June 30, 2010 decreased $9.2 million, or 26.2% to $25.9 million from $35.1 million in the same period of 2009. Lower salaries, fringe benefits, and incentives, as well as rent and utilities, and travel and entertainment expense caused the decrease in direct costs of services in the six months ended June 30, 2010 compared to the same period in 2009. This decrease was also the result of lower procedure volumes, which resulted in lower bad debt, financing fees, and laser maintenance, partially offset by an increase in stock compensation expense.

General and administrative

General and administrative expenses in the six months ended June 30, 2010 decreased by $1.4 million, or 16.2%, from the six months ended June 30, 2009, due primarily to workforce reductions which resulted in reduced salaries and fringe benefits, and reductions in travel and entertainment, contract services, professional services, and stock-based compensation expense.

Marketing and advertising

Marketing and advertising expenses in the six months ended June 30, 2010 decreased by $8.3 million, or 36.9%, from the six months ended June 30, 2009. These expenses were 23.5% of revenues in the six months ended June 30, 2010, compared to 28.3% during the six months ended June 30, 2009. In 2010, we reduced our marketing spend levels to continue to align spending levels with consumer demand. We believe the decrease in monetary expenditures better aligns our spending with anticipated consumer demand. We are continuing to work to develop more efficient marketing techniques and expand local initiatives as a means to attract customers. Our future operating profitability will depend in large part on the success of our efforts in this regard.

Gain on sale of assets

We sold excimer and femtosecond lasers held for sale for a gain of approximately $1.3 million in the six months ended June 30, 2010. Gain on sale of assets was minimal for the first six months of 2009.

Consent revocation solicitation charges

In the six months ended June 30, 2009, we incurred $804,000 in charges related to our successful defense of a consent solicitation by a dissident stockholder group.

Impairment charges

The impairment charge in the six months ended June 30, 2010 was $87,000 for the impairment of fixed assets in one vision center, which was the result of our decision to close the Birmingham, Alabama vision center. In the six months ended June 30, 2009, we recorded impairment charges of $1.2 million. These charges were primarily for closed centers and asset disposals.

Restructuring charges

The net restructuring charges in the six months ended June 30, 2010 were $648,000, comprised primarily of contract termination costs associated with the closure of certain of our laser vision centers. Also included in the charges were other exit and disposal costs incurred in 2010 related to vacating leased properties and relocating medical equipment. We incurred restructuring charges totaling $1.3 million for the six months ended June 30, 2009, which included $725,000 of contract termination costs and $541,000 of employee separation benefits.

Non-operating income and expenses

Net investment income in the six months ended June 30, 2010 increased $841,000, or 184.8%. This is due primarily to the gain on sale of investments of $988,000 that occurred in the second quarter of 2010 and $365,000 other-than-temporary impairment of auction rate securities and equity investments recognized in the second quarter of 2009. Patient financing interest income declined $461,000 on lower procedure volume, investment income declined by $205,000 on lower yielding debt investments, and interest expense declined by $164,000.

Income taxes

Due to the lack of positive evidence that the deferred tax assets will be realized as required by U.S. GAAP, we were unable to record tax benefits with respect to our losses in the U.S. and state jurisdictions in the six months ended June 30, 2010. Income tax expense for the six months ended June 30, 2010 includes the interest on unrecognized tax benefits and state taxes in certain jurisdictions.

Liquidity and Capital Resources

At June 30, 2010, we held $57.8 million in cash and cash equivalents and short-term investments, an increase of $5.3 million from $52.5 million at December 31, 2009. Our cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows, are summarized as follows (dollars in thousands):

	Six Months Ending
	June 30,
	2010			2009
Cash provided (used) by:
Operating activities	$	7,443		$	12,522
Investing activities		(1,860	)		159
Financing activities		(3,273	)		(5,271	)
Net effect of exchange rate changes on cash and cash equivalents		(56	)		209
Net increase in cash and cash equivalents	$	2,254		$	7,619

Cash flows generated from operating activities declined to $7.4 million for the six months ended June 30, 2010 compared to $12.5 million for the same period in 2009. This decrease was due primarily to $6.8 million received in the first half of 2009 in connection with our revised laser contracts and $1.4 million in increased insurance payments in the first half of 2010 compared with the same period in 2009. Cost control and cash conservation efforts have provided significant reductions in our marketing spend, salary expense, and laser maintenance, as well as all other discretionary areas which have more than offset reductions in revenue. We continue to closely manage working capital with particular focus on ensuring timely collection of outstanding patient receivables and the management of our trade payable obligations. Gross patient receivables decreased $1.7 million in the six months ended June 30, 2010 as a result of lower procedure volume. Our accounts payable significantly decreased at June 30, 2010, primarily due to a change in marketing vendors and timing of invoices. At June 30, 2010, working capital (excluding debt due within one year) amounted to $47.8 million compared to $54.3 million at December 31, 2009. Liquid assets (cash and cash equivalents, short-term investments, and accounts receivable) amounted to 246.5% of current liabilities at June 30, 2010, compared to 206.3% at December 31, 2009.

We continue to offer our own sponsored patient financing. As of June 30, 2010, we had $3.6 million in patient receivables, net of allowance for doubtful accounts, which was a decrease of $1.8 million, or 33.4% from December 31, 2009. We continually monitor the allowance for doubtful accounts and will adjust our lending criteria or require greater down payments if our experience indicates that is necessary. However, our ability to collect patient accounts depends, in part, on overall economic conditions. Bad debt expense was 1.9% and 2.5% of revenue for the six months ended June 30, 2010 and 2009, respectively. The decrease in bad debt expense is attributable to improved collection experience within our 12-month and 18-month patient financing plans resulting from improvements to our underwriting that were implemented last year including FICO scoring patients and requiring varying down payments depending upon credit scores.

We had assets held for sale of $405,000 and $1.0 million at June 30, 2010 and December 31, 2009, respectively, related to unused excimer and femtosecond lasers. During the six months ended June 30, 2010, we were able to sell some of our excimer and femtosecond lasers held for sale with a combined net book value of $626,000 for total cash proceeds of approximately $1.1 million and notes receivable of $836,000, resulting in a gain of approximately $1.3 million before tax. We have collected $112,000 on the notes receivable in the six months ended June 30, 2010.

In April 2008, we entered into a five-year loan agreement with PNC Equipment Finance, LLC to finance the majority of the IntraLase units which we purchased. The remaining unpaid balance on the bank loan was $10.0 million at June 30, 2010. The loan agreement contains no financial covenants and, as with our capital lease obligations, is secured by certain medical equipment. Loan repayments increased approximately $965,000 for the six months ended June 30, 2010 compared to the same period in 2009 due primarily to additional payoffs of excimer lasers that were sold.

At June 30, 2010 and December 31, 2009, we held $2.3 million and $2.4 million, respectively, par value of various auction rate securities. The assets underlying the auction rate instruments are primarily municipal bonds and preferred closed end funds. Our auction rate instruments are not currently liquid. Maturity dates for our auction rate securities range from 2016 to 2036. In the first two quarters of 2010, $25,000 of the related securities was called at par by their issuers. In the full year of 2009, $1.0 million of the securities were called at par by their issuers and we redeemed an additional $2.3 million at 46.9% of original par value. See Note 2 to Condensed Consolidated Financial Statements for further information regarding our auction rate security investments.

During the six months ended June 30, 2010 we purchased $203.3 million of investment securities and received proceeds from the sale of investment securities of $200.3 million. The majority of our investment portfolio consists of high-grade commercial paper and bonds with maturities of 30 days or less, which resulted in increased purchasing and selling activity for the six months ended June 30, 2010. Investing activities for the six months ended June 30, 2010 included purchases of investments in excess of proceeds from sales of investments of approximately $2.9 million. This net investment was made from excess cash to improve our investment income.

We have not opened any new vision centers in 2010 or 2009. Capital expenditures for the six months ended June 30, 2010 and 2009 were $144,000 and $178,000, respectively. In January 2010, we closed our San Jose, CA vision center. In July 2010, we announced the closing of our Birmingham, AL vision center and our licensed operation in Savannah, GA.

We believe that cash flow from operations, available cash and short-term investments provide sufficient cash reserves and liquidity to fund our working capital needs, capital expenditures and debt and capital lease obligations for at least the next 12 months. We are balancing cash conservation in the current challenging economic environment against our longer-term objective of managing to profitability and growth when the economy improves. As a result of aggressive efforts to reduce costs, the number of procedures per vision center required to reach breakeven is estimated at 95 per month. We estimate the number of procedures companywide required for breakeven cash flow, excluding any tax refunds and after capital expenditures and debt service, to be approximately 85,000 per year. We believe that we have sufficient cash and investments to fund our business beyond 2012 if we perform at least 61,000 procedures annually. We performed 72,776 procedures in 2009. There can be no assurance as to the number of procedures we will perform in 2010.

Critical Accounting Estimates

There have been no material changes in the critical accounting policies described in Management’s Discussion and Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

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

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

Long-term investments include auction rate securities that are currently failing auction. These investments are recorded at fair value using a trinomial discount model. We are divesting all auction rate securities as the market allows. There can be no assurance, however, that the issuers of the auction rate securities that we hold will do so in advance of their maturity or the restoration of a regularized auction market.

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

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

Item 4. Controls and Procedures.

(a) Evaluation of Disclosure Controls and Procedures

Under the supervision of and with the participation of our management, including the company's Chief Operating Officer (COO) and Chief Financial Officer (CFO), an evaluation of the effectiveness of our disclosure controls and procedures was performed as of June 30, 2010. Based on this evaluation, the COO and CFO concluded that our disclosure controls and procedures are effective to ensure that material information is (1) accumulated and communicated to our management as appropriate to allow timely decisions regarding disclosure and (2) recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

(b) Changes in Internal Control over Financial Reporting

Under the supervision of and with the participation of our management, including the COO and CFO, an evaluation of our internal control over financial reporting was performed as of June 30, 2010. Based on this evaluation, management concluded that there were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION.

Item 1. Legal Proceedings

Not applicable.

Item 1A. Risk Factors

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

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. (Removed and Reserved).

Item 5. Other Information

Not applicable.

Item 6. Exhibits

Exhibits

Number		Description
31.1		COO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
31.2		CFO Certification under Section 302 of the Sarbanes-Oxley Act of 2002
32		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	LCA-VISION INC.

Date: July 27, 2010	/s/ David L. Thomas
	David L. Thomas
	Chief Operating Officer

Date: July 27, 2010	/s/ Michael J. Celebrezze
	Michael J. Celebrezze
	Senior Vice President of Finance,
	Chief Financial Officer and Treasurer