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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(MARK ONE)

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



For The Quarterly Period Ended September 30, 2005



OR



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



FOR THE TRANSITION PERIOD FROM  TO



Commission File Number 0-19946



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LINCARE HOLDINGS INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 51-0331330                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|19387 US 19 North Clearwater, FL                               |  | 33764                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code:

(727) 530-7700



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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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act).    Yes  x    No ̈



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.



|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding at October 31, 2005
|Common Stock, $0.01 par value |  | 97,237,996                     



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

FORM 10-Q

For The Quarterly Period Ended September 30, 2005

INDEX



|                              |  |                                                                                       |  |     
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                       |  | Page
|PART I.
FINANCIAL INFORMATION |  |                                                                                      
|Item 1.                       |  | Financial Statements (unaudited)                                                      |  | 3   
|                              |  | Condensed consolidated balance sheets                                                 |  | 3   
|                              |  | Condensed consolidated statements of operations                                       |  | 4   
|                              |  | Condensed consolidated statements of cash flows                                       |  | 5   
|                              |  | Notes to unaudited condensed consolidated financial statements                        |  | 6   
|Item 2.                       |  | Managements Discussion and Analysis of Results of Operations and Financial Condition |  | 11  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 22  
|Item 4.                       |  | Controls and Procedures                                                               |  | 22  
|                              | 
|PART II.
OTHER INFORMATION    |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 23  
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 23  
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  | 24  
|Item 4.                       |  | Submission of Matters to a Vote of the Security Holders                               |  | 24  
|Item 5.                       |  | Other Information                                                                     |  | 24  
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  | 24  
|SIGNATURE                     |  | 25                                                                                   
|INDEX OF EXHIBITS             |  | S-1                                                                                  



2



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##### Table of Contents

PART I. FINANCIAL INFORMATION



Item 1.Financial Statements (Unaudited)



LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                      |  |                   |           |   |                  |   |           |  
|----------------------------------------------------- |  | ----------------- | --------- | - | ---------------- | - | --------- | -
|                                                      |  | September 30,2005 |           |   | December 31,2004 |  
|ASSETS                                                |  |                   |           |   |                  |   |           |  
|Current assets:                                       |  |                   |           |   |                  |   |           |  
|Cash and cash equivalents                             |  | $                 | 80,945    |   |                  | $ | 33,614    |  
|Short-term investments                                |  |                   | 24,730    |   |                  |   | 192,175   |  
|Restricted cash                                       |  |                   | 169       |   |                  |   | 2,365     |  
|Accounts receivable, net                              |  |                   | 149,980   |   |                  |   | 137,891   |  
|Income taxes receivable                               |  |                   | 0         |   |                  |   | 4,106     |  
|Inventories                                           |  |                   | 2,554     |   |                  |   | 2,354     |  
|Prepaid and other current assets                      |  |                   | 3,998     |   |                  |   | 5,350     |  
|                                                      |  |                   |           |   |                  |   |           |  
|Total current assets                                  |  |                   | 262,376   |   |                  |   | 377,855   |  
|                                                      |  |                   |           |   |                  |   |           |  
|Property and equipment                                |  |                   | 717,167   |   |                  |   | 678,377   |  
|Accumulated depreciation                              |  |                   | (413,540  | ) |                  |   | (382,686  | )
|                                                      |  |                   |           |   |                  |   |           |  
|Net property and equipment                            |  |                   | 303,627   |   |                  |   | 295,691   |  
|                                                      |  |                   |           |   |                  |   |           |  
|Other assets:                                         |  |                   |           |   |                  |   |           |  
|Goodwill                                              |  |                   | 1,135,731 |   |                  |   | 1,035,865 |  
|Covenants not-to-compete, net                         |  |                   | 2,252     |   |                  |   | 3,292     |  
|Other                                                 |  |                   | 8,062     |   |                  |   | 8,361     |  
|                                                      |  |                   |           |   |                  |   |           |  
|Total other assets                                    |  |                   | 1,146,045 |   |                  |   | 1,047,518 |  
|                                                      |  |                   |           |   |                  |   |           |  
|Total assets                                          |  | $                 | 1,712,048 |   |                  | $ | 1,721,064 |  
|                                                      |  |                   |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                  |  |                   |           |   |                  |   |           |  
|Current liabilities:                                  |  |                   |           |   |                  |   |           |  
|Current installments on long-term obligations         |  | $                 | 18,101    |   |                  | $ | 67,937    |  
|Accounts payable                                      |  |                   | 35,202    |   |                  |   | 26,786    |  
|Accrued expenses:                                     |  |                   |           |   |                  |   |           |  
|Compensation and benefits                             |  |                   | 24,566    |   |                  |   | 20,639    |  
|Liability insurance                                   |  |                   | 13,230    |   |                  |   | 12,516    |  
|Other current liabilities                             |  |                   | 7,386     |   |                  |   | 4,537     |  
|Income taxes payable                                  |  |                   | 9,538     |   |                  |   | 0         |  
|                                                      |  |                   |           |   |                  |   |           |  
|Total current liabilities                             |  |                   | 108,023   |   |                  |   | 132,415   |  
|                                                      |  |                   |           |   |                  |   |           |  
|Long-term obligations, excluding current installments |  |                   | 275,470   |   |                  |   | 275,293   |  
|Deferred income taxes                                 |  |                   | 154,036   |   |                  |   | 146,327   |  
|Minority interest                                     |  |                   | 0         |   |                  |   | 704       |  
|                                                      |  |                   |           |   |                  |   |           |  
|Total liabilities                                     |  |                   | 537,529   |   |                  |   | 554,739   |  
|                                                      |  |                   |           |   |                  |   |           |  
|Stockholders equity:                                 |  |                   |           |   |                  |   |           |  
|Common stock                                          |  |                   | 1,275     |   |                  |   | 1,250     |  
|Additional paid-in capital                            |  |                   | 349,031   |   |                  |   | 278,884   |  
|Unearned compensation                                 |  |                   | (4,181    | ) |                  |   | (6,184    | )
|Retained earnings                                     |  |                   | 1,574,205 |   |                  |   | 1,415,604 |  
|Treasury stock                                        |  |                   | (745,811  | ) |                  |   | (523,229  | )
|                                                      |  |                   |           |   |                  |   |           |  
|Total stockholders equity                            |  |                   | 1,174,519 |   |                  |   | 1,166,325 |  
|                                                      |  |                   |           |   |                  |   |           |  
|Total liabilities and stockholders equity            |  | $                 | 1,712,048 |   |                  | $ | 1,721,064 |  
|                                                      |  |                   |           |   |                  |   |           |  



See accompanying notes
to unaudited condensed consolidated financial statements.



3



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | -
|                                                                                  |  | For The Three Months Ended |         |   | For The Nine Months Ended |  
|                                                                                  |  | September 30,2005          |         |   | September 30,2004         |   |         | September 30,2005 |  |   | September 30,2004 |  
|Net revenues                                                                      |  | $                          | 320,121 |   |                           | $ | 322,010 |                   |  | $ | 940,479           |   |  | $ | 944,290 |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Costs and expenses:                                                               |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Cost of goods and services                                                        |  |                            | 65,388  |   |                           |   | 45,628  |                   |  |   | 189,493           |   |  |   | 137,063 |  
|Operating expenses                                                                |  |                            | 75,156  |   |                           |   | 67,473  |                   |  |   | 219,061           |   |  |   | 198,778 |  
|Selling, general and administrative expenses                                      |  |                            | 62,550  |   |                           |   | 65,091  |                   |  |   | 187,034           |   |  |   | 193,745 |  
|Bad debt expense                                                                  |  |                            | 4,802   |   |                           |   | 4,830   |                   |  |   | 14,107            |   |  |   | 14,164  |  
|Depreciation expense                                                              |  |                            | 23,731  |   |                           |   | 21,897  |                   |  |   | 68,626            |   |  |   | 65,022  |  
|Amortization expense                                                              |  |                            | 415     |   |                           |   | 383     |                   |  |   | 1,265             |   |  |   | 1,141   |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|                                                                                  |  |                            | 232,042 |   |                           |   | 205,302 |                   |  |   | 679,586           |   |  |   | 609,913 |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Operating income                                                                  |  |                            | 88,079  |   |                           |   | 116,708 |                   |  |   | 260,893           |   |  |   | 334,377 |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Other income (expense):                                                           |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Interest income                                                                   |  |                            | 1,071   |   |                           |   | 901     |                   |  |   | 3,017             |   |  |   | 1,281   |  
|Interest expense                                                                  |  |                            | (3,168  | ) |                           |   | (4,498  | )                 |  |   | (10,060           | ) |  |   | (13,635 | )
|Net gain (loss) on disposal of property and equipment                             |  |                            | 26      |   |                           |   | (205    | )                 |  |   | 74                |   |  |   | (209    | )
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|                                                                                  |  |                            | (2,071  | ) |                           |   | (3,802  | )                 |  |   | (6,969            | ) |  |   | (12,563 | )
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Income before income taxes                                                        |  |                            | 86,008  |   |                           |   | 112,906 |                   |  |   | 253,924           |   |  |   | 321,814 |  
|Income tax expense                                                                |  |                            | 32,136  |   |                           |   | 42,498  |                   |  |   | 95,323            |   |  |   | 121,094 |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Net income                                                                        |  | $                          | 53,872  |   |                           | $ | 70,408  |                   |  | $ | 158,601           |   |  | $ | 200,720 |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Basic earnings per common share                                                   |  | $                          | 0.55    |   |                           | $ | 0.71    |                   |  | $ | 1.59              |   |  | $ | 2.02    |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Diluted earnings per common share                                                 |  | $                          | 0.52    |   |                           | $ | 0.67    |                   |  | $ | 1.52              |   |  | $ | 1.91    |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Weighted average number of common shares outstanding                              |  |                            | 98,294  |   |                           |   | 99,807  |                   |  |   | 99,605            |   |  |   | 99,428  |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  
|Weighted average number of common shares and common share equivalents outstanding |  |                            | 105,506 |   |                           |   | 107,185 |                   |  |   | 107,102           |   |  |   | 106,891 |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |         |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                  |  |                           |          |   |                   |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                  |  | For The Nine Months Ended |         
|                                                                                  |  | September 30,2005         |          |   | September 30,2004 |  
|Cash flows from operating activities:                                             |  |                           |          |   |                   |   |          |  
|Net income                                                                        |  | $                         | 158,601  |   |                   | $ | 200,720  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |          |   |                   |   |          |  
|Bad debt expense                                                                  |  |                           | 14,107   |   |                   |   | 14,164   |  
|Depreciation expense                                                              |  |                           | 68,626   |   |                   |   | 65,022   |  
|Net (gain) loss on disposal of property and equipment                             |  |                           | (74      | ) |                   |   | 209      |  
|Amortization expense                                                              |  |                           | 1,265    |   |                   |   | 1,141    |  
|Amortization of debt issuance costs                                               |  |                           | 549      |   |                   |   | 611      |  
|Vesting of restricted stock                                                       |  |                           | 2,003    |   |                   |   | 2,108    |  
|Deferred income tax benefit                                                       |  |                           | 7,708    |   |                   |   | 19,172   |  
|Minority interest in net earnings of subsidiary                                   |  |                           | 79       |   |                   |   | 65       |  
|Change in assets and liabilities net of effects of acquired businesses:           |  |                           |          |   |                   |   |          |  
|Increase in accounts receivable                                                   |  |                           | (22,283  | ) |                   |   | (8,775   | )
|Decrease in inventories                                                           |  |                           | 238      |   |                   |   | 250      |  
|Decrease in prepaid and other assets                                              |  |                           | 1,174    |   |                   |   | 487      |  
|Increase (decrease) in accounts payable                                           |  |                           | 8,406    |   |                   |   | (4,719   | )
|Increase (decrease) in accrued expenses                                           |  |                           | 6,976    |   |                   |   | (1,381   | )
|Increase in income taxes payable                                                  |  |                           | 37,113   |   |                   |   | 31,651   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net cash provided by operating activities                                         |  |                           | 284,488  |   |                   |   | 320,725  |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash flows from investing activities:                                             |  |                           |          |   |                   |   |          |  
|Proceeds from sale of property and equipment                                      |  |                           | 204      |   |                   |   | 94       |  
|Capital expenditures                                                              |  |                           | (73,906  | ) |                   |   | (67,919  | )
|Purchases of short-term investments                                               |  |                           | (307,000 | ) |                   |   | (232,000 | )
|Sales and maturities of short-term investments                                    |  |                           | 474,445  |   |                   |   | 89,000   |  
|Business acquisitions, net of cash acquired and purchase price adjustments        |  |                           | (81,945  | ) |                   |   | (40,884  | )
|Cash restricted for future payments                                               |  |                           | 12       |   |                   |   | (576     | )
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net cash provided by (used in) investing activities                               |  |                           | 11,810   |   |                   |   | (252,285 | )
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash flows from financing activities:                                             |  |                           |          |   |                   |   |          |  
|Proceeds from issuance of debt                                                    |  |                           | 915      |   |                   |   | 253      |  
|Payments of principal on debt and deferred acquisition obligations                |  |                           | (72,955  | ) |                   |   | (57,253  | )
|Change in minority interests                                                      |  |                           | (783     | ) |                   |   | (89      | )
|Payments of debt issuance costs                                                   |  |                           | (266     | ) |                   |   | (64      | )
|Proceeds from exercise of stock options and issuance of common shares             |  |                           | 44,953   |   |                   |   | 13,047   |  
|Payments to acquire treasury stock                                                |  |                           | (220,831 | ) |                   |   | 0        |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net cash used in financing activities                                             |  |                           | (248,967 | ) |                   |   | (44,106  | )
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net increase in cash and cash equivalents                                         |  |                           | 47,331   |   |                   |   | 24,334   |  
|Cash and cash equivalents, beginning of period                                    |  |                           | 33,614   |   |                   |   | 9,815    |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                         | 80,945   |   |                   | $ | 34,149   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Supplemental disclosure of cash flow information:                                 |  |                           |          |   |                   |   |          |  
|Cash paid for interest                                                            |  | $                         | 5,820    |   |                   | $ | 12,309   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash paid for taxes                                                               |  | $                         | 49,487   |   |                   | $ | 75,141   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Supplemental disclosure of non-cash investing and financing activities:           |  |                           |          |   |                   |   |          |  
|Assets acquired under capital lease                                               |  | $                         | 815      |   |                   | $ | 0        |  
|                                                                                  |  |                           |          |   |                   |   |          |  



See accompanying notes
to unaudited condensed consolidated financial statements.



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1. Basis of Presentation and Summary of Significant Accounting Policies



The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with
generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. They should be read in conjunction with the consolidated financial statements and related notes to the financial statements of
Lincare Holdings Inc. and Subsidiaries (the Company) on Form 10-K for the fiscal year ended December 31, 2004. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation
of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates.



Cash and Cash Equivalents: For purposes of the balance sheets and statements of cash flows, the Company considers all highly liquid investments
with an original maturity of less than three months to be cash equivalents.



Short-term Investments: The Company invests in auction rate securities as part of its cash management strategy. In 2005, the Company concluded that it was appropriate to classify its holdings of auction rate
securities as short-term investments. Previously, such investments had been classified as cash and cash equivalents. Accordingly, the Company has revised the classification to report these securities as short-term investments in its consolidated
balance sheets. The Company has also made corresponding adjustments to its consolidated statements of cash flows to reflect the gross purchases and sales of these securities as investing activities rather than as a component of cash and cash
equivalents. This change in classification does not affect previously reported cash flows from operations in the Companys consolidated statements of cash flows or the Companys previously reported consolidated statements of operations for
any period.



The Company classifies its investments in
marketable securities with readily determinable fair values as investments available-for-sale in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Available-for-sale securities consist of debt and equity securities not classified as trading securities or as securities to be held to maturity. The Company has classified all investments as available-for-sale. Unrealized holding
gains and losses on available-for-sale securities are reported as a net amount in accumulated other comprehensive gain or loss in stockholders equity until realized. Gains and losses on the sale of available-for-sale securities are determined
using the specific identification method.



Concentration of
Credit Risk: The Companys revenues are generated through locations in 47 states. The Company generally does not require collateral or other security in extending credit to patients; however, the Company routinely obtains assignment of (or
is otherwise entitled to receive) benefits receivable under the health insurance programs, plans or policies of customers. Included in the Companys net revenues is reimbursement from government sources under Medicare, Medicaid and other
federally funded programs, which aggregated approximately 66% and 67% of net revenues for the nine months ended September 30, 2005 and 2004, respectively.



Note 2. Business Combinations



Lincare acquires the business and related assets of local and regional companies as an ongoing strategy to increase sales within its respective markets.
Lincare arrives at a negotiated purchase price taking into account such factors including, but not limited to, the acquired companys historical and projected revenue growth, operating cash flow, product mix, payor mix, service reputation and
geographical location.



During the nine months ended
September 30, 2005, the Company acquired certain assets of 11 companies in separate transactions. Each acquisition was accounted for as a purchase of a business. The results of the acquired



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



companies are included in the accompanying
consolidated statements of operations since the respective dates of acquisition.



|                                                                       |  |                |        
|---------------------------------------------------------------------- |  | -------------- | -------
|The aggregate cost of the acquisitions described above was as follows: |  |                |        
|                                                                       | 
|                                                                       |  | (In thousands)
|Cash                                                                   |  | $              | 81,945 
|Deferred acquisition obligations                                       |  |                | 26,027 
|Assumption of liabilities                                              |  |                | 437    
|                                                                       |  |                |        
|                                                                       |  | $              | 108,409
|                                                                       |  |                |        
|                                                                       | 
|The aggregate purchase price was allocated as follows:                 |  |                |        
|                                                                       | 
|Current assets                                                         |  | $              | 4,251  
|Property and equipment                                                 |  |                | 2,786  
|Intangible assets                                                      |  |                | 175    
|Goodwill                                                               |  |                | 101,197
|                                                                       |  |                |        
|                                                                       |  | $              | 108,409
|                                                                       |  |                |        



Unaudited pro forma
supplemental information on the results of operations for the nine months ended September 30, 2005 and September 30, 2004, is provided below and reflects the acquisitions as if they had been combined at the beginning of each period.



|                         |  |                                        |         |      |   |        
|------------------------ |  | -------------------------------------- | ------- | ---- | - | -------
|                         |  | For The Nine MonthsEnded September 30,
|                         |  | 2005                                   |         | 2004
|                         |  | (In thousands, except per share data) 
|Net revenues             |  | $                                      | 964,632 |      | $ | 991,393
|                         |  |                                        |         |      |   |        
|Net income               |  | $                                      | 164,098 |      | $ | 211,313
|                         |  |                                        |         |      |   |        
|Income per common share: |  |                                        |         |      |   |        
|Basic                    |  | $                                      | 1.65    |      | $ | 2.13   
|                         |  |                                        |         |      |   |        
|Diluted                  |  | $                                      | 1.57    |      | $ | 2.01   
|                         |  |                                        |         |      |   |        



The unaudited pro
forma financial information is not necessarily indicative of either the results of operations that would have occurred had the transactions been effected at the beginning of the respective preceding periods or of future results of operations of the
combined companies.



Note 3. Income Per Common Share



Basic income per common share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding for the period. Diluted income per common share reflects the potential dilution of securities that could share in the Companys earnings, including securities that
may be issued on conversion of convertible debentures and exercise of outstanding stock options. When the exercise of stock options would be anti-dilutive, they are excluded from the calculation. For the three months ended September 30, 2004,
there were 2,523 shares excluded. There were no shares excluded for the other periods presented.



In October 2004, the Emerging Issues Task Force (EITF) ratified the consensus on EITF Issue 04-8, The Effect of Contingently Convertible
Instruments on Diluted Earnings per Share, that the impact of contingently convertible debt should be included in diluted earnings per share computations regardless of whether the market price conversion condition has been met. This provision
is effective for reporting periods ending after December 15, 2004 with the requirement to restate all prior period earnings per share amounts to conform to the provisions of the final EITF.



7



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



A reconciliation of the numerators
and the denominators of the basic and diluted earnings per common share computations is as follows:



|                                                                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|------------------------------------------------------------------------------------ |  | --------------------------------------- | ------- | -------------------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                                                                     |  | For The Three MonthsEnded September 30, |         | For The Nine MonthsEnded September 30,
|                                                                                     |  | 2005                                    |         | 2004                                   |   | 2005    |  | 2004
|                                                                                     |  | (In thousands, except per share data)   |         | (In thousands, except per share data) 
|Numerator:                                                                           |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Basic  Income available to common stockholders                                      |  | $                                       | 53,872  |                                        | $ | 70,408  |  | $    | 158,601 |  | $ | 200,720
|Adjustment for assumed dilution:                                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Interest on convertible debt, net of tax                                             |  |                                         | 1,292   |                                        |   | 1,287   |  |      | 3,865   |  |   | 3,861  
|                                                                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Diluted  Income available to common stockholders and holders of dilutive securities |  | $                                       | 55,164  |                                        | $ | 71,695  |  | $    | 162,466 |  | $ | 204,581
|                                                                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Denominator:                                                                         |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Weighted average shares                                                              |  |                                         | 98,294  |                                        |   | 99,807  |  |      | 99,605  |  |   | 99,428 
|Effect of dilutive securities:                                                       |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Stock options                                                                        |  |                                         | 2,055   |                                        |   | 2,221   |  |      | 2,340   |  |   | 2,306  
|Convertible debt                                                                     |  |                                         | 5,157   |                                        |   | 5,157   |  |      | 5,157   |  |   | 5,157  
|                                                                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Adjusted weighted average shares                                                     |  |                                         | 105,506 |                                        |   | 107,185 |  |      | 107,102 |  |   | 106,891
|                                                                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Per share amount:                                                                    |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Basic                                                                                |  | $                                       | 0.55    |                                        | $ | 0.71    |  | $    | 1.59    |  | $ | 2.02   
|                                                                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Diluted (1)                                                                          |  | $                                       | 0.52    |                                        | $ | 0.67    |  | $    | 1.52    |  | $ | 1.91   
|                                                                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        

---

|(1) | Figures reflect the application of the if converted method of accounting for the Companys outstanding convertible debentures in accordance with EITF No. 04-8,
effective for reporting periods ending after December 15, 2004. Figures in 2004 have been restated for comparative purposes in accordance with the requirements of EITF No. 04-8.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 4. Stock Plans



The Company issues stock options and other stock-based awards to key
employees and directors under stock-based compensation plans, which are described more fully in Note 8 to the consolidated financial statements in the Companys 2004 Annual Report on Form 10-K.



Under the 2004 Stock Plan, certain key employees may be granted restricted
stock at nominal cost to them. Restricted stock is measured at fair value on the date of the grant, based on the number of shares granted and the quoted price of the Companys common stock. Such value will be recognized as compensation expense
ratably over the corresponding employees specified service period. Restricted stock vests upon fulfillment of specified performance and service-based conditions. On July 1, 2004, the Company granted 260,000 shares of restricted stock to
certain key employees.



SFAS No. 123, Accounting for
Stock-Based Compensation, establishes financial accounting and reporting standards for stock-based compensation plans. SFAS No. 123 allows two alternative accounting methods: (1) a fair-value-based method, or (2) an
intrinsic-value-based method which is prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and related interpretations. The Company has elected to account for its stock
options under APB No. 25, and has adopted the disclosure requirements of SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based CompensationTransition and Disclosure. Had the Company determined
compensation cost based on the fair value at the grant date for stock options under SFAS No. 123, the Companys net income and earnings per share would have been reduced to the pro forma amounts indicated below:





8



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



|                                                                                                                                      |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------ | - | -------------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                      |  | For The Three MonthsEnded September 30, |        |   | For The Nine MonthsEnded September 30, |  
|                                                                                                                                      |  | 2005                                    |        |   | 2004                                   |   |        | 2005 |  |   | 2004    |  
|                                                                                                                                      |  | (In thousands, except per share data)   |        |   | (In thousands, except per share data)  |  
|Net income:                                                                                                                           |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|As reported                                                                                                                           |  | $                                       | 53,872 |   |                                        | $ | 70,408 |      |  | $ | 158,601 |   |  | $ | 200,720 |  
|Add: Stock-based employee compensation expense included in net income, net of related tax effects                                     |  |                                         | 537    |   |                                        |   | 1,314  |      |  |   | 1,251   |   |  |   | 1,314   |  
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax
effects |  |                                         | (2,502 | ) |                                        |   | (5,136 | )    |  |   | (6,624  | ) |  |   | (10,966 | )
|                                                                                                                                      |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Pro forma                                                                                                                             |  | $                                       | 51,907 |   |                                        | $ | 66,586 |      |  | $ | 153,228 |   |  | $ | 191,068 |  
|                                                                                                                                      |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Earnings per common share:                                                                                                            |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Basicas reported                                                                                                                     |  | $                                       | 0.55   |   |                                        | $ | 0.71   |      |  | $ | 1.59    |   |  | $ | 2.02    |  
|                                                                                                                                      |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Dilutedas reported (1)                                                                                                               |  | $                                       | 0.52   |   |                                        | $ | 0.67   |      |  | $ | 1.52    |   |  | $ | 1.91    |  
|                                                                                                                                      |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Basicpro forma                                                                                                                       |  | $                                       | 0.53   |   |                                        | $ | 0.67   |      |  | $ | 1.54    |   |  | $ | 1.92    |  
|                                                                                                                                      |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  
|Dilutedpro forma (1)                                                                                                                 |  | $                                       | 0.50   |   |                                        | $ | 0.63   |      |  | $ | 1.47    |   |  | $ | 1.82    |  
|                                                                                                                                      |  |                                         |        |   |                                        |   |        |      |  |   |         |   |  |   |         |  

---

|(1) | Figures reflect the application of the if converted method of accounting for the Companys outstanding convertible debentures in accordance with EITF No. 04-8,
effective for reporting periods ending after December 15, 2004. Figures in 2004 have been restated for comparative purposes in accordance with the requirements of EITF No. 04-8.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Note 5. Comprehensive Income



SFAS No. 130, Reporting Comprehensive Income, establishes
standards for the reporting and display of comprehensive income and its components in the Companys consolidated financial statements. The objective of SFAS No. 130 is to report a measure (comprehensive income (loss)) of all changes in
equity of an enterprise that result from transactions and other economic events in a period other than transactions with owners.



The Company had no unrealized gains or losses on short-term investments available-for-sale for the nine months ended September 30, 2005 and
September 30, 2004.



Note 6. Noncash Financing and Investing Activities



In the normal course of business, the Company obtains
seller financing on business acquisitions and also makes adjustments to seller financing from business acquisitions obtained in prior periods based on terms of the original purchase agreements. Terms of the financing are typically principal only.
Seller financing incurred in the nine months ended September 30, 2005 and 2004, was $26.0 million and $9.0 million, respectively.



Note 7. New Accounting Standards



In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. 154, Accounting Changes and Error Corrections - a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods financial statements of changes in accounting principle, unless it is impracticable to determine
either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, this Statement



9



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



requires that the new accounting principle be
applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other
appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting
principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. This Statement will be effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material impact on the Companys consolidated financial statements.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based
Payment. SFAS No. 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation, amends SFAS No. 95, Statement of Cash Flows, and supersedes APB Opinion No. 25, Accounting for Stock Issued to
Employees. SFAS No. 123(R) will require compensation costs related to share-based payment transactions to be recognized in the financial statements. The amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides service in exchange for the award. SFAS No. 123(R) also requires the benefits of tax deductions in excess of
recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. The Company will implement this standard effective January 1, 2006. The Company is currently
evaluating the impact from this standard on its results of operations and financial position.



10



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES



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



Medicare Reimbursement



As a supplier of home oxygen and other respiratory therapy services for the home health care market, we participate in Medicare Part B, the Supplementary
Medical Insurance Program, which was established by the Social Security Act of 1965. Providers of home oxygen and other respiratory therapy services have historically been heavily dependent on Medicare reimbursement due to the high proportion of
elderly persons suffering from respiratory disease. Durable medical equipment (DME), including oxygen equipment, is traditionally reimbursed by Medicare based on fixed fee schedules.



On December 8, 2003, the President of the United States signed into law
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, codified at Public Law 108-173 (MMA). The legislation, among other things, provides expanded Medicare prescription drug coverage, modifies payments to Medicare
providers and institutes administrative reforms intended to improve Medicare program operations. MMA includes sweeping changes that impact a broad spectrum of health care industry participants, including physicians, pharmacies, manufacturers and
pharmacy benefit managers, as well as other Medicare suppliers and providers including Lincare.



MMA contains provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. Among other things,
MMA:



|(1) | Significantly reduces reimbursement for inhalation drug therapies. Historically, prescription drug coverage under Medicare has been limited to drugs furnished incident to a
physicians services and certain self-administered drugs, including inhalation drug therapies. Prior to MMA, Medicare reimbursement for covered drugs, including the inhalation drugs that we provide, had been limited to 95 percent of the
published average wholesale price (AWP) for the drug. MMA establishes new payment limits and procedures for drugs reimbursed under Medicare Part B. Payments for inhalation drugs furnished during 2004 declined to 80 percent of the AWP in
effect as of April 1, 2003, a reduction of approximately 15.8%. Beginning in 2005, inhalation drugs furnished to Medicare beneficiaries are reimbursed at 106 percent of the volume-weighted average selling price (ASP) of the drug, as
determined from data provided each quarter by drug manufacturers under a specific formula described in MMA.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On November 3, 2004, the Centers for Medicare and Medicaid Services (CMS) issued its final rule, CMS-1429-FC, which established a monthly
dispensing fee of $57.00 per customer for inhalation drug therapy in addition to the ASP-based payment rate for the drugs dispensed. The rule also established an alternative dispensing fee of $80.00 per customer when dispensed in 90-day increments.
Payment rates for inhalation drugs are updated quarterly based on the manufacturer ASP calculated for the most recent calendar quarter for which data are available. Manufacturer ASP submissions are due to CMS not later than 30 days after the last
day of each calendar quarter. Accordingly, inhalation drug payment rates in the third quarter of 2005 were based on ASP data from the first quarter of 2005. The new ASP-based payment formula in effect for 2005 has resulted in substantially reduced
payment rates for inhalation drugs. The combination of the new ASP payment rates for inhalation drugs commencing in 2005 and the monthly dispensing fee of $57.00 is estimated by the Company to have reduced net revenues by approximately $101.4
million in the first nine months of 2005.



On November 2,
2005, CMS issued its final rule, CMS-1502-FC, establishing the dispensing fee amount for inhalation drugs for 2006. The final rule establishes a dispensing fee of $57.00 for the first 30-day period in which a Medicare beneficiary uses inhalation
drugs and $33.00 for a 30-day supply of inhalation drugs for all other months. The rule also establishes a dispensing fee of $66.00 for a 90-day supply of inhalation drugs. We estimate that the reduction in the Medicare payment amount for the
dispensing fee will reduce net revenues by approximately $46.0 million in 2006.



We continue to evaluate the impact of the reduced Medicare payment rates on our business. We can not determine the outcome of any future rulemaking by CMS nor the impact that such rulemaking might have on our ability
to continue to provide inhalation drugs to Medicare beneficiaries. Further, we can not determine whether quarterly updates in ASP pricing data submitted by drug manufacturers and adopted by CMS will result in further reductions in payment rates for
inhalation drugs, and what impact such payment reductions could have on us in 2005 and beyond.



11



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##### Table of Contents

|(2) | Reduces payment amounts for five categories of DME, including oxygen, beginning in 2005 and freezes payment amounts for other Medicare-covered DME items from 2004 to 2007.
MMA contains provisions that will reduce Medicare payment amounts in 2005 for oxygen equipment, standard wheelchairs (including standard power wheelchairs), nebulizers, diabetic supplies consisting of lancets and testing strips, hospital beds and
air mattresses to the median prices paid under the Federal Employee Health Plan (FEHP). Reductions in payment rates for 2005 established by CMS for the non-oxygen items subject to the FEHP provisions range between 2% and 14%, and are
estimated by the Company to have reduced net revenues by approximately $2.6 million in the first nine months of 2005. MMA also freezes payment amounts for other Medicare-covered DME items through 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On September 13, 2004, the Office of Inspector General
(OIG) released a preliminary report entitled, Medicare Payment Rates for Home Oxygen Equipment, which was intended to serve as the basis for establishing Medicare payment rates for oxygen in 2005. The CMS
Administrator, in his comment letter to the OIG report, agreed with the OIGs recommendation to use the pricing information contained in the OIG report to reduce the rates Medicare pays for home oxygen equipment in 2005. CMS also concurred with
the OIGs recommendation to consider alternative methods for determining future Medicare oxygen payment rates, such as competitive bidding, contracts with local or national providers, and capped rental arrangements.



On March 30, 2005, CMS released the new Medicare fee schedule amounts
for oxygen equipment. The new payment rates were made effective for claims for oxygen equipment furnished after January 1, 2005, that are received by Medicare on or after April 1, 2005. We estimate that the new fee schedule resulted in a
net price reduction of 8.7% for oxygen equipment provided by the Company to Medicare beneficiaries beginning in the second fiscal quarter of 2005. We estimate that these changes reduced net revenues in the second and third quarters of 2005 by
approximately $31.1 million in aggregate.



|(3) | Establishes a competitive acquisition program for DME beginning in 2007. MMA instructs the Secretary of the Department of Health and Human Services (the
Secretary) to establish and implement programs under which competitive acquisition areas are established throughout the United States for contract award purposes for the furnishing of competitively priced items of DME, including oxygen
equipment. The program would be implemented in phases such that competition under the program occurs in 10 of the largest metropolitan statistical areas (MSAs) in 2007, 80 of the largest MSAs in 2009, and additional areas after 2009.
Items selected for competitive acquisition may be phased in first among the highest cost and highest volume items and services or those items and services that the Secretary determines have the largest savings potential. In carrying out such
programs, the Secretary may exempt rural areas and areas with low-population density within urban areas that are not competitive, unless there is a significant national market through mail order for a particular item or service.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For each competitive acquisition area, the
Secretary would conduct a competition under which providers would submit bids to supply certain covered items of DME. Successful bidders would be expected to meet certain program quality standards in order to be awarded a contract and only
successful bidders could supply the covered items to Medicare beneficiaries in the acquisition area. The applicable contract award prices are expected to be less than would be paid under current Medicare fee schedules and contracts would be re-bid
at least every three years. The Secretary will be required to award contracts to multiple entities submitting bids in each area for an item or service, but would have the authority to limit the number of contractors in a competitive acquisition area
to the number needed to meet projected demand. The Secretary may use competitive bid pricing information to adjust the payment amount otherwise in effect for an area that is not a competitive acquisition area. We can not predict the effect of the
competitive acquisition program or the Medicare payment rates that will be in effect in 2007 and beyond for the items ultimately subjected to competitive bidding.



|(4) | Implements quality standards and accreditation requirements for DME suppliers. MMA instructs the Secretary to establish and implement quality standards for DME suppliers to
be monitored by recognized independent accreditation organizations. Suppliers will be required to comply with these standards in order to receive payment for furnishing any covered item of DME to a Medicare beneficiary and to receive or retain a
supplier number used to submit claims for reimbursement. We can not predict the nature or extent of the final quality standards to be implemented by CMS or the effect such standards would have on our ability to continue to provide products to
Medicare beneficiaries.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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On December 13, 2002, CMS issued an interim final rule establishing a process for adjusting payments
for Medicare Part B services (other than physician services), pursuant to the agencys Inherent Reasonableness (IR) authority, when existing payment amounts are determined to be either grossly excessive or deficient. The interim
final rule describes the factors CMS or its contractors will consider in making such determinations and the procedures that will be followed in establishing new payment amounts. The interim rule became effective on February 11, 2003, but to
date, no payment adjustments have occurred as a result of the IR authority.



The effectiveness of the IR rule itself does not trigger payment adjustments for any items or services. Nevertheless, the IR rule puts in place a process that eventually could have a significant impact on Medicare
payments for such Part B services as home oxygen, DME and Part B covered prescription drugs. We can not predict whether, especially in light of MMAs enactment, CMS will exercise its IR authority with respect to certain products and services
that we provide to Medicare beneficiaries, or the effect such payment adjustments would have on our financial position or operating results.



Federal and state budgetary and other cost-containment pressures will continue to impact the home respiratory care industry. We can not predict whether
new federal and state budgetary proposals will be adopted or the effect, if any, such proposals would have on our business.



Operating Results



The following table sets forth for the periods indicated a summary of the Companys net revenues by source:



|                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|------------------------------------ |  | --------------------------------------- | ------- | -------------------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                     |  | For The Three MonthsEnded September 30, |         | For The Nine MonthsEnded September 30,
|                                     |  | 2005                                    |         | 2004                                   |   | 2005    |  | 2004
|                                     |  | (In thousands)                          |         | (In thousands)                        
|Oxygen and other respiratory therapy |  | $                                       | 292,926 |                                        | $ | 294,277 |  | $    | 854,777 |  | $ | 861,389
|Home medical equipment and other     |  |                                         | 27,195  |                                        |   | 27,733  |  |      | 85,702  |  |   | 82,901 
|                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        
|Total                                |  | $                                       | 320,121 |                                        | $ | 322,010 |  | $    | 940,479 |  | $ | 944,290
|                                     |  |                                         |         |                                        |   |         |  |      |         |  |   |        



Net revenues for the
three months ended September 30, 2005, decreased by $1.9 million, a decrease of 0.6% compared with the three months ended September 30, 2004, and for the nine months ended September 30, 2005, decreased by $3.8 million (or 0.4%)
compared with the nine months ended September 30, 2004. The 0.6% decrease in net revenues was comprised of 10.0% internal growth and 5.5% acquisition growth offset by a 16.1% revenue reduction from lower Medicare payment rates for inhalation
drugs and certain items of DME that took effect on January 1, 2005 and oxygen equipment that took effect April 1, 2005 (see Medicare Reimbursement). The 0.4% decrease in net revenues in the nine-month period was comprised of
9.2% internal growth and 4.7% acquisition growth offset by a 14.3% revenue reduction from lower Medicare payment rates. Net revenues for the three months and nine months ended September 30, 2005 were negatively impacted by $51.8 million (or
16.1%) and $135.1 million (or 14.3%), respectively, as a result of the Medicare reimbursement reductions. The internal growth in net revenues excluding price reductions is attributable to underlying demographic growth in the markets for our products
and gains in customer counts resulting primarily from our sales and marketing efforts that emphasize high-quality equipment and customer service. Growth in net revenues from acquisitions is attributable to the effects of acquisitions of local
and regional companies and is based on the estimated contribution to net revenues for the four quarters following such acquisitions. During the first nine months of 2005, we completed the acquisition of 11 companies with aggregate annual
revenues of approximately $62.0 million.



The contribution of
oxygen and other respiratory therapy products to our net revenues was 91.5% and 90.9% respectively, during the three and nine months ended September 30, 2005. Our strategy is to focus on the provision of oxygen and other respiratory
therapy services to patients in the home and to provide home medical equipment and other services where we believe such services will enhance our core respiratory business.



Cost of goods and services as a percentage of net revenues increased to 20.4% and 20.1%, respectively, for the three and
nine months ended September 30, 2005, compared with 14.2% and 14.5% for the comparable prior year periods. The increase in costs expressed as a percentage of net revenues was due in part to a reduction in revenues from Medicare price cuts
taking effect in the first nine months of 2005 and an increase in drug purchasing costs due to a product mix shift to higher cost branded products in our inhalation drug business.



13



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##### Table of Contents

Operating expenses as a percentage of net revenues for the three and nine months ended September 30,
2005, increased to 23.5% and 23.3%, respectively, compared with 21.0% and 21.1% for the comparable prior year periods. This increase as a percentage of net revenues was due primarily to the effect on revenues of the lower Medicare reimbursement
rates taking effect in the first nine months of 2005 and increased operating costs associated with higher fuel costs and recent business acquisitions.



Selling, general and administrative (SG&A) expenses as a percentage of net revenues were 19.5% and 19.9% for the three and nine months
ended September 30, 2005, compared with 20.2% and 20.5% for the three and nine months ended September 30, 2004. The reduction in SG&A expense expressed as a percentage of net revenues resulted from cost controls and productivity gains
at our overhead locations and lower advertising expenses, which partially offset the impact of the Medicare price cuts taking effect in the first nine months of 2005.



Operating income for the three and nine months ended September 30, 2005, was $88.1 million (27.5% of net revenues) and
$260.9 million (27.7% of net revenues), respectively, compared with $116.7 million (36.2% of net revenues) and $334.4 million (35.4% of net revenues) for the comparable three and nine months of the prior year. The decrease in operating income is
attributable primarily to the reduction of Medicare reimbursement rates for inhalation drugs and certain items of durable medical equipment effective January 1, 2005, decreased reimbursements rates for oxygen equipment that took effect on
April 1, 2005 and increased costs of purchased inhalation drugs partially offset by customer volume growth, gains in labor productivity and control over operating costs. We estimate that the reductions in Medicare reimbursement rates reduced
net revenues and operating income by approximately $51.8 million and $135.1 million, respectively, in the three and nine month periods ended September 30, 2005.



Liquidity and Capital Resources



Our primary sources of liquidity have been internally generated funds from operations, borrowings under credit facilities and proceeds from equity
and debt transactions. We have used these funds to meet our capital requirements, which consist primarily of operational needs, capital expenditures, acquisitions, debt service and share repurchases.



Net cash provided by operating activities decreased by 11.3% to $284.5
million for the nine months ended September 30, 2005, compared with $320.7 million for the nine months ended September 30, 2004. The decrease in net cash from operating activities was due primarily to a decrease in net income
attributable to the reductions in Medicare reimbursement for respiratory medications and certain items of durable medical equipment that took effect on January 1, 2005 and the reduction in Medicare reimbursements for oxygen equipment that took
effect on April 1, 2005, in addition to increased cost of sales related to a product mix shift in the inhalation drug business.



Net cash used in investing and financing activities was $237.2 million for the nine months ended September 30, 2005. Activity during the nine-month
period ended September 30, 2005 included our investment of $81.9 million in business acquisitions, investment in capital equipment of $73.9 million, payments of principal on debt and deferred acquisition obligations of $73.0 million and
repurchases of our common stock of $220.8 million.



As of
September 30, 2005, our principal sources of liquidity consisted of $154.4 million of working capital and up to $200.0 million available under our revolving bank credit facility.



On December 9, 2004, the Board of Directors authorized a plan to repurchase up to $250.0 million of the Companys
common stock. Purchases are made through the open market or privately negotiated transactions, subject to market conditions and trading restrictions. As of September 30, 2005, there have been approximately 5,324,367 shares purchased under
this plan at a cost of approximately $220.8 million and the total common stock held in treasury, at cost, was $745.8 million. On October 24, 2005, we announced the completion of the $250.0 million repurchase plan and the authorization by our
Board of Directors of an additional $100.0 million of repurchases of our common stock.



In June 2003, we completed the sale of $275.0 million aggregate principal amount of 3.0% Convertible Senior Debentures due 2033 (the Debentures) in a private placement. The Debentures are convertible into
shares of our common stock based on a conversion rate of 18.7515 shares for each $1,000 principal amount of Debentures. The conversion rate is equivalent to a conversion price of approximately $53.33 per share of common stock. The Debentures are
convertible into common stock in any calendar quarter if, among other circumstances, the last reported sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading



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day of our previous calendar quarter is greater than or equal to $64.00 (120% of the applicable conversion price per share of our common stock) on such last
trading day. Interest on the Debentures is payable at the rate of 3.0% per annum on June 15 and December 15 of each year. The Debentures are senior unsecured obligations and will mature on June 15, 2033. The Debentures are
redeemable by us on or after June 15, 2008 and may be put to us for repurchase on June 15, 2008, 2010, 2013, or 2018.



Our future liquidity will continue to be dependent upon our operating cash flow and management of accounts receivable. We anticipate that funds generated
from operations, together with our current cash on hand and funds available under our revolving credit facility, will be sufficient to finance our working capital requirements, fund anticipated acquisitions and capital expenditures, and meet our
contractual obligations for at least the next 12 months.



Future Minimum
Obligations



In the normal course of business, we enter
into obligations and commitments that require future contractual payments. The commitments primarily result from repayment obligations for borrowings under our revolving bank credit facility and Debentures, as well as contractual lease payments for
facility, vehicle, and equipment leases and deferred acquisition obligations. The following table presents, in aggregate, scheduled payments under our contractual obligations (in thousands):



|                          |  |                         |        |            |   |        |  |      |        |      |   |        |  |   |        |  |   |         |  |   |        
|------------------------- |  | ----------------------- | ------ | ---------- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ |  | - | ------- |  | - | -------
|                          |  | Fiscal Years            |        | Thereafter |   | Total 
|                          |  | (remaining3 months2005) |        | 2006       |   | 2007   |  | 2008 |        | 2009 |   |       
|Short-term debt           |  | $                       | 9,735  |            | $ | 8,021  |  | $    | 0      |      | $ | 0      |  | $ | 0      |  | $ | 0       |  | $ | 17,756 
|Long-term debt            |  |                         | 0      |            |   | 0      |  |      | 0      |      |   | 0      |  |   | 0      |  |   | 275,000 |  |   | 275,000
|Capital lease commitments |  |                         | 25     |            |   | 341    |  |      | 449    |      |   | 0      |  |   | 0      |  |   | 0       |  |   | 815    
|Interest expense          |  |                         | 4,360  |            |   | 8,721  |  |      | 8,370  |      |   | 8,250  |  |   | 8,250  |  |   | 193,508 |  |   | 231,459
|Operating leases          |  |                         | 8,836  |            |   | 28,476 |  |      | 19,513 |      |   | 9,808  |  |   | 3,354  |  |   | 96      |  |   | 70,083 
|Employment agreements     |  |                         | 441    |            |   | 1,761  |  |      | 1,761  |      |   | 1,761  |  |   | 1,761  |  |   | 0       |  |   | 7,485  
|                          |  |                         |        |            |   |        |  |      |        |      |   |        |  |   |        |  |   |         |  |   |        
|Total                     |  | $                       | 23,397 |            | $ | 47,320 |  | $    | 30,093 |      | $ | 19,819 |  | $ | 13,365 |  | $ | 468,604 |  | $ | 602,598
|                          |  |                         |        |            |   |        |  |      |        |      |   |        |  |   |        |  |   |         |  |   |        



New Accounting Standards



In May 2005, the Financial Accounting Standards Board
(FASB) issued SFAS No. 154, Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods
financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an
accounting change on one or more individual prior periods presented, this Statement requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being
reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were
adopted prospectively from the earliest date practicable. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not
expected to have a material impact on the Companys consolidated financial statements.



In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS No. 123(R) revises SFAS No. 123, Accounting for Stock-Based Compensation, amends SFAS No. 95,
Statement of Cash Flows, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) will require compensation costs related to share-based payment transactions to be recognized in
the financial statements. The amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instruments issued. Compensation cost will be recognized over the period that an employee provides
service in exchange for the award. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under
current literature. The Company will implement this standard effective January 1, 2006. The Company is currently evaluating the impact from this standard on its results of operations and financial position.



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Forward Looking Statements



Statements in this report concerning future results, performance or expectations are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended. All forward-looking statements included in this document are based upon information available to us as of the date hereof and we assume no obligation to update any such
forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any results, levels of
activity, performance or achievements expressed or implied by any forward-looking statements. In some cases, forward-looking statements that involve risks and uncertainties contain terminology such as may, will,
should, could, expects, intends, plans, anticipates, believes, estimates, predicts, potential, or continue or
variations of these terms or other comparable terminology.



Key
factors that have an impact on our ability to attain these estimates include potential reductions in reimbursement rates by government and other third-party payors, changes in reimbursement policies, the demand for our products and services, the
availability of appropriate acquisition candidates and our ability to successfully complete and integrate acquisitions, efficient operations of our existing and future operating facilities, regulation and/or regulatory action affecting us or our
business, economic and competitive conditions, access to borrowed and/or equity capital on favorable terms and other risks described below.



In developing our forward-looking statements, we have made certain assumptions relating to reimbursement rates and policies, internal growth and
acquisitions and the outcome of various legal and regulatory proceedings. If the assumptions we use differ materially from what actually occurs, then actual results could vary significantly from the performance projected in the forward-looking
statements. We are under no duty to update any of the forward-looking statements after the date of this report.



Certain Risk Factors Relating to the Companys Business



We operate in a rapidly changing environment that involves a number of risks. The following discussion highlights some of these risks and others are
discussed elsewhere in this report. These and other risks could materially and adversely affect our business, financial condition, operating results and cash flows.



A MAJORITY OF OUR CUSTOMERS HAVE PRIMARY HEALTH COVERAGE UNDER MEDICARE PART B, AND RECENTLY ENACTED AND FUTURE CHANGES IN THE
REIMBURSEMENT RATES OR PAYMENT METHODOLOGIES UNDER THE MEDICARE PROGRAM COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.



As a provider of home oxygen and other respiratory therapy services for the home health care market, we have historically depended heavily on Medicare
reimbursement as a result of the high proportion of elderly persons suffering from respiratory disease. Medicare Part B, the Supplementary Medical Insurance Program, provides coverage to eligible beneficiaries for DME, such as oxygen equipment,
respiratory assistance devices, continuous positive airway pressure devices, nebulizers and associated respiratory medications, hospital beds and wheelchairs for the home setting. Approximately 75 percent of our customers have primary coverage under
Medicare Part B. There are increasing pressures on Medicare to control health care costs and to reduce or limit reimbursement rates for home medical equipment and services. Medicare reimbursement is subject to statutory and regulatory changes,
retroactive rate adjustments, administrative and executive orders and governmental funding restrictions, all of which could materially decrease payments to us for the services and equipment we provide.



As discussed herein (see MEDICARE REIMBURSEMENT), MMA was signed
into law on December 8, 2003. This legislation, among other things, provides expanded Medicare prescription drug coverage, modifies payments to Medicare providers and institutes administrative reforms intended to improve Medicare program
operations. MMA includes sweeping changes that will impact a broad spectrum of health care industry participants, including physicians, pharmacies, manufacturers and pharmacy benefit managers, as well as other Medicare suppliers and providers,
including Lincare.



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The MMA legislation contains provisions that directly impact reimbursement for the primary respiratory
and other DME products provided by Lincare. Among other things, MMA significantly reduces reimbursement for inhalation drug therapies in 2005, reduces payment amounts for five categories of DME, including oxygen, beginning in 2005, freezes payment
amounts for other covered DME items through 2007, establishes a competitive acquisition program for DME beginning in 2007, and implements quality standards and accreditation requirements for DME suppliers. The MMA provisions, when implemented, could
materially and adversely affect our business, financial condition, operating results and cash flows. See MEDICARE REIMBURSEMENT for a full discussion of the MMA provisions.



A SIGNIFICANT PERCENTAGE OF OUR BUSINESS IS DERIVED FROM THE SALE AND RENTAL OF MEDICARE-COVERED DME ITEMS, INCLUDING OXYGEN, AND RECENT
LEGISLATION REDUCES PAYMENT AMOUNTS FOR FIVE CATEGORIES OF DME, INCLUDING OXYGEN, BEGINNING IN 2005 AND IMPOSES A PAYMENT FREEZE FOR OTHER DME THROUGH 2007.



MMA contains provisions that reduce payment amounts, beginning in 2005, for oxygen equipment, standard wheelchairs
(including standard power wheelchairs), nebulizers, diabetic supplies consisting of lancets and testing strips, hospital beds and air mattresses to the median prices paid under the Federal Employee Health Plan (FEHP). Reductions in
payment rates for 2005 established by CMS for the non-oxygen items subject to the FEHP provisions range between 2% and 14%, and are estimated to have reduced our net revenues by approximately $2.6 million in the first nine months of 2005. MMA also
freezes payment amounts for other covered DME items through 2007.



On September 13, 2004, the OIG released a preliminary report entitled, Medicare Payment Rates for Home Oxygen Equipment, which was intended to serve as the basis for establishing Medicare payment rates for oxygen in
2005. The CMS Administrator, in his comment letter to the OIG, agreed with the OIGs recommendation to use the pricing information contained in the OIG report to reduce the rates Medicare pays for home oxygen equipment in 2005. CMS also
concurred with the OIGs recommendation to consider alternative methods for determining future Medicare oxygen payment rates, such as competitive bidding, contracts with local or national providers, and capped rental arrangements.



On March 30, 2005, CMS released the new Medicare fee schedule amounts
for oxygen equipment. The new payment rates were made effective for claims for oxygen equipment furnished after January 1, 2005, that are received by Medicare on or after April 1, 2005. We estimate that the new fee schedule resulted in a
net price reduction of 8.7% for oxygen equipment provided by the Company to Medicare beneficiaries beginning in the second fiscal quarter of 2005. We estimate that these changes reduced net revenues in the second and third quarters of 2005 by
approximately $31.1 million in aggregate.



A SIGNIFICANT PERCENTAGE OF OUR
BUSINESS IS DERIVED FROM THE SALE OF MEDICARE-COVERED RESPIRATORY MEDICATIONS, AND RECENT LEGISLATION IMPOSES SIGNIFICANT REDUCTIONS IN MEDICARE REIMBURSEMENT FOR SUCH INHALATION DRUGS.



Historically, prescription drug coverage under Medicare has been limited to
drugs furnished incident to a physicians services and certain self-administered drugs, including inhalation drug therapies. Prior to MMA, Medicare reimbursement for covered Part B drugs, including inhalation drugs that we provide, had been
limited to 95 percent of the published average wholesale price (AWP) for the drug. MMA establishes new payment limits and procedures for drugs reimbursed under Medicare Part B. Payments for inhalation drugs furnished during 2004 declined
to 80 percent of the AWP in effect as of April 1, 2003, a reduction of approximately 15.8%. Beginning in 2005, inhalation drugs furnished to Medicare beneficiaries are reimbursed at 106 percent of the volume-weighted average selling price
(ASP) of the drug, as determined from data provided each quarter by drug manufacturers under a specific formula described in MMA.



On November 3, 2004, CMS issued its final rule, CMS-1429-FC, which established a monthly dispensing fee of $57.00 per customer for inhalation drug
therapy in addition to the ASP-based payment rate for the drugs dispensed. The rule also established an alternative dispensing fee of $80.00 per customer when dispensed in 90-day increments. Payment rates for inhalation drugs are updated quarterly
based on the manufacturer ASP calculated for the most recent calendar quarter for which data are available. Manufacturer ASP submissions are due to CMS not later than 30 days after the last day of each calendar quarter. Inhalation drug payment rates
in the third quarter of 2005 were based on ASP data from the first quarter of 2005. The new ASP-based payment formula in effect for 2005 has resulted in substantially reduced



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payment rates for inhalation drugs. The combination of the new ASP payment rates for inhalation drugs commencing in 2005
and the monthly dispensing fee of $57.00 is estimated to have reduced our net revenues by approximately $101.4 million in the first nine months of 2005.



On November 2, 2005, CMS issued its final rule, CMS-1502-FC, establishing the dispensing fee amount for inhalation drugs for 2006. The final rule
establishes a dispensing fee of $57.00 for the first 30-day period in which a Medicare beneficiary uses inhalation drugs and $33.00 for a 30-day supply of inhalation drugs for all other months. The rule also establishes a dispensing fee of $66.00
for a 90-day supply of inhalation drugs. We estimate that the reduction in the Medicare payment amount for the dispensing fee will reduce net revenues by approximately $46.0 million in 2006.



We continue to evaluate the impact of the reduced Medicare payment rates on
our business. We can not determine the outcome of any future rulemaking by CMS nor the impact that such rulemaking might have on our ability to continue to provide inhalation drugs to Medicare beneficiaries. Further, we can not determine whether
quarterly updates in ASP pricing data submitted by drug manufacturers and adopted by CMS will continue to result in further reductions in payment rates for inhalation drugs, and what impact such payment reductions could have on Lincare in 2005 and
beyond. Such payment adjustments could have a material adverse effect on our financial position and operating results.



RECENT REGULATORY CHANGES SUBJECT THE MEDICARE REIMBURSEMENT RATES FOR OUR EQUIPMENT AND SERVICES TO POTENTIAL DISCRETIONARY ADJUSTMENT BY CMS, WHICH COULD REDUCE OUR
REVENUES, NET INCOME AND CASH FLOWS.



In February 2003, a
final rule governing CMS Inherent Reasonableness, or IR, authority became effective. The IR rule establishes a process for adjusting fee schedule amounts for Medicare Part B services when existing payment amounts are determined to be either
grossly excessive or deficient. The rule describes the factors that CMS or its contractors will consider in making such determinations and the procedures that will be followed in establishing new payment amounts. To date, no payment adjustments have
occurred or been proposed as a result of the IR rule.



The
effectiveness of the IR rule itself does not trigger payment adjustments for any items or services. Nevertheless, the IR rule puts in place a process that could eventually have a significant impact on Medicare payments for our equipment and
services. We can not predict whether or when CMS will exercise its IR authority with respect to our equipment and services. Such payment adjustments, if implemented, could reduce our revenues, net income and cash flows.



RECENT LEGISLATION ESTABLISHING A COMPETITIVE BIDDING PROCESS UNDER MEDICARE COULD REDUCE
OUR REVENUES, NET INCOME AND CASH FLOWS.



MMA instructs
the Secretary to establish and implement programs under which competitive acquisition areas are established throughout the United States for contract award purposes for the furnishing of competitively priced items of DME, including oxygen equipment.
The program would be implemented in phases such that competition under the program occurs in 10 of the largest MSAs in 2007, 80 of the largest MSAs in 2009, and additional areas after 2009. Items selected for competitive acquisition may be phased in
first among the highest cost and highest volume items and services or those items and services that the Secretary determines have the largest savings potential. In carrying out such programs, the Secretary may exempt rural areas and areas with
low-population density within urban areas that are not competitive, unless there is a significant national market through mail order for a particular item or service.



For each competitive acquisition area, the Secretary would conduct a competition under which providers would submit bids to
supply certain covered items of DME. Successful bidders would be expected to meet certain program quality standards in order to be awarded a contract and only successful bidders could supply the covered items to Medicare beneficiaries in the
acquisition area. The applicable contract award prices are expected to be less than would be paid under current Medicare fee schedules and contracts would be re-bid at least every three years. The Secretary will be required to award contracts to
multiple entities submitting bids in each area for an item or service, but would have the authority to limit the number of contractors in a competitive acquisition area to the number needed to meet projected demand. The Secretary may use competitive
bid pricing information to adjust the payment amount otherwise in effect for an area that is not a competitive acquisition area. We can not predict the outcome of the competitive acquisition program or the Medicare payment rates that will be in
effect in 2007 and beyond for the items subject to competitive bidding. Competitive bidding, when implemented, could have a material adverse effect on our financial position and operating results.



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FUTURE REDUCTIONS IN REIMBURSEMENT RATES UNDER MEDICAID COULD REDUCE OUR REVENUES, NET INCOME AND CASH FLOWS.



Due to budgetary shortfalls, many states are considering,
or have enacted, cuts to their Medicaid programs, including funding for our equipment and services. These cuts have included, or may include, elimination or reduction of coverage for some or all of our equipment and services, amounts eligible for
payment under co-insurance arrangements, or payment rates for covered items. Approximately 5% of our customers are eligible for primary Medicaid benefits, and State Medicaid programs fund approximately 11% of our payments from primary and secondary
insurance benefits. Continued state budgetary pressures could lead to further reductions in funding for the reimbursement for our equipment and services which, in turn, could have a material adverse effect on our financial position and operating
results.



FUTURE REDUCTIONS IN REIMBURSEMENT RATES FROM PRIVATE PAYORS COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION AND OPERATING RESULTS.



Payors such as private insurance companies and employers are under pressure to increase profitability and reduce costs. In response, certain payors are limiting coverage or reducing reimbursement rates for the
equipment and services we provide. Approximately 17% of our customers and approximately 26% of our primary and secondary payments are derived from private payors. Continued financial pressures on these entities could lead to further reimbursement
reductions for our equipment and services that could have a material adverse effect on our financial condition and operating results.



WE DEPEND UPON REIMBURSEMENT FROM THIRD-PARTY PAYORS FOR A SIGNIFICANT MAJORITY OF OUR REVENUES, AND IF WE FAIL TO MANAGE THE COMPLEX AND LENGTHY REIMBURSEMENT
PROCESS, OUR BUSINESS AND OPERATING RESULTS COULD SUFFER.



We derive a significant majority of our revenues from reimbursement by third-party payors. We accept assignment of insurance benefits from customers and, in most instances, invoice and collect payments directly from Medicare, Medicaid and
private insurance carriers, as well as from customers under co-insurance provisions. Approximately 55% of our revenues are derived from Medicare, 26% from private insurance carriers, 11% from Medicaid and the balance directly from individual
customers and commercial entities.



Our financial condition and
results of operations may be affected by the reimbursement process, which in the health care industry is complex and can involve lengthy delays between the time that services are rendered and the time that the reimbursement amounts are settled.
Depending on the payor, we may be required to obtain certain payor-specific documentation from physicians and other health care providers before submitting claims for reimbursement. Certain payors have filing deadlines and they will not pay claims
submitted after such time. We can not assure you that we will be able to continue to effectively manage the reimbursement process and collect payments for our equipment and services promptly.



WE ARE SUBJECT TO EXTENSIVE FEDERAL AND STATE REGULATION, AND IF WE FAIL TO COMPLY WITH
APPLICABLE REGULATIONS, WE COULD SUFFER SEVERE CRIMINAL OR CIVIL SANCTIONS OR BE REQUIRED TO MAKE SIGNIFICANT CHANGES TO OUR OPERATIONS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.



The federal government and all states in which we operate regulate many
aspects of our business. In particular, our operating centers are subject to federal laws that regulate the repackaging of drugs (including oxygen) and interstate motor-carrier transportation. Our operations also are subject to state laws governing,
among other things, pharmacies, nursing services, distribution of medical equipment and certain types of home health activities. Certain of our employees are subject to state laws and regulations governing the ethics and professional practices of
respiratory therapy, pharmacy and nursing.



As a health care
supplier, we are subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs. The marketing, billing, documenting and other practices
of health care companies are all subject to government scrutiny. To ensure compliance with Medicare and other regulations, regional carriers often conduct audits and request customer records and other documents to support our claims for payment.
Similarly, government agencies periodically open investigations and obtain information from health care providers pursuant to the legal process. Violations of federal and state regulations can



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result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and
other reimbursement programs, which could have a material adverse effect on our business.



Health care is an area of rapid regulatory change. Changes in the law and new interpretations of existing laws may affect permissible activities, the costs associated with doing business, and reimbursement amounts
paid by federal, state and other third-party payors. We can not predict the future of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations, or possible changes in national health care policies.
Future legislation and regulatory changes could have a material adverse effect on our business.



COMPLIANCE WITH NEW REGULATIONS UNDER THE FEDERAL HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996 AND RELATED RULES, OR HIPAA, RELATING TO THE TRANSMISSION AND PRIVACY OF HEALTH INFORMATION COULD IMPOSE
ADDITIONAL SIGNIFICANT COSTS ON OUR OPERATIONS.



Numerous
federal and state laws and regulations, including HIPAA, govern the collection, dissemination, use and confidentiality of patient-identifiable health information. HIPAA requires us to comply with standards for the use and disclosure of health
information within our company and with third parties. HIPAA also includes standards for common health care electronic transactions and code sets, such as claims information, plan eligibility, payment information and the use of electronic
signatures, and privacy and electronic security of individually identifiable health information. Each set of HIPAA regulations has a specified compliance date and requires health care providers, including us, in addition to health plans and
clearinghouses, to develop and maintain policies and procedures with respect to protected health information that is used or disclosed.



If we do not comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions.
New health information standards, whether implemented pursuant to HIPAA or otherwise, could have a significant effect on the manner in which we handle health care related data and communicate with payors, and the cost of complying with these
standards could be significant.



WE MAY UNDERTAKE ACQUISITIONS THAT COULD
SUBJECT US TO UNANTICIPATED LIABILITIES AND THAT COULD FAIL TO ACHIEVE EXPECTED BENEFITS.



Our strategy is to increase our market share through internal growth and strategic acquisitions. Consideration for the acquisitions has generally consisted of cash, unsecured non-interest bearing obligations and the
assumption of certain liabilities.



The implementation of an
acquisition strategy entails certain risks, including inaccurate assessment of disclosed liabilities, the existence of undisclosed liabilities, entry into markets in which we may have limited or no experience, diversion of managements
attention and human resources from our underlying business, difficulties in integrating the operations of an acquired business or in realizing anticipated efficiencies and cost savings, failure to retain key management or operating personnel of the
acquired business, and an increase in indebtedness and a limitation in the ability to access additional capital on favorable terms. The successful integration of an acquired business may be dependent on the size of the acquired business, condition
of the customer billing records, and complexity of system conversions and execution of the integration plan by local management. If we do not successfully integrate the acquired business, the acquisition could fail to achieve its expected revenue
contribution or there could be delays in the billing and collection of claims for services rendered to customers, which may have a material adverse effect on our financial position and operating results.



WE FACE INTENSE NATIONAL, REGIONAL AND LOCAL COMPETITION AND IF WE ARE UNABLE TO COMPETE
SUCCESSFULLY, WE WILL LOSE REVENUES AND OUR BUSINESS WILL SUFFER.



The home respiratory market is a fragmented and highly competitive industry. We compete against other national providers and, by our estimate, more than 2,000 local and regional providers. Home respiratory companies compete primarily on the
basis of service rather than price since reimbursement levels are established by Medicare and Medicaid or by the individual determinations of private health plans.



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Our ability to compete successfully and to increase our referrals of new customers are highly dependent
upon our reputation within each local health care market for providing responsive, professional and high-quality service and achieving strong customer satisfaction. Given the relatively low barriers to entry in the home respiratory market, we expect
that the industry will become increasingly competitive in the future. Increased competition in the future could limit our ability to attract and retain key operating personnel and achieve continued growth in our core business.



INCREASES IN OUR COSTS COULD ERODE OUR PROFIT MARGINS AND SUBSTANTIALLY REDUCE OUR NET
INCOME AND CASH FLOWS.



Cost containment in the health
care industry, fueled, in part, by federal and state government budgetary shortfalls, is likely to result in constant or decreasing reimbursement amounts for our equipment and services. As a result, we must control our operating cost levels,
particularly labor and related costs, which account for a significant component of our operating costs and expenditures. We compete with other health care providers to attract and retain qualified or skilled personnel. We also compete with various
industries for lower-wage administrative and service employees. Since reimbursement rates are established by fee schedules mandated by Medicare, Medicaid and private payors, we are not able to offset the effects of general inflation in labor and
related cost components, if any, through increases in prices for our equipment and services. Consequently, such cost increases could erode our profit margins and reduce our net income.



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Item 3.Quantitative and Qualitative Disclosures About Market Risk



We are exposed to changes in interest rates as a result of our revolving bank credit facility which is based on the London Interbank Offered Rate. A 10%
increase in interest rates related to our revolving bank credit facility would not alone have a material adverse effect on our earnings over the next fiscal year or the fair value of our revolving bank credit facility.



The fair value of our debt securities is subject to change as a result of
changes in interest rates. We estimate potential changes in the fair value of interest rate sensitive financial instruments based on a hypothetical decrease (or increase) in interest rates. Our use of this methodology to quantify the market
risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. The quantitative information about market risk is necessarily limited because it does not take into account anticipated
operating and financial transactions.



The following table sets
forth the estimated fair value of our long-term obligations and our estimate of the impact from a 10% decrease in interest rates on the fair value of our long-term obligations and the associated change in annual interest expense. We had no
derivative securities as of September 30, 2005.



Market
Risk Sensitive Instruments  Interest Rate Sensitivity (assuming 10% Decrease in Interest Rates):



|                               |  |            |         |                |   |            |  |                              |         |  |   |      
|------------------------------ |  | ---------- | ------- | -------------- | - | ---------- |  | ---------------------------- | ------- |  | - | -----
|(dollars in thousands)         |  | FaceAmount |         | CarryingAmount |   | Fair Value |  | EstimatedChange inFair Value
|As of September 30, 2005:      |  |            |         |                |   |            |  |                              |         |  |   |      
|Convertible debt               |  | $          | 275,000 |                | $ | 275,000    |  | $                            | 275,000 |  | $ | 1,989
|Deferred obligations           |  |            | 18,571  |                |   | 18,571     |  |                              | 18,571  |  |   | 0    
|Senior secured notes           |  |            | 0       |                |   | 0          |  |                              | 0       |  |   | 0    
|Revolving bank credit facility |  |            | 0       |                |   | 0          |  |                              | 0       |  |   | 0    
|                               |  |            |         |               
|As of December 31, 2004:       |  |            |         |                |   |            |  |                              |         |  |   |      
|Convertible debt               |  | $          | 275,000 |                | $ | 275,000    |  | $                            | 295,625 |  | $ | 2,234
|Deferred obligations           |  |            | 23,230  |                |   | 23,230     |  |                              | 23,230  |  |   | 0    
|Senior secured notes           |  |            | 45,000  |                |   | 45,000     |  |                              | 46,591  |  |   | 116  
|Revolving bank credit facility |  |            | 0       |                |   | 0          |  |                              | 0       |  |   | 0    



Item 4.Controls and Procedures



The Company has conducted an evaluation of its disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, as of the end of the
period covered by this report (the Evaluation Date). Based on its evaluation, the Companys principal executive officer and principal financial officer have concluded that the Companys disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company is recorded, processed, summarized and reported within the required time periods.



No change in the Companys internal control over financial reporting (as defined in Rules 13a-15(f) and 15d  15(f) under the Securities and
Exchange Act of 1934, as amended) occurred during the fiscal quarter ended September 30, 2005, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1.Legal Proceedings



As a health care provider, the Company is subject to extensive government regulation, including numerous laws directed at preventing fraud and abuse and laws regulating reimbursement under various government programs.
The marketing, billing, documenting and other practices of health care companies are all subject to government scrutiny. To ensure compliance with Medicare and other regulations, regional carriers often conduct audits and request patient records and
other documents to support claims submitted by Lincare for payment of services rendered to customers. Similarly, government agencies periodically open investigations and obtain information from health care providers pursuant to legal process.



Violations of federal and state regulations can result in
severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.



From time to time, the Company receives inquiries from various government agencies requesting customer records and other documents. It has been the
Companys policy to cooperate with all such requests for information. There are several pending government inquiries, but the government has not instituted any proceedings or served us with any complaints as a result of these inquiries.
However, the Company can provide no assurances as to the duration or outcome of these inquiries.



Private litigants may also make claims against health care providers for violations of health care laws in actions known as qui tam suits. In these
cases, the government has the opportunity to intervene in, and take control of, the litigation. We are a defendant in certain qui tam proceedings. The government has declined to intervene in all unsealed qui tam actions of which we are
aware and we are vigorously defending these suits.



We are also
involved in certain other claims and legal actions arising in the ordinary course of our business. The ultimate disposition of all such matters is not currently expected to have a material adverse impact on our financial position, results of
operations or liquidity.



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



During the nine months ended September 30, 2005, the Company repurchased approximately 5.3 million shares of its common stock in
the open market at a cost of approximately $220.8 million under a publicly announced repurchase program approved by its Board of Directors.



ISSUER PURCHASES OF EQUITY SECURITIES



|                                        |  |                                |  |                             |       |                                                               |           |                                                                                    |   |            
|--------------------------------------- |  | ------------------------------ |  | --------------------------- | ----- | ------------------------------------------------------------- | --------- | ---------------------------------------------------------------------------------- | - | -----------
|Period                                  |  | Total Numberof SharesPurchased |  | Average PricePaid Per Share |       | Total Numberof SharesPurchased asPart of theRepurchaseProgram |           | ApproximateDollar Value ofShares that MayYet BePurchasedUnder theRepurchaseProgram
|January 1, 2005 to January 31, 2005     |  | 0                              |  |                             |      |                                                               | 0         |                                                                                    | $ | 250,000,000
|February 1, 2005 to February 28, 2005   |  | 201,700                        |  | $                           | 40.23 |                                                               | 201,700   |                                                                                    | $ | 241,886,000
|March 1, 2005 to March 31, 2005         |  | 1,437,867                      |  | $                           | 40.79 |                                                               | 1,437,867 |                                                                                    | $ | 183,235,000
|April 1, 2005 to April 30, 2005         |  | 1,674,000                      |  | $                           | 42.55 |                                                               | 1,674,000 |                                                                                    | $ | 112,003,000
|May 1, 2005 to May 31, 2005             |  | 405,500                        |  | $                           | 42.46 |                                                               | 405,500   |                                                                                    | $ | 94,784,000 
|June 1, 2005 to June 30, 2005           |  | 0                              |  |                             |      |                                                               | 0         |                                                                                    | $ | 94,784,000 
|July 1, 2005 to July 31, 2005           |  | 1,605,300                      |  | $                           | 40.87 |                                                               | 1,605,300 |                                                                                    | $ | 29,169,000 
|August 1, 2005 to August 31, 2005       |  | 0                              |  |                             |      |                                                               | 0         |                                                                                    | $ | 29,169,000 
|September 1, 2005 to September 30, 2005 |  | 0                              |  |                             |      |                                                               | 0         |                                                                                    | $ | 29,169,000 
|                                        |  |                                |  |                             |       |                                                               |           |                                                                                    |   |            
|Total                                   |  | 5,324,367                      |  | $                           | 41.48 |                                                               | 5,324,367 |                                                                                    |   |            
|                                        |  |                                |  |                             |       |                                                               |           |                                                                                    |   |            



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Item 3.Defaults Upon Senior Securities- Not Applicable



Item 4.Submission of Matters to a Vote of the Security Holders- Not Applicable



Item 5.Other Information- Not Applicable



Item 6.Exhibits and Reports on Form 8-K



| | (a) | Exhibits included or incorporated herein: See Exhibit Index.
| | --- | ------------------------------------------------------------



| | (b) | Furnished July 26, 2005: Announcement of the financial results for the quarter ended June 30, 2005.
| | --- | ---------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURE



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.



LINCARE HOLDINGS INC.Registrant/s/ PAUL G. GABOSPaul G. Gabos Secretary, Chief Financial Officer and Principal Accounting Officer




November 8, 2005



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INDEX OF EXHIBITS



|              |  |                                                                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                                                                                      
|3.10 (A)      |  | Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.                                                                                                                                                   
|              | 
|3.11 (A)      |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.                                                                                                                   
|              | 
|3.20 (B)      |  | Amended and Restated By-Laws of Lincare Holdings Inc.                                                                                                                                                                        
|              | 
|4.10 (C)      |  | Lincare Holdings Inc. Indenture dated as of June 11, 2003                                                                                                                                                                    
|              | 
|4.20 (C)      |  | Lincare Holdings Inc. Registration Rights Agreement dated as of June 11, 2003                                                                                                                                                
|              | 
|31.1          |  | Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by John P.
Byrnes, Chief Executive Officer
|              | 
|31.2          |  | Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Paul G.
Gabos, Chief Financial Officer 
|              | 
|32.1          |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John P. Byrnes, Chief Executive Officer                                                  
|              | 
|32.2          |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Paul G. Gabos, Chief Financial Officer                                                   

---

|A | Incorporated by reference to the Registrants Form 10-Q dated August 12, 1998.
|- | ------------------------------------------------------------------------------

|B | Incorporated by reference to the Registrants Form 10-Q dated August 13, 2002.
|- | ------------------------------------------------------------------------------

|C | Incorporated by reference to the Registrants Form 8-K dated June 12, 2003.
|- | ---------------------------------------------------------------------------



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