##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(MARK ONE)

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

For The Quarterly Period Ended September 30, 2008

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





LINCARE HOLDINGS INC.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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





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 a large accelerated filer, an accelerated filer, or non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|Large accelerated filer |  | x                                                |  | Accelerated filer         |  |  ̈
|                        |  |                                                  | 
|Non-accelerated filer   |  |  ̈  (Do not check if a smaller reporting company) |  | Smaller reporting company |  |  ̈

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

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                              |  |                                
|----------------------------- |  | -------------------------------
|Class                         |  | Outstanding at October 31, 2008
|Common Stock, $0.01 par value |  | 74,378,369                     









---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

FORM 10-Q

For The Quarterly Period
Ended September 30, 2008

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 condensed consolidated financial statements (unaudited)                      |  | 6   
|Item 2.                       |  | Managements Discussion and Analysis of Results of Operations and Financial Condition |  | 16  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 32  
|Item 4.                       |  | Controls and Procedures                                                               |  | 32  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 33  
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 34  
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  | 34  
|Item 4.                       |  | Submission of Matters to a Vote of the Security Holders                               |  | 34  
|Item 5.                       |  | Other Information                                                                     |  | 34  
|Item 6.                       |  | Exhibits                                                                              |  | 34  
|SIGNATURE                     |  | 35                                                                                   
|INDEX OF EXHIBITS             |  | S-1                                                                                  



2



---

##### 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 30,2008 |           | December 31,2007
|ASSETS                                                |  |                   |           |                  |   |          
|Current assets:                                       |  |                   |           |                  |   |          
|Cash and cash equivalents                             |  | $                 | 32,916    |                  | $ | 51,707   
|Short-term investments                                |  |                   | 0         |                  |   | 98,250   
|Accounts receivable, net                              |  |                   | 198,915   |                  |   | 198,918  
|Income tax receivable                                 |  |                   | 4,394     |                  |   | 3,399    
|Inventories                                           |  |                   | 10,188    |                  |   | 8,971    
|Prepaid and other current assets                      |  |                   | 2,083     |                  |   | 4,359    
|Deferred income taxes                                 |  |                   | 20,638    |                  |   | 607      
|                                                      |  |                   |           |                  |   |          
|Total current assets                                  |  |                   | 269,134   |                  |   | 366,211  
|                                                      |  |                   |           |                  |   |          
|Property and equipment, net                           |  |                   | 346,995   |                  |   | 340,151  
|Long-term investments                                 |  |                   | 92,900    |                  |   | 0        
|Goodwill                                              |  |                   | 1,214,005 |                  |   | 1,208,370
|Other                                                 |  |                   | 11,458    |                  |   | 13,632   
|                                                      |  |                   |           |                  |   |          
|Total assets                                          |  | $                 | 1,934,492 |                  | $ | 1,928,364
|                                                      |  |                   |           |                  |   |          
|LIABILITIES AND STOCKHOLDERS EQUITY                  |  |                   |           |                  |   |          
|Current liabilities:                                  |  |                   |           |                  |   |          
|Current installments of long-term obligations         |  | $                 | 72,673    |                  | $ | 288,044  
|Accounts payable                                      |  |                   | 61,142    |                  |   | 60,245   
|Accrued expenses:                                     |  |                   |           |                  |   |          
|Compensation and benefits                             |  |                   | 34,378    |                  |   | 22,134   
|Liability insurance                                   |  |                   | 17,942    |                  |   | 15,806   
|Other current liabilities                             |  |                   | 59,920    |                  |   | 52,245   
|                                                      |  |                   |           |                  |   |          
|Total current liabilities                             |  |                   | 246,055   |                  |   | 438,474  
|                                                      |  |                   |           |                  |   |          
|Long-term obligations, excluding current installments |  |                   | 550,051   |                  |   | 550,163  
|Deferred income taxes and other taxes                 |  |                   | 241,698   |                  |   | 205,939  
|                                                      |  |                   |           |                  |   |          
|Total liabilities                                     |  |                   | 1,037,804 |                  |   | 1,194,576
|                                                      |  |                   |           |                  |   |          
|Commitments and contingencies:                        |  |                   |           |                  |   |          
|Stockholders equity:                                 |  |                   |           |                  |   |          
|Common stock                                          |  |                   | 734       |                  |   | 742      
|Additional paid-in capital                            |  |                   | 475,455   |                  |   | 456,437  
|Retained earnings                                     |  |                   | 420,499   |                  |   | 276,609  
|                                                      |  |                   |           |                  |   |          
|Total stockholders equity                            |  |                   | 896,688   |                  |   | 733,788  
|                                                      |  |                   |           |                  |   |          
|Total liabilities and stockholders equity            |  | $                 | 1,934,492 |                  | $ | 1,928,364
|                                                      |  |                   |           |                  |   |          

See accompanying notes to condensed consolidated financial statements (unaudited).



3



---

##### 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 30,2008          |         |   | September 30,2007         |   |         | September 30,2008 |  |   | September 30,2007 |  
|Net revenues                                                                      |  | $                          | 405,677 |   |                           | $ | 408,152 |                   |  | $ | 1,249,488         |   |  | $ | 1,183,694 |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Costs and expenses:                                                               |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Cost of goods and services                                                        |  |                            | 94,969  |   |                           |   | 101,398 |                   |  |   | 302,362           |   |  |   | 289,494   |  
|Operating expenses                                                                |  |                            | 100,508 |   |                           |   | 91,458  |                   |  |   | 294,442           |   |  |   | 272,939   |  
|Selling, general and administrative expenses                                      |  |                            | 82,165  |   |                           |   | 80,128  |                   |  |   | 243,708           |   |  |   | 236,190   |  
|Bad debt expense                                                                  |  |                            | 6,085   |   |                           |   | 6,122   |                   |  |   | 18,742            |   |  |   | 17,755    |  
|Depreciation and amortization expense                                             |  |                            | 29,015  |   |                           |   | 29,957  |                   |  |   | 88,618            |   |  |   | 83,694    |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|                                                                                  |  |                            | 312,742 |   |                           |   | 309,063 |                   |  |   | 947,872           |   |  |   | 900,072   |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Operating income                                                                  |  |                            | 92,935  |   |                           |   | 99,089  |                   |  |   | 301,616           |   |  |   | 283,622   |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Other income (expense):                                                           |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Interest income                                                                   |  |                            | 1,390   |   |                           |   | 525     |                   |  |   | 5,163             |   |  |   | 1,650     |  
|Interest expense                                                                  |  |                            | (5,466  | ) |                           |   | (4,864  | )                 |  |   | (19,190           | ) |  |   | (15,595   | )
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|                                                                                  |  |                            | (4,076  | ) |                           |   | (4,339  | )                 |  |   | (14,027           | ) |  |   | (13,945   | )
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Income before income taxes                                                        |  |                            | 88,859  |   |                           |   | 94,750  |                   |  |   | 287,589           |   |  |   | 269,677   |  
|Income tax expense                                                                |  |                            | 33,073  |   |                           |   | 36,111  |                   |  |   | 108,550           |   |  |   | 101,188   |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Net income                                                                        |  | $                          | 55,786  |   |                           | $ | 58,639  |                   |  | $ | 179,039           |   |  | $ | 168,489   |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Basic earnings per common share                                                   |  | $                          | 0.76    |   |                           | $ | 0.69    |                   |  | $ | 2.46              |   |  | $ | 1.98      |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Diluted earnings per common share                                                 |  | $                          | 0.76    |   |                           | $ | 0.66    |                   |  | $ | 2.38              |   |  | $ | 1.89      |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Weighted average number of common shares outstanding                              |  |                            | 73,006  |   |                           |   | 84,562  |                   |  |   | 72,903            |   |  |   | 85,034    |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  
|Weighted average number of common shares and common share equivalents outstanding |  |                            | 73,435  |   |                           |   | 90,551  |                   |  |   | 76,346            |   |  |   | 91,392    |  
|                                                                                  |  |                            |         |   |                           |   |         |                   |  |   |                   |   |  |   |           |  

See accompanying notes to condensed consolidated financial statements (unaudited).



4



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                  |  |                           |          |   |                   |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                  |  | For The Nine Months Ended |         
|                                                                                  |  | September 30,2008         |          |   | September 30,2007 |  
|Cash flows from operating activities:                                             |  |                           |          |   |                   |   |          |  
|Net income                                                                        |  | $                         | 179,039  |   |                   | $ | 168,489  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                           |          |   |                   |   |          |  
|Bad debt expense                                                                  |  |                           | 18,742   |   |                   |   | 17,755   |  
|Depreciation and amortization expense                                             |  |                           | 88,618   |   |                   |   | 83,694   |  
|Net gain on disposal of property and equipment                                    |  |                           | (30      | ) |                   |   | (27      | )
|Amortization of debt issuance costs                                               |  |                           | 2,211    |   |                   |   | 321      |  
|Stock-based compensation expense                                                  |  |                           | 12,366   |   |                   |   | 12,892   |  
|Deferred income taxes                                                             |  |                           | 22,231   |   |                   |   | 20,116   |  
|Excess tax benefit from stock-based compensation                                  |  |                           | (19      | ) |                   |   | (4,133   | )
|Change in assets and liabilities net of effects of acquired businesses:           |  |                           |          |   |                   |   |          |  
|Increase in accounts receivable                                                   |  |                           | (18,082  | ) |                   |   | (48,253  | )
|Increase in inventories                                                           |  |                           | (1,121   | ) |                   |   | (1,216   | )
|Decrease in prepaid and other assets                                              |  |                           | 2,274    |   |                   |   | 2,569    |  
|Increase in accounts payable                                                      |  |                           | 757      |   |                   |   | 13,174   |  
|Increase in accrued expenses                                                      |  |                           | 15,502   |   |                   |   | 22,029   |  
|(Decrease) increase in income taxes payable                                       |  |                           | (425     | ) |                   |   | 17,814   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net cash provided by operating activities                                         |  |                           | 322,063  |   |                   |   | 305,224  |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash flows from investing activities:                                             |  |                           |          |   |                   |   |          |  
|Proceeds from sale of property and equipment                                      |  |                           | 19,745   |   |                   |   | 93       |  
|Capital expenditures                                                              |  |                           | (114,773 | ) |                   |   | (95,917  | )
|Purchases of investments                                                          |  |                           | (31,450  | ) |                   |   | (96,375  | )
|Sales and maturities of investments                                               |  |                           | 36,800   |   |                   |   | 80,550   |  
|Business acquisitions, net of cash acquired and purchase price adjustments        |  |                           | (6,120   | ) |                   |   | 0        |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net cash used in investing activities                                             |  |                           | (95,798  | ) |                   |   | (111,649 | )
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash flows from financing activities:                                             |  |                           |          |   |                   |   |          |  
|Proceeds from issuance of debt                                                    |  |                           | 165,000  |   |                   |   | 205,435  |  
|Payments of principal on debt                                                     |  |                           | (380,872 | ) |                   |   | (143,036 | )
|Payments of debt issuance costs                                                   |  |                           | (128     | ) |                   |   | (7       | )
|Proceeds from exercise of stock options and issuance of common shares             |  |                           | 6,136    |   |                   |   | 35,103   |  
|Excess tax benefit from stock-based compensation                                  |  |                           | 19       |   |                   |   | 4,133    |  
|Payments to acquire treasury stock                                                |  |                           | (35,211  | ) |                   |   | (300,039 | )
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net cash used in financing activities                                             |  |                           | (245,056 | ) |                   |   | (198,411 | )
|                                                                                  |  |                           |          |   |                   |   |          |  
|Net decrease in cash and cash equivalents                                         |  |                           | (18,791  | ) |                   |   | (4,836   | )
|Cash and cash equivalents, beginning of period                                    |  |                           | 51,707   |   |                   |   | 25,075   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                         | 32,916   |   |                   | $ | 20,239   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Supplemental disclosure of cash flow information:                                 |  |                           |          |   |                   |   |          |  
|Cash paid for interest                                                            |  | $                         | 13,016   |   |                   | $ | 12,378   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Cash paid for income taxes                                                        |  | $                         | 93,337   |   |                   | $ | 67,344   |  
|                                                                                  |  |                           |          |   |                   |   |          |  
|Supplemental disclosure of non-cash financing activities:                         |  |                           |          |   |                   |   |          |  
|Assets acquired under capital lease                                               |  | $                         | 0        |   |                   | $ | 435      |  
|                                                                                  |  |                           |          |   |                   |   |          |  

See accompanying notes to condensed consolidated financial statements (unaudited).



5



---

##### Table of Contents

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 accepted in the United States 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, 2007. 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. Certain amounts in the prior years financial statements have been reclassified to conform to the current year presentation. 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. It is at least reasonably possible that a change in those estimates
will occur in the near term.

Investments: 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 auction rate securities not classified as trading securities or as securities to be held to maturity. The Company has classified all investments as available-for-sale. There were no unrealized holding gains or losses on available-for-sale
securities in the periods presented.

At September 30, 2008, the Company held $92.9 million of investment grade auction rate
securities. These securities are variable-rate debt instruments with contractual maturities between the years 2020 and 2041 with interest rates that reset every seven or 35 days pursuant to a bidding process as determined by the underlying security
indentures. Under the provisions of SFAS No. 115, the investments are classified as available-for-sale and are carried at fair value, with any unrealized gains and losses included in comprehensive income as a separate component of
shareholders equity. The book value of available-for-sale investments held at September 30, 2008, approximated fair value. Therefore, the Company had no reported unrealized gains or losses.

During the first quarter of 2008, the Company reclassified all of its investments in auction rate securities from short-term to long-term investments. Of
the auction rate securities held as of September 30, 2008, $60.4 million are secured by pools of student loans guaranteed by state-designated guaranty agencies or monoline insurers or reinsured by the United States government. The remaining
$32.5 million are comprised of securities backed by pools of municipal bonds. All of the auction rate securities held by the Company are senior obligations under the applicable indentures authorizing the issuance of such securities. Recent turmoil
in the credit markets has resulted in widespread failures to attract demand for such securities at the periodic auction dates occurring subsequent to December 31, 2007. As of September 30, 2008, all of the securities held by the Company
continued to experience auction failures, resulting in the Company continuing to hold such securities. The Company received partial redemptions, at par, in the amount of $175,000 in February 2008, $250,000 in April 2008, $3.4 million in June 2008,
$1.3 million in July 2008 and $250,000 in August 2008.

All of the auction rate securities owned by the Company were purchased from UBS
Financial Services, Inc., a subsidiary of UBS AG (UBS) and are held, for the benefit of the Company, by UBS. On August 8, 2008, UBS announced a settlement in principle with the Securities and Exchange Commission, the New York
Attorney General and other state regulatory agencies to restore liquidity to remaining clients who hold auction rate securities.



6



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



In October 2008, the Company received an offer (the Offer) from UBS to sell to them at
par value all of the auction rate securities originally purchased from UBS (approximately $92.9 million) in accordance with the terms of the settlement agreement. Under the settlement agreement, the Company will be able to redeem all of its auction
rate securities at par during a two-year time period beginning June 30, 2010, while UBS may purchase all or some of the auction rate securities at par from the Company at any time through July 2, 2012. The Offer is non-transferable and
expires on November 14, 2008.

Pursuant to the Companys acceptance of the offer, UBS purchased a portion of the Companys
holdings of auction rate securities at par on November 6, 2008 in the amount of $32.5 million.

The Company will continue to monitor
credit market conditions to assess the liquidity of its investments. Due to its ability to access its cash and cash equivalents, amounts available under its revolving credit facility, and its expected operating cash flows, the Company believes that
it has adequate liquidity available to meet its obligations.

Concentration of Credit Risk: The Companys revenues are
generated through locations in 48 states. The Company generally does not require collateral or other security in extending credit to customers; however, the Company routinely obtains assignment of (or is otherwise entitled to receive) benefits
receivable under the health insurance programs, plans or policies of its customers. Included in the Companys net revenues is reimbursement from government sources under Medicare, Medicaid and other federally funded programs, which aggregated
approximately 60% and 64% of net revenues for the nine months ended September 30, 2008 and 2007, respectively. The exclusion of the Company from participating in federally funded programs would have a material adverse effect on the
Companys business, financial condition, operating results and cash flows.

Revenue Recognition: The Companys revenues
are recognized on an accrual basis in the period in which services and related products are provided to customers and are recorded at net realizable amounts estimated to be paid by customers and third-party payors. The Companys billing system
contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to a customer. The Company has established an
allowance to account for sales adjustments that result from differences between the payment amount received and the expected realizable amount. Actual adjustments that result from differences between the payment amount received and the expected
realizable amount are recorded against the allowance for sales adjustments and are typically identified and ultimately recorded at the point of cash application or when otherwise determined pursuant to the Companys collection procedures. The
Company reports revenues in its financial statements net of such adjustments.

Certain items provided by the Company are reimbursed under
rental arrangements that generally provide for fixed monthly payments established by fee schedules for as long as the patient is using the equipment and medical necessity continues (subject to capped rental arrangements that limit the rental payment
periods in some instances and that may result in a transfer of title to the equipment at the end of the rental payment period). Once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the
initial date of delivery. The Company recognizes rental arrangement revenues ratably over the monthly service period and defers revenue for the portion of the monthly bill that is unearned. No separate payment is earned from the initial equipment
delivery and setup process. During the rental period, the Company is responsible for servicing the equipment and providing routine maintenance, if necessary.

The Companys revenue recognition policy is consistent with the criteria set forth in Staff Accounting Bulletin 104, Revenue Recognition (SAB 104) for determining when revenue is realized
or realizable and earned. The Company recognizes revenue in accordance with the requirements of SAB 104 that:



| |  |  | persuasive evidence of an arrangement exists;
| | - |  | ---------------------------------------------



| |  |  | delivery has occurred;
| | - |  | ----------------------



| |  |  | the sellers price to the buyer is fixed or determinable; and
| | - |  | -------------------------------------------------------------



| |  |  | collectibility is reasonably assured.
| | - |  | -------------------------------------

Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net realizable values at the time products are
provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement
amounts for certain services from certain payors may result in adjustments to amounts originally recorded.



7



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Such adjustments are typically identified and recorded by the Company at the point of cash application, claim denial or account review. Included in accounts
receivable are earned but unbilled accounts receivable from earned revenues. Unbilled accounts receivable represent charges for equipment and supplies delivered to customers for which invoices have not yet been generated by the billing system. Prior
to the delivery of equipment and supplies to customers, the Company performs certain certification and approval procedures to ensure collection is reasonably assured. Once the items are delivered, unbilled accounts receivable are recorded at net
amounts expected to be paid by customers and third-party payors. Billing delays, ranging from several weeks to several months, can occur due to delays in obtaining certain required payor-specific documentation from internal and external sources as
well as interim transactions occurring between cycle billing dates established for each customer within the billing system, and business acquisitions awaiting assignment of new provider enrollment identification numbers. In the event that a
third-party payor does not accept the claim, the customer is ultimately responsible. Accounts receivable are reported net of allowances for sales adjustments and uncollectible accounts. Sales adjustments are recorded against revenues and result from
differences between the payment amount received and the expected realizable amount. Bad debt is recorded as an operating expense and consists of billed charges that are ultimately deemed uncollectible due to the customers or third-party
payors inability or refusal to pay.

The Company performs analyses to evaluate the net realizable value of accounts receivable.
Specifically, the Company considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the health care industry and third-party reimbursement, it
is possible that the Companys estimates could change, which could have a material impact on the Companys results of operations and cash flows.

Sales and Certain Other Taxes:In its consolidated financial statements, Lincare accounts for taxes imposed on revenue-producing transactions by government authorities on a net basis, and accordingly, excludes
such taxes from net revenues. Such taxes include, but are not limited to sales, use, privilege and excise taxes.

Cost of Goods and
Services: Cost of goods and services includes the cost of equipment (excluding depreciation of $20.9 million and $62.7 million for the three and nine-month periods in 2008 and $20.6 million and $58.9 million for the three and nine-month periods
in 2007, respectively), drugs and supplies sold to patients and certain operating costs related to the Companys respiratory drug product line. These costs include an allocation of customer service, distribution and administrative costs
relating to the respiratory drug product line of approximately $10.2 million and $35.8 million for the three and nine-month periods of 2008 and approximately $11.7 million and $36.3 million for the three and nine-month periods in 2007, respectively.
Included in cost of goods and services in the three and nine-month periods ended September 30, 2008 are salary and related expenses of pharmacists and pharmacy technicians of $2.8 million and $8.5 million, respectively. Such salary and related
expenses for the three and nine-month periods ended September 30, 2007, were $2.5 million and $7.7 million, respectively.

Operating Expenses:The Company manages 1,049 operating centers from which customers are provided equipment, supplies and services. An operating center averages approximately seven to eight employees and is typically comprised of a
center manager, two customer service representatives (referred to as CSRs  telephone intake, scheduling, documentation), two or three service representatives (referred to as Service Reps  delivery,
maintenance and retrieval of equipment and delivery of disposables), a respiratory therapist (non-reimbursable and discretionary clinical follow-up with the customer and communication to the prescribing physician) and a sales representative
(marketing calls to local physicians and other referral sources).

The Company includes in operating expenses the costs incurred at the
Companys operating centers for certain service personnel (center manager, CSRs and Service Reps), facilities (rent, utilities, communications, property taxes, etc.), vehicles (vehicle leases, gasoline, repair and maintenance), and
general business supplies and miscellaneous expenses. Operating expenses for the interim periods of 2008 and 2007 within these major categories were as follows:



8



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



|                                  |  |                                 |         |                                |   |        |  |      |         |  |   |        
|--------------------------------- |  | ------------------------------- | ------- | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                                  |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|Operating Expenses (in thousands) |  | 2008                            |         | 2007                           |   | 2008   |  | 2007
|Salary and related                |  | $                               | 63,156  |                                | $ | 57,655 |  | $    | 186,559 |  | $ | 173,822
|Facilities                        |  |                                 | 14,404  |                                |   | 14,191 |  |      | 43,056  |  |   | 41,553 
|Vehicles                          |  |                                 | 14,127  |                                |   | 11,514 |  |      | 39,896  |  |   | 33,466 
|General supplies/miscellaneous    |  |                                 | 8,821   |                                |   | 8,098  |  |      | 24,931  |  |   | 24,098 
|                                  |  |                                 |         |                                |   |        |  |      |         |  |   |        
|Total                             |  | $                               | 100,508 |                                | $ | 91,458 |  | $    | 294,442 |  | $ | 272,939
|                                  |  |                                 |         |                                |   |        |  |      |         |  |   |        

Included in operating expenses during the three and nine months ended September 30, 2008 are
salary and related expenses for Service Reps in the amount of $27.1 million and $81.0 million, respectively. Such salary and related expenses for the three and nine months ended September 30, 2007 were $25.0 million and $74.5 million,
respectively.

Selling, General and Administrative Expenses:Selling, general and administrative expenses (SG&A)
include costs related to sales and marketing activities, corporate overhead and other business support functions. Included in SG&A during the three and nine months ended September 30, 2008 are salary and related expenses of $58.5 million
and $176.2 million, respectively. These salary and related expenses include the cost of the Companys respiratory therapists for the three and nine months ended September 30, 2008 of $16.2 million and $49.2 million, respectively. Included
in SG&A during the three and nine months ended September 30, 2007 are salary and related expenses of $56.6 million and $169.0 million, respectively. These salary and related expenses include the cost of the Companys respiratory
therapists in the amount of $15.6 million and $47.0 million in the respective periods during 2007. The Companys respiratory therapists generally provide non-reimbursable and discretionary clinical follow-up with the customer and communication,
as appropriate, to the prescribing physician with respect to the customers plan of care. The Company includes the salaries and related expenses of its respiratory therapist personnel (licensed respiratory therapists or, in some cases,
registered nurses) in SG&A because it believes that these personnel enhance the Companys business relative to its competitors who do not employ respiratory therapists.

Note 2. Business Combinations

Lincare acquires the business and related assets of local and
regional companies as an ongoing strategy to increase revenue 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 month
period ended September 30, 2008, the Company acquired certain assets of three companies. During the nine month period ended September 30, 2007, the Company did not acquire the business or assets of any companies.



9



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The aggregate cost of the 2008 acquisitions described above was as follows:



|                                                       |  |                |      
|------------------------------------------------------ |  | -------------- | -----
|                                                       |  | (In thousands)
|Cash                                                   |  | $              | 6,120
|Deferred acquisition obligations                       |  |                | 1,520
|Assumption of liabilities                              |  |                | 51   
|                                                       |  |                |      
|                                                       |  | $              | 7,691
|                                                       |  |                |      
|                                                       | 
|The aggregate purchase price was allocated as follows: |  |                |      
|                                                       | 
|Current assets                                         |  | $              | 483  
|Property and equipment                                 |  |                | 127  
|Intangible assets                                      |  |                | 45   
|Goodwill                                               |  |                | 7,036
|                                                       |  |                |      
|                                                       |  | $              | 7,691
|                                                       |  |                |      

Unaudited pro forma supplemental information on the results of operations for the nine months
ended September 30, 2008 and September 30, 2007, is provided below and reflects the acquisitions as if they had been completed at the beginning of each period.



|                         |  |                                        |           |      |   |          
|------------------------ |  | -------------------------------------- | --------- | ---- | - | ---------
|                         |  | For The Nine Months EndedSeptember 30,
|                         |  | 2008                                   |           | 2007
|                         |  | (In thousands, except per share data) 
|Net revenues             |  | $                                      | 1,251,881 |      | $ | 1,188,043
|                         |  |                                        |           |      |   |          
|Net income               |  | $                                      | 179,579   |      | $ | 169,476  
|                         |  |                                        |           |      |   |          
|Income per common share: |  |                                        |           |      |   |          
|Basic                    |  | $                                      | 2.46      |      | $ | 1.99     
|                         |  |                                        |           |      |   |          
|Diluted                  |  | $                                      | 2.38      |      | $ | 1.90     
|                         |  |                                        |           |      |   |          

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. Accounts Receivable, Net

Accounts
receivable, net at September 30, 2008 and December 31, 2007 consist of:



|                                                                |  |                   |         |   |                  |   |         |  
|--------------------------------------------------------------- |  | ----------------- | ------- | - | ---------------- | - | ------- | -
|                                                                |  | September 30,2008 |         |   | December 31,2007 |  
|                                                                |  | (In thousands)    |        
|Trade accounts receivable                                       |  | $                 | 239,844 |   |                  | $ | 241,288 |  
|Less allowance for sales adjustments and uncollectible accounts |  |                   | (40,929 | ) |                  |   | (42,370 | )
|                                                                |  |                   |         |   |                  |   |         |  
|Accounts receivable, net                                        |  | $                 | 198,915 |   |                  | $ | 198,918 |  
|                                                                |  |                   |         |   |                  |   |         |  

Note 4. Property and Equipment, Net

Property and equipment, net at September 30, 2008 and December 31, 2007 consist of:



|                               |  |                   |          |   |                  |   |          |  
|------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                               |  | September 30,2008 |          |   | December 31,2007 |  
|                               |  | (In thousands)    |         
|Property and equipment at cost |  | $                 | 977,836  |   |                  | $ | 900,299  |  
|Less accumulated depreciation  |  |                   | (630,841 | ) |                  |   | (560,148 | )
|                               |  |                   |          |   |                  |   |          |  
|Property and equipment, net    |  | $                 | 346,995  |   |                  | $ | 340,151  |  
|                               |  |                   |          |   |                  |   |          |  



10



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Note 5. Long-Term Obligations

Long-term obligations at September 30, 2008 and December 31, 2007 consist of:



|                                                                                                                                                                                                                                                                                             |  |                   |         |                  |   |        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ---------------- | - | -------
|                                                                                                                                                                                                                                                                                             |  | September 30,2008 |         | December 31,2007
|                                                                                                                                                                                                                                                                                             |  | (In thousands)   
|Convertible debt to mature in 2037, bearing fixed interest of 2.75%, with a callable option in 2012                                                                                                                                                                                          |  | $                 | 275,000 |                  | $ | 275,000
|Convertible debt to mature in 2037, bearing fixed interest of 2.75%, with a callable option in 2014                                                                                                                                                                                          |  |                   | 275,000 |                  |   | 275,000
|Convertible debt to mature in 2033, bearing fixed interest of 3.0%, with a callable option in 2008                                                                                                                                                                                           |  |                   | 0       |                  |   | 275,000
|Eurodollar loans under five-year revolving credit agreement bearing annual interest equal to the British Bankers Association LIBOR Rate
(BBA LIBOR) plus an applicable margin based on the Companys consolidated leverage ratio (consolidated funded indebtedness to consolidated EBITDA) |  |                   | 70,000  |                  |   | 10,000 
|Capital lease obligations due through 2010                                                                                                                                                                                                                                                   |  |                   | 200     |                  |   | 307    
|Unsecured, deferred acquisition obligations net of imputed interest, payable in various installments through 2009                                                                                                                                                                            |  |                   | 2,524   |                  |   | 2,900  
|                                                                                                                                                                                                                                                                                             |  |                   |         |                  |   |        
|Total long-term obligations                                                                                                                                                                                                                                                                  |  |                   | 622,724 |                  |   | 838,207
|Less: current installments                                                                                                                                                                                                                                                                   |  |                   | 72,673  |                  |   | 288,044
|                                                                                                                                                                                                                                                                                             |  |                   |         |                  |   |        
|Long-term debt, excluding current installments                                                                                                                                                                                                                                               |  | $                 | 550,051 |                  | $ | 550,163
|                                                                                                                                                                                                                                                                                             |  |                   |         |                  |   |        

The Companys current revolving credit agreement with several lenders and Bank of America
N.A. as agent, dated December 1, 2006, permits the Company to borrow amounts up to $390.0 million under a five-year revolving credit facility. The five-year revolving credit facility contains a $60.0 million letter of credit sub-facility, which
reduces the principal amount available under the five-year revolving credit facility by the amount of outstanding letters of credit on the sub-facility. As of September 30, 2008, $70.0 million in borrowings were outstanding on the five-year
credit facility and $23.5 million in standby letters of credit were issued as of that date. The revolving five-year credit agreement has a maturity date of December 1, 2011. Upon entering into the five-year credit agreement, origination and
other upfront fees and expenses of $1.0 million were paid and are being amortized over five years. In addition to the upfront fees, the Company pays an annual administration agency fee along with a quarterly facility fee. The facility fee is based
on the Companys consolidated leverage ratio and ranges between 0.10% and 0.175% annually. The leverage ratio is calculated each quarter to determine the applicable interest rate on revolving loans, the letter of credit fee and the facility fee
for the following quarter. The revolving credit agreement contains several financial and other negative and affirmative covenants customary in such agreements and is secured by a pledge of the stock of the wholly-owned subsidiaries of Lincare
Holdings Inc. The financial covenants in the Companys credit agreement include interest coverage and leverage ratios, as defined in the agreement. The Companys credit agreement requires compliance with all covenants set forth in the
agreement and the Company was in compliance with all covenants as of September 30, 2008 and December 31, 2007. The credit agreement defines the occurrence of certain specified events as events of default which, if not waived by or cured to
the satisfaction of the requisite lenders, allow the lenders to take actions against the Company, including termination of commitments under the agreement, acceleration of any unpaid principal and accrued interest in respect of outstanding
borrowings, payment of additional cash collateral to be held in escrow for the benefit of the lenders and enforcement of any and all rights and interests created and existing under the credit agreement. Under certain conditions, an event of default
may result in an increase in the interest rate (the Default Rate) payable by the Company on loans outstanding under the credit facility. The Default Rate is equal to the interest rate (including any applicable percentage as set forth in
the agreement) otherwise applicable to such loans plus 2% per annum. In the case of a bankruptcy event (as defined in the credit agreement), all commitments automatically terminate and all amounts outstanding under the credit facility become
immediately due and payable.



11



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



On October 31, 2007, we completed the sale of $275.0 million principal amount (including
exercise of a $25.0 million over-allotment option) of convertible senior debentures due 2037  Series A (the Series A Debentures) and $275.0 million principal amount (including exercise of a $25.0 million over-allotment option) of
convertible senior debentures due 2037  Series B (the Series B Debentures and together with the Series A Debentures, the Series Debentures) in a private placement. The Series Debentures pay interest semi-annually at a
rate of 2.75% per annum. The Series Debentures are unsecured and unsubordinated obligations and are convertible under specified circumstances based upon a base conversion rate, which, under certain circumstances, will be increased pursuant to a
formula that is subject to a maximum conversion rate. Upon conversion, holders of the Series Debentures will receive cash up to the principal amount, and any excess conversion value will be delivered in shares of our common stock or in a combination
of cash and shares of common stock, at our option. The initial base conversion rate for the Debentures is 19.5044 shares of common stock per $1,000 principal amount of Series Debentures, equivalent to an initial base conversion price of
approximately $51.27 per share. In addition, if at the time of conversion the applicable price of our common stock exceeds the base conversion price, holders of the Series Debentures will receive an additional number of shares of common stock per
$1,000 principal amount as determined pursuant to a specified formula. We have the right to redeem the Series A Debentures and the Series B Debentures at any time after November 1, 2012 and November 1, 2014, respectively. Holders of the
Series Debentures will have the right to require us to repurchase for cash all or some of their Series Debentures upon the occurrence of certain fundamental change transactions or on November 1, 2012, 2017, 2022, 2027 and 2032 in the case of
the Series A Debentures and November 1, 2014, 2017, 2022, 2027 and 2032 in the case of the Series B Debentures.

On June 15,
2008, we redeemed $275.0 million of 3.0% Convertible Senior Debentures due 2033 (the Debentures) pursuant to a redemption notice. The Debentures were convertible into shares of our common stock based on a conversion rate of 18.7515
shares for each $1,000 principal amount of Debentures. Interest on the Debentures was payable at the rate of 3.0% per annum on June 15 and December 15 of each year. We funded the redemption of the Debentures with $110.0 million of
available cash and $165.0 million of borrowings under our revolving credit facility.

In May 2008, the Financial Accounting Standards Board
(FASB) issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP APB 14-1 specifies that issuers of
such instruments should separately account for the liability and equity components in a manner that will reflect the entitys nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective
for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company will adopt FSP APB 14-1 beginning in the first quarter of fiscal 2009, and this standard must be
applied on a retrospective basis. The Company is currently evaluating the potential future impact the adoption of FSP APB 14-1 will have on its financial condition, results of operations and cash flows.

Note 6. Income Taxes

The Company conducts
business nationally and, as a result, files U.S. federal income tax returns and returns in various state and local jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the United
States. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations for years before 2002.

During the three months ended September 30, 2008, the Company effectively settled an examination with a taxing jurisdiction for $5.3 million for which reserves had been provided in prior periods. The Company does not expect that the
total amount of unrecognized tax positions will significantly increase or decrease in the next twelve months. The Company continues to recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax
expense.



12



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The Internal Revenue Service (IRS) completed its examination of the Companys U.S.
income tax returns through 2006. The U.S. federal statute of limitations remains open for the year 2005 and onward. There are no material disputes for the open tax years.

The Company was invited to participate in the IRSs Compliance Assurance Program, or CAP, for the years 2007 and 2008. The years 2007 and 2008 are currently under examination under the CAP program. The objective
of CAP is to reduce taxpayer burden and uncertainty while assuring the IRS of the tax returns accuracy prior to filing, thereby reducing or eliminating the need for post-filing examination.

Note 7. 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 upon 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
income per common share calculation. For the three and nine months ended September 30, 2008, the number of excluded shares underlying anti-dilutive stock options was 684,676 and 1,110,466, respectively. For the three and nine months ended
September 30, 2007, the number of excluded shares underlying anti-dilutive stock options was 925,976 and 620,625, respectively.

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, |       
|                                                                                     |  | 2008                                    |        | 2007 |                                        |        | 2008 |  |   | 2007    |    
|                                                                                     |  | (In thousands, except per share data)   |       
|Numerator:                                                                           |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Basic  Income available to common stockholders                                      |  | $                                       | 55,786 |      | $                                      | 58,639 |      |  | $ | 179,039 |     |  | $ | 168,489 |    
|Adjustment for assumed dilution:                                                     |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Interest on convertible debt, net of tax                                             |  |                                         | 0      |      |                                        | 1,277  |      |  |   | 2,343   |     |  |   | 3,867   |    
|                                                                                     |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Diluted  Income available to common stockholders and holders of dilutive securities |  | $                                       | 55,786 |      | $                                      | 59,916 |      |  | $ | 181,382 |     |  | $ | 172,356 |    
|                                                                                     |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Denominator:                                                                         |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Weighted average shares                                                              |  |                                         | 73,006 |      |                                        | 84,562 |      |  |   | 72,903  |     |  |   | 85,034  |    
|Effect of dilutive securities:                                                       |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Incremental shares under stock compensation plans                                    |  |                                         | 429    |      |                                        | 832    |      |  |   | 300     |     |  |   | 1,201   |    
|Incremental shares from assumed conversion of convertible debt                       |  |                                         | 0      |      |                                        | 5,157  |      |  |   | 3,143   |     |  |   | 5,157   |    
|                                                                                     |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Adjusted weighted average shares                                                     |  |                                         | 73,435 |      |                                        | 90,551 |      |  |   | 76,346  |     |  |   | 91,392  |    
|                                                                                     |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Per share amount:                                                                    |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Basic                                                                                |  | $                                       | 0.76   |      | $                                      | 0.69   |      |  | $ | 2.46    |     |  | $ | 1.98    |    
|                                                                                     |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    
|Diluted                                                                              |  | $                                       | 0.76   |      | $                                      | 0.66   | (1)  |  | $ | 2.38    | (1) |  | $ | 1.89    | (1)
|                                                                                     |  |                                         |        |      |                                        |        |      |  |   |         |     |  |   |         |    

|(1) | Figures reflect the application of the if converted method of accounting for the Companys 3.0% Convertible Senior Debentures due 2033 (see Liquidity and
Capital Resources) in accordance with EITF No. 04-8. The debentures were redeemed in full on June 15, 2008, pursuant to a notice of redemption.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Note 8. Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based
Payment, using the modified prospective transition method. Under the modified prospective transition method, fair value accounting and recognition provisions of SFAS No. 123R are applied to stock-based awards granted or modified
subsequent to the date of adoption and prior periods presented are not restated. In addition, for awards granted prior to the effective date, the unvested portion of the awards are recognized in periods subsequent to the effective adoption date
based on the grant date fair value determined for pro forma disclosure purposes under SFAS No. 123.

For the three months ended
September 30, 2008 and 2007, the Company recognized total stock-based compensation costs of $4.2 million and $5.4 million, respectively, as well as related tax benefits of $1.6 million and $1.9 million, respectively. For the nine months ended
September 30, 2008 and 2007, the Company recognized total stock-based compensation costs of $12.4 million and $12.9 million, respectively, as well as related tax benefits of $4.5 million and $4.5 million, respectively. Substantially all
stock-based compensation costs are classified within selling, general and administrative expenses on the accompanying condensed consolidated statements of operations.

Stock Options

Stock option activity for the nine months ended September 30, 2008 is summarized
below:



|                                                    |  |                  |   |  |                              |       |                                                 |      |                          |   |           
|--------------------------------------------------- |  | ---------------- | - |  | ---------------------------- | ----- | ----------------------------------------------- | ---- | ------------------------ | - | ----------
|                                                    |  | Number ofOptions |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractual Life(Years) |      | AggregateIntrinsic Value
|Outstanding at December 31, 2007                    |  | 8,970,616        |   |  | $                            | 33.46 |                                                 |      |                          |   |           
|Options granted in 2008                             |  | 0                |   |  |                              |      |                                                 |      |                          |   |           
|Exercised in 2008                                   |  | (212,000         | ) |  |                              | 24.45 |                                                 |      |                          |   |           
|Forfeited in 2008                                   |  | (21,350          | ) |  |                              | 39.03 |                                                 |      |                          |   |           
|                                                    |  |                  |   |  |                              |       |                                                 |      |                          |   |           
|Outstanding at September 30, 2008                   |  | 8,737,266        |   |  | $                            | 33.66 |                                                 | 3.60 |                          | $ | 13,744,907
|                                                    |  |                  |   |  |                              |       |                                                 |      |                          |   |           
|Exercisable at September 30, 2008                   |  | 5,984,885        |   |  | $                            | 30.75 |                                                 | 2.54 |                          | $ | 13,744,907
|                                                    |  |                  |   |  |                              |       |                                                 |      |                          |   |           
|Vested or expected to vest as of September 30, 2008 |  | 8,595,686        |   |  | $                            | 33.53 |                                                 | 3.57 |                          | $ | 13,744,907
|                                                    |  |                  |   |  |                              |       |                                                 |      |                          |   |           

Stock options outstanding at September 30, 2008, were 8,737,266. Of the stock options
outstanding at September 30, 2008, options for 5,984,885 shares were exercisable and options for 2,752,381 shares were unvested. Of the total stock options outstanding at September 30, 2008, 8,595,686 were vested or expected to vest in the
future, net of expected cancellations and forfeitures of 141,580. The intrinsic value of options exercised during the nine months ended September 30, 2008 and 2007, amounted to $1.6 million and $27.2 million, respectively.

As of September 30, 2008, the total remaining unrecognized compensation cost related to unvested stock options amounted to $12.0 million, which will
be amortized over the weighted-average remaining requisite service period of 1.0 year.



14



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Restricted Stock

The following table summarizes information about restricted stock activity for the nine months ended September 30, 2008:



|                               |  |         |   |  |                                                |      
|------------------------------ |  | ------- | - |  | ---------------------------------------------- | -----
|                               |  | Shares  |   |  | Weighted-AverageGrant Date FairValue Per Share
|Unvested at December 31, 2007  |  | 371,850 |   |  | $                                              | 38.99
|Granted                        |  | 561,000 |   |  |                                                | 30.44
|Vested                         |  | 0       |   |  |                                                |     
|Forfeited                      |  | (17,700 | ) |  |                                                | 39.03
|                               |  |         |   |  |                                                |      
|Unvested at September 30, 2008 |  | 915,150 |   |  | $                                              | 33.75
|                               |  |         |   |  |                                                |      

As of September 30, 2008, the total remaining unrecognized compensation cost related to
restricted stock amounted to $27.8 million, which will be amortized over the weighted-average remaining requisite service period of 2.1 years.

Note 9.
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 condensed 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s comprehensive
income is the same as reported net income for the three and nine-month periods ended September 30, 2008 and 2007.

Note 10. Subsequent Event

In October 2008, the Company received an offer (the Offer) from UBS to sell to them at par value all of the auction rate
securities originally purchased from UBS (approximately $92.9 million) in accordance with the terms of the settlement agreement. Under the settlement agreement, the Company will be able to redeem all of its auction rate securities at par during a
two-year time period beginning June 30, 2010, while UBS may purchase all or some of the auction rate securities at par from the Company at any time through July 2, 2012. The Offer is non-transferable and expires on November 14, 2008.

Pursuant to the Companys acceptance of the offer, UBS purchased a portion of the Companys holdings of auction rate securities
at par on November 6, 2008 in the amount of $32.5 million.



15



---

##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES



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

This Managements Discussion and Analysis of Results of Operations and Financial Condition is intended to assist in understanding and
assessing the trends and significant changes in our results of operations and financial condition. Historical results may not indicate future performance. As used in this Managements Discussion and Analysis of Results of Operations and
Financial Condition, the words we, our, us and the Company refer to Lincare Holdings Inc. and its consolidated subsidiaries.

Medicare Reimbursement

As a provider of home oxygen and other respiratory therapy services to 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.

Recent legislation, including the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA),
the Medicare, Medicaid and SCHIP Extension Act of 2007 (SCHIP Extension Act), the Deficit Reduction Act of 2005 (DRA) and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), contain
provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. MIPPA delays for up to 18 months the implementation of a Medicare competitive bidding program for oxygen equipment and certain
other DME items that was scheduled to begin on July 1, 2008 and institutes a 9.5% price reduction nationwide for these items as of January 1, 2009. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Part B drugs,
including inhalation drugs that we provide, beginning April 1, 2008. DRA contains provisions that will negatively impact reimbursement for oxygen equipment beginning in 2009 and negatively impacted reimbursement for DME items subject to capped
rental payments beginning in 2007. MMA significantly reduced reimbursement for inhalation drug therapies beginning in 2005, reduced payment amounts for five categories of DME, including oxygen, beginning in 2005, froze payment amounts for other
covered DME items through 2007, established a competitive bidding program for DME, and implemented quality standards and accreditation requirements for DME suppliers. The MIPPA, SCHIP Extension Act, DRA and MMA provisions, when fully implemented,
will materially and adversely affect our business, financial condition, operating results and cash flows.

The SCHIP Extension Act, which
became law on December 29, 2007, reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. The SCHIP Extension Act required the Centers for Medicare and Medicaid
Services (CMS) to adjust the methodology used to determine Medicare payment amounts for inhalation drugs by using volume-weighted average selling prices (ASP) based on actual sales volumes rather than average sales prices.
The SCHIP Extension Act also specifically lowered reimbursement for the inhalation drug albuterol. Based on the payment rates published quarterly by CMS for inhalation drugs dispensed in 2008, we estimate that our reimbursement for such drugs will
be reduced by approximately $72.6 million in 2008. We can not determine whether quarterly updates in ASP pricing data will continue to result in ongoing reductions in payment rates for inhalation drugs, and what impact such payment reductions could
have on our business in the future.

On April 10, 2008, the Durable Medical Equipment Medicare Administrative Contractors (DME
MACs) issued a revision of the Nebulizer Local Coverage Determination (LCD) that would have caused claims for levalbuterol and commercially-available combinations of albuterol and ipratropium to be downcoded and reimbursed based on
the allowances for less costly medications. According to the LCD, claims for levalbuterol would be paid based on the allowance for albuterol and claims for commercially-available combinations of albuterol and ipratropium would be paid based on the
allowances for individual vials of the component medications. The practical effect of the LCD, had it been implemented, would have eliminated coverage and access to these medications for Medicare beneficiaries. CMS subsequently issued instructions
to the DME MACs to delay the implementation of the LCD pending the outcome of a civil action brought in the U.S. District Court for the District of Columbia challenging CMS authority to implement the LCD revision with respect to combinations
of albuterol and ipratropium. On October 16, 2008, the U.S. District Court ruled in favor of the plaintiffs, thereby permanently enjoining CMS from implementing or enforcing the April 2008 LCD or any local coverage determination that bases
reimbursement on a least costly alternative standard. It is unclear at this time whether CMS will attempt to implement the LCD with respect to levalbuterol, which was not the subject of the civil



16



---

##### Table of Contents

suit. We will continue to monitor any instructions that CMS issues to the DME MACs that might amend or rescind the LCD in order to assess the potential
impact on our ability to make these medications available to our pharmacy customers in the future.

On February 1, 2006, Congress passed the DRA legislation which contains provisions that impacted reimbursement for oxygen equipment and DME. DRA changes the reimbursement methodology for oxygen equipment from
continuous monthly payment for as long as the equipment is in use by a Medicare beneficiary, which includes payment for oxygen contents and maintenance of equipment, to a capped rental arrangement whereby payment for oxygen equipment (including
portable oxygen equipment) may not extend over a period of continuous use of longer than 36 months. Separate payments for oxygen contents will continue to be made for the period of medical need beyond the 36thmonth. Additionally, payment for routine maintenance and service of the oxygen equipment, limited to 30 minutes of labor, will be made following each six-month period after the
36-month rental period ends. The oxygen provisions contained in DRA became effective on January 1, 2006. In the case of beneficiaries receiving oxygen equipment prior to the effective date, the 36-month period of continuous use began on
January 1, 2006. Accordingly, the first month in which the new payment methodology will impact our net revenues is January 2009.

On
November 1, 2006, CMS published rule CMS-1304-F, describing the Medicare regulations required to implement the DRA oxygen provisions. The rule codifies the new payment methodology and related provisions with respect to oxygen, including, but
not limited to, defining the 36-month capped rental period of continuous use, payment for oxygen contents beyond the 36-month rental period, payment for maintenance and servicing of oxygen equipment and procedures for replacement of oxygen
equipment. The DRA oxygen provisions and related regulations represent a fundamental change in the Medicare payment system for oxygen. These provisions are complex, and are expected to result in profound changes in the provider-customer relationship
for oxygen equipment and related services.

The financial impact to the Company of the oxygen capped rental regulations will be dependent
upon a number of variables, including, (i) the number of Medicare oxygen customers reaching 36 months of continuous service, (ii) the number of patients receiving oxygen contents beyond the 36-month rental period and the coverage and
billing requirements established by CMS for suppliers to receive payment for such oxygen contents, (iii) the mortality rates of patients on service beyond 36 months, (iv) the incidence of patients with equipment deemed to be beyond its
useful life that may be eligible for new equipment and therefore a new rental episode and the coverage and billing requirements established by CMS for suppliers to receive payment for a new rental period, and (v) payment amounts established by
CMS to reimburse suppliers for maintenance of oxygen equipment. The Company continues to evaluate these factors in order to determine the expected impact of the regulations, which we believe will have a material adverse effect on our revenues,
operating income, cash flows and financial position in 2009 and beyond.

Pursuant to provisions included in rule CMS-1304-F, the monthly
payment rate for stationary oxygen equipment in 2008 was increased from $198.40 to $199.28, which is expected to increase our net revenues by approximately $3.0 million in 2008. CMS will revise payment rates for oxygen equipment in future years
under the methodology specified in the rule based on data on the distribution of beneficiaries using various modalities of oxygen equipment. We are unable to predict the oxygen payment revisions to be determined by CMS in future years.

DRA also changed the reimbursement methodology for items of DME in the capped rental payment
category, including but not limited to such items as continuous positive airway pressure (CPAP) devices, certain respiratory assist devices, nebulizers, hospital beds and wheelchairs. For such items of DME, payment may not extend over a
period of continuous use of longer than 13 months. On the first day that begins after the 13thcontinuous month during which payment is made for the
item, the supplier must transfer title of the item to the beneficiary. Additional payments for maintenance and service of the item are made for parts and labor not covered by a suppliers or manufacturers warranty. The DME capped rental
provisions contained in DRA applied to items furnished for which the first rental month occurred on or after January 1, 2006. Accordingly, the first month in which the new payment methodology impacted our net revenues was February 2007.

Included in rule CMS-1304-F is a discussion of the Medicare regulations necessary
to implement the DME capped rental changes contained in the DRA. In addition, on January 26, 2006, CMS announced a final rule revising the payment classification of certain respiratory assist devices (RADs). RADs with a backup rate
feature were reclassified as capped rental DME items effective April 1, 2006, whereby payments to providers of such devices cease after the 13thcontinuous month of rental. Prior to the rule, providers were paid a continuous monthly rental amount over the entire period of medical necessity. In cases where Medicare beneficiaries received the item prior to April 1, 2006, only
the rental payments for months after the effective date count toward the 13-month cap. Accordingly, the first month in which the new payment methodology impacted our net revenues was May 2007. We estimate that the capped rental changes to DME and
RADs reduced our net revenues by approximately $11.4 million in fiscal 2007 and will reduce net revenues in fiscal 2008 by approximately $22.9 million.



17



---

##### Table of Contents

On December 8, 2003, MMA was signed into law. The MMA legislation contains provisions that directly
impact reimbursement for the primary respiratory and other DME products provided by Lincare. Among other things, MMA:



|(1) | Significantly reduced 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, was limited to 95 percent of the published
average wholesale price (AWP) for the drug. MMA established new payment limits and procedures for drugs reimbursed under Medicare Part B. 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. Implementation of the ASP-based reimbursement formula
resulted in a dramatic reduction in payment rates for inhalation drugs. We can not determine whether quarterly updates in ASP pricing data submitted by drug manufacturers and adopted by CMS will continue to result in ongoing reductions in payment
rates for inhalation drugs, and what impact such payment reductions could have on our business in the future.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Established a competitive acquisition program for DME that was expected to commence in 2008.MMA instructs CMS to establish and implement programs under which competitive
acquisition areas will be established throughout the United States for contract award purposes for the furnishing of competitively priced items of DME, including oxygen equipment. The program will be implemented in phases such that competition under
the program will occur in ten of the largest metropolitan statistical areas (MSAs) in the first year, 80 of the largest MSAs in the following year, and additional areas thereafter.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For each competitive acquisition area, CMS will conduct a competition under which providers will submit bids to supply certain covered items of DME.
Successful bidders will be expected to meet certain program quality standards in order to be awarded a contract and only successful bidders can 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 will be re-bid at least every three years. CMS will be required to award contracts to multiple entities submitting bids in each area for an item or
service, but will have the authority to limit the number of contractors in a competitive acquisition area to the number needed to meet projected demand. CMS may use competitive bid pricing information to adjust the payment amounts otherwise in
effect for an area that is not a competitive acquisition area.

CMS concluded the bidding process for the first round of MSAs in September
2007. On March 20, 2008, CMS completed the bid evaluation process and announced the payment amounts that would have taken effect in the ten competitive bidding areas beginning July 1, 2008. Contracts to provide products within the
competitive bid areas were awarded to selected suppliers and took effect on July 1, 2008. On July 15, 2008, Congress enacted the MIPPA legislation pursuant to an override of a Presidential veto. MIPPA retroactively delays the
implementation of competitive bidding for up to 18 months and reduces Medicare prices nationwide by 9.5% for the product categories, including oxygen, that were initially included in competitive bidding. Pursuant to the delay, CMS cancelled all
contract awards, retroactive to June 30, 2008. We will continue to monitor developments regarding the implementation of the competitive bidding program. We can not predict the outcome of the competitive bidding program on our business when
fully implemented nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding.

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.

Government Regulation

The federal government and all states in which we currently operate regulate various aspects of our business. In particular, our operating centers are subject to federal laws regulating interstate motor-carrier
transportation and covering the repackaging of oxygen. State laws also govern, among other things, pharmacies, nursing services, distribution of medical equipment and certain types of home health activities and apply to those locations involved in
such activities. Certain of our employees are subject to state laws and regulations governing the ethics and professional practice of respiratory therapy, pharmacy and nursing.



18



---

##### Table of Contents

As a health care supplier, Lincare 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 health insurance carriers often conduct audits and request customer records and other documents to support claims submitted for payment of services rendered to customers. 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 result in severe criminal, civil and administrative penalties and sanctions, including
disqualification from Medicare and other reimbursement programs.

Numerous federal and state laws and regulations, including the Health
Insurance Portability and Accountability Act of 1996 (HIPAA), govern the collection, dissemination, use and confidentiality of patient-identifiable health information. As part of our provision of, and billing for, health care equipment
and services, we are required to collect and maintain patient-identifiable health information. New health information standards, whether implemented pursuant to HIPAA, congressional action 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. 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.

Health care is an area of rapid regulatory change. Changes in the laws and regulations
and new interpretations of existing laws and regulations may affect permissible activities, the relative 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. Future legislative and regulatory changes could have a material adverse impact on us.

Operating Results

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



|                                     |  |                                         |         |                                        |   |         |  |      |           |  |   |          
|------------------------------------ |  | --------------------------------------- | ------- | -------------------------------------- | - | ------- |  | ---- | --------- |  | - | ---------
|                                     |  | For The Three MonthsEnded September 30, |         | For The Nine MonthsEnded September 30,
|                                     |  | 2008                                    |         | 2007                                   |   | 2008    |  | 2007
|                                     |  | (In thousands)                          |         | (In thousands)                        
|Oxygen and other respiratory therapy |  | $                                       | 370,713 |                                        | $ | 375,561 |  | $    | 1,147,310 |  | $ | 1,090,568
|Home medical equipment and other     |  |                                         | 34,964  |                                        |   | 32,591  |  |      | 102,178   |  |   | 93,126   
|                                     |  |                                         |         |                                        |   |         |  |      |           |  |   |          
|Total                                |  | $                                       | 405,677 |                                        | $ | 408,152 |  | $    | 1,249,488 |  | $ | 1,183,694
|                                     |  |                                         |         |                                        |   |         |  |      |           |  |   |          

Net revenues for the three months ended September 30, 2008, decreased by $2.5 million (or
0.6%) compared with the three months ended September 30, 2007, and for the nine months ended September 30, 2008, increased $65.8 million (or 5.6%) compared with the nine months ended September 30, 2007. The Company estimates that the
0.6% decrease in net revenues in the three-month period was comprised of 4.8% internal growth and 0.6% acquisition growth offset by $24.5 million of Medicare price changes taking effect in 2008 (see Medicare Reimbursement). The Company
estimates that the 5.6% increase in net revenues in the nine-month period was comprised of 9.9% internal growth and 0.4% acquisition growth partially offset by $55.4 million of Medicare price changes taking effect in 2008. The internal growth in net
revenues 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 nine
months ended September 30, 2008, the Company acquired certain assets of three companies with aggregate annual revenues of approximately $5.8 million. The aggregate cost of these acquisitions was $7.7 million. During the nine months ended
September 30, 2007, we did not acquire the business or assets of any companies.

Revenues for the three months ended
September 30, 2008, were also impacted by a change in ordering patterns for certain inhalation drugs by customers concerned about the potential loss of Medicare coverage of these drugs. In April of 2008, the Durable Medical Equipment Medicare
Administrative Contractors (DME MACs) issued a revision of the Nebulizer Local Coverage Determination (LCD) that would have effectively eliminated Medicare reimbursement and patient access to these medications as of
July 1, 2008. In response to this potential loss of access, a significant number of the Companys customers placed orders in June to receive a 90-day shipment of these drugs rather than a 30-day shipment.



19



---

##### Table of Contents

The net effect of this change in ordering patterns was to accelerate approximately $18.9 million of revenues in the second quarter that would otherwise have
been expected to occur in the third quarter. The DME MACs subsequently announced a delay in the implementation of the LCD pending the outcome of a civil suit challenging the authority of CMS to enforce the revision (see Medicare
Reimbursement).

The contribution of oxygen and other respiratory therapy products to our net revenues was 91.4% and 91.8%,
respectively, during the three and nine months ended September 30, 2008. 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 were 23.4% and 24.2%, respectively, for the three and nine months ended September 30, 2008, compared with 24.8% and 24.5% for the comparable prior year periods. Cost of goods and services for the three months ended September 30,
2008, decreased by $6.4 million, or 6.3%, compared to the prior year period. Cost of goods and services for the nine months ended September 30, 2008, increased $12.9 million or 4.4%, when compared with the prior year period. The increase in
cost of goods and services in 2008 is attributable to an increase in drug purchasing costs due to a product mix shift away from compounded to higher cost commercially-available products in our inhalation drug business as a result of a determination
by CMS to eliminate Medicare coverage of compounded medications as of July 1, 2007. Contributing to the decrease in cost of goods and services in the third quarter of 2008 was the impact from the change in pharmacy customer ordering patterns,
which resulted in the acceleration of approximately $11.2 million of drug purchasing costs in the second quarter that would otherwise have been expected to occur in the third quarter. Also contributing to higher costs was growth in our sleep therapy
product lines during the first nine months of 2008, compared with the first nine months of 2007, which generally carry a higher cost of goods sold than other products we provide.

Cost of goods and services for the three and nine-month periods includes the cost of equipment (excluding depreciation of $20.9 million and $62.7 million
in 2008 and $20.6 million and $58.9 million in 2007, respectively), drugs and supplies sold to patients and certain costs related to the Companys respiratory drug product line. These costs include an allocation of customer service,
distribution and administrative costs relating to the respiratory drug product line of approximately $10.2 million and $35.8 million for the three and nine-month periods of 2008 and approximately $11.7 million and $36.3 million for the three and
nine-month periods of 2007, respectively. Included in cost of goods and services in the three and nine months ended September 30, 2008 are salary and related expenses of pharmacists and pharmacy technicians of $2.8 million and $8.5 million,
respectively. Such salary and related expenses for the three and nine months ended September 30, 2007, were $2.5 million and $7.7 million, respectively.

Operating expenses as a percentage of net revenues were 24.8% and 23.6%, respectively, for the three and nine months ended September 30, 2008, compared with 22.4% and 23.1%, respectively, for the comparable prior
year periods. Operating expenses for the three and nine months ended September 30, 2008, increased by $9.1 million, or 9.9%, and $21.5 million or 7.9%, respectively, over the prior year periods. Contributing to the increase in operating
expenses, as a percentage of net revenues, during the first nine months of 2008 were increases in payroll and related expenses and higher vehicle, fuel and facility costs.

The Company manages 1,049 operating centers from which customers are provided equipment, supplies and services. An operating center averages
approximately seven to eight employees and is typically comprised of a center manager, two customer service representatives (referred to as CSRs  telephone intake, scheduling, documentation), two or three service
representatives (referred to as Service Reps  delivery, maintenance and retrieval of equipment and delivery of disposables), a respiratory therapist (non-reimbursable and discretionary clinical follow-up with the customer and
communication to the prescribing physician) and a sales representative (marketing calls to local physicians and other referral sources).



20



---

##### Table of Contents

The Company includes in operating expenses the costs incurred at the Companys operating centers for
certain service personnel (center manager, CSRs and Service Reps), facilities (rent, utilities, communications, property taxes, etc.), vehicles (vehicle leases, gasoline, repair and maintenance), and general business supplies and miscellaneous
expenses. Operating expenses for the interim periods of 2008 and 2007 within these major categories were as follows:



|                                  |  |                                 |         |                                |   |        |  |      |         |  |   |        
|--------------------------------- |  | ------------------------------- | ------- | ------------------------------ | - | ------ |  | ---- | ------- |  | - | -------
|                                  |  | Three Months EndedSeptember 30, |         | Nine Months EndedSeptember 30,
|Operating Expenses (in thousands) |  | 2008                            |         | 2007                           |   | 2008   |  | 2007
|Salary and related                |  | $                               | 63,156  |                                | $ | 57,655 |  | $    | 186,559 |  | $ | 173,822
|Facilities                        |  |                                 | 14,404  |                                |   | 14,191 |  |      | 43,056  |  |   | 41,553 
|Vehicles                          |  |                                 | 14,127  |                                |   | 11,514 |  |      | 39,896  |  |   | 33,466 
|General supplies/miscellaneous    |  |                                 | 8,821   |                                |   | 8,098  |  |      | 24,931  |  |   | 24,098 
|                                  |  |                                 |         |                                |   |        |  |      |         |  |   |        
|Total                             |  | $                               | 100,508 |                                | $ | 91,458 |  | $    | 294,442 |  | $ | 272,939
|                                  |  |                                 |         |                                |   |        |  |      |         |  |   |        

Included in operating expenses during the three and nine months ended September 30, 2008 are
salary and related expenses for Service Reps in the amount of $27.1 million and $81.0 million, respectively. Such salary and related expenses for the three and nine months ended September 30, 2007 were $25.0 million and $74.5 million,
respectively.

Selling, general and administrative (SG&A) expenses as a percentage of net revenues were 20.3% and 19.5%,
respectively, for the three and nine months ended September 30, 2008, compared with 19.6% and 20.0%, respectively, for the comparable prior year periods. SG&A expenses for the three months ended September 30, 2008 increased by $2.0
million, or 2.5%, compared to the prior year period. SG&A expenses for the nine months ended September 30, 2008 increased by $7.5 million, or 3.2% over the prior year period. Contributing to the modest increase in SG&A expenses in 2008
were containment of growth in payroll and related expenses, an increase in reserves for auto and workers compensation insurance claims and higher vehicle reimbursement expenses, partially offset by lower advertising expenses.

SG&A expenses include costs related to sales and marketing activities, corporate overhead and other business support functions. Included in SG&A
during the three and nine months ended September 30, 2008 are salary and related expenses of $58.5 million and $176.2 million, respectively. These salary and related expenses include the cost of the Companys respiratory therapists in the
amount of $16.2 million and $49.2 million during the respective periods. Included in SG&A during the three and nine months ended September 30, 2007 are salary and related expenses of $56.6 million and $169.0 million, respectively. These
salary and related expenses include the cost of the Companys respiratory therapists in the amount of $15.6 million and $47.0 million during the respective periods. The Companys respiratory therapists generally provide non-reimbursable
and discretionary clinical follow-up with the customer and communication, as appropriate, to the prescribing physician with respect to the customers plan of care. The Company includes the salaries and related expenses of its respiratory
therapist personnel (licensed respiratory therapists or, in some cases, registered nurses) in SG&A because it believes that these personnel enhance the Companys business relative to its competitors who do not employ respiratory therapists.

Included in depreciation and amortization expense in the three and nine months ended September 30, 2008 is depreciation of patient
service equipment of $20.9 million and $62.7 million, respectively, and depreciation of other property and equipment of $8.1 million and $25.8 million, respectively. Included in depreciation and amortization expense in the three and nine months
ended September 30, 2007 is depreciation of patient service equipment of $20.6 million and $58.9 million, respectively, and depreciation of other property and equipment of $9.3 million and $24.6 million, respectively. The change in depreciation
and amortization expense in the three and nine months ended September 30, 2008 compared with the prior year period is attributable to increased purchases of medical and other equipment necessary to support the growth in the Companys
customer base during 2008.

Operating income for the three and nine months ended September 30, 2008, was $92.9 million (22.9% of net
revenues) and $301.6 million (24.1% of net revenues), respectively, compared with $99.1 million (24.3% of net revenues) and $283.6 million (24.0% of net revenues), respectively, for the comparable prior year periods.



21



---

##### Table of Contents

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 operating costs, capital expenditures, acquisitions, debt service and share repurchases.

Net cash
provided by operating activities increased by 5.5% to $322.1 million for the nine months ended September 30, 2008, compared with $305.2 million for the nine months ended September 30, 2007. Net cash used in investing and financing
activities was $340.9 million for the nine months ended September 30, 2008. Activity during the nine-month period ended September 30, 2008 included our net investment in property and equipment of $95.0 million, investment in business
acquisitions of $6.1 million, payments of principal on debt of $380.9 million, repurchases of our common stock of $35.2 million, proceeds from issuance of debt of $165.0 million and proceeds from the exercise of stock options and issuance of common
shares of $6.1 million.

As of September 30, 2008, our principal sources of liquidity consisted of $32.9 million of cash and
equivalents and $296.5 million available under our revolving bank credit facility. At September 30, 2008, the Company held $92.9 million of investment grade auction rate securities. These securities are variable-rate debt instruments with
contractual maturities between the years 2020 and 2041 with interest rates that reset every seven or 35 days pursuant to a bidding process as determined by the underlying security indentures. Under the provisions of SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the investments are classified as available-for-sale and are carried at fair value, with any unrealized gains and losses included in comprehensive income as a separate
component of shareholders equity. The book value of available-for-sale investments held at September 30, 2008, approximated fair value. Therefore, the Company had no reported unrealized gains or losses.

During the first quarter of 2008, the Company reclassified all of its investments in auction rate securities from short-term to long-term investments. Of
the auction rate securities held as of September 30, 2008, $60.4 million are secured by pools of student loans guaranteed by state-designated guaranty agencies or monoline insurers or reinsured by the United States government. The remaining
$32.5 million are comprised of securities backed by pools of municipal bonds. All of the auction rate securities held by the Company are senior obligations under the applicable indentures authorizing the issuance of such securities. Recent turmoil
in the credit markets has resulted in widespread failures to attract demand for such securities at the periodic auction dates occurring subsequent to December 31, 2007. As of September 30, 2008, all of the securities held by the Company
continued to experience auction failures, resulting in our continuing to hold such securities. The Company received partial redemptions, at par, in the amount of $175,000 in February 2008, $250,000 in April 2008, $3.4 million in June 2008, $1.3
million in July 2008 and $250,000 in August 2008.

All of the auction rate securities owned by the Company were purchased from UBS
Financial Services, Inc., a subsidiary of UBS AG (UBS) and are held, for the benefit of the Company, by UBS. On August 8, 2008, UBS announced a settlement in principle with the Securities and Exchange Commission, the New York
Attorney General and other state regulatory agencies to restore liquidity to remaining clients who hold auction rate securities.

In
October 2008, the Company received an offer (the Offer) from UBS to sell to them at par value all of the auction rate securities originally purchased from UBS (approximately $92.9 million) in accordance with the terms of the settlement
agreement. Under the settlement agreement, the Company will be able to redeem all of its auction rate securities at par during a two-year time period beginning June 30, 2010, while UBS may purchase all or some of the auction rate securities at
par from the Company at any time through July 2, 2012. The Offer is non-transferable and expires on November 14, 2008.

Pursuant
to the Companys acceptance of the offer, UBS purchased a portion of the Companys holdings of auction rate securities at par on November 6, 2008 in the amount of $32.5 million.

We will continue to monitor credit market conditions to assess the liquidity of our investments. Due to our ability to access our cash and cash
equivalents, amounts available under our revolving credit facility, and our expected operating cash flows, we believe that we have adequate liquidity available to meet our obligations.

On February 14, 2006, our Board of Directors authorized a share repurchase plan whereby the Company may repurchase from time to time, on the open
market or in privately negotiated transactions, shares of the Companys common stock in amounts determined pursuant to a formula (the share repurchase formula) that takes into account both the ratio of the Companys net debt to
cash flow and its available cash resources and borrowing availability. During the nine months ended September 30, 2008, the Company repurchased and retired 1,009,250 shares for $35.2 million pursuant



22



---

##### Table of Contents

to the repurchase plan. On January 23, 2007 and October 23, 2007, our Board of Directors approved modifications to the share repurchase formula to
increase the ratio of debt to cash flow to allow additional share repurchases. As of September 30, 2008, $229.4 million of the Companys common stock was eligible for repurchase in accordance with the amended formula.

On October 31, 2007, we completed the sale of $275.0 million principal amount (including exercise of a $25.0 million over-allotment option) of
convertible senior debentures due 2037  Series A (the Series A Debentures) and $275.0 million principal amount (including exercise of a $25.0 million over-allotment option) of convertible senior debentures due 2037  Series B
(the Series B Debentures and together with the Series A Debentures, the Series Debentures) in a private placement. The Series Debentures pay interest semi-annually at a rate of 2.75% per annum. The Series Debentures are
unsecured and unsubordinated obligations and are convertible under specified circumstances based upon a base conversion rate, which, under certain circumstances, will be increased pursuant to a formula that is subject to a maximum conversion rate.
Upon conversion, holders of the Series Debentures will receive cash up to the principal amount, and any excess conversion value will be delivered in shares of our common stock or in a combination of cash and shares of common stock, at our option.
The initial base conversion rate for the Debentures is 19.5044 shares of common stock per $1,000 principal amount of Series Debentures, equivalent to an initial base conversion price of approximately $51.27 per share. In addition, if at the time of
conversion the applicable price of our common stock exceeds the base conversion price, holders of the Series Debentures will receive an additional number of shares of common stock per $1,000 principal amount as determined pursuant to a specified
formula. We have the right to redeem the Series A Debentures and the Series B Debentures at any time after November 1, 2012 and November 1, 2014, respectively. Holders of the Series Debentures will have the right to require us to
repurchase for cash all or some of their Series Debentures upon the occurrence of certain fundamental change transactions or on November 1, 2012, 2017, 2022, 2027 and 2032 in the case of the Series A Debentures and November 1, 2014, 2017,
2022, 2027 and 2032 in the case of the Series B Debentures.

On June 15, 2008, we redeemed $275.0 million of 3.0% Convertible Senior
Debentures due 2033 (the Debentures) pursuant to a redemption notice. The Debentures were convertible into shares of our common stock based on a conversion rate of 18.7515 shares for each $1,000 principal amount of Debentures. Interest
on the Debentures was payable at the rate of 3.0% per annum on June 15 and December 15 of each year. We funded the redemption of the Debentures with $110.0 million of available cash and $165.0 million of borrowings under our revolving
credit facility.

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.

Accounts Receivable:The
Company maintains payor-specific price tables in its billing system that reflect the fee schedule amounts statutorily in effect or contractually agreed upon by various government and commercial payors for each item of equipment or supply provided to
a customer. Due to the nature of the health care industry and the reimbursement environment in which Lincare operates, situations can occur where expected payment amounts are not established by fee schedules or contracted rates, and estimates are
required to record revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that revenues and accounts receivable will have to be revised or updated as additional information becomes available.
Contractual adjustments to revenues and accounts receivable can result from price differences between allowed charges and amounts initially recognized as revenue due to incorrect price tables or subsequently negotiated payment rates. Actual
adjustments that result from differences between the payment amount received and the expected realizable amount are recorded against the allowance for sales adjustments and are typically identified and ultimately recorded at the point of cash
application or account review. We report revenues in our financial statements net of such adjustments. Accounts receivable are reported net of allowances for sales adjustments and uncollectible accounts. Bad debt is recorded as an operating expense
and consists of billed charges that are ultimately deemed uncollectible due to the customers or third-party payors inability or refusal to pay.

The Companys payor mix is highly concentrated among Medicare, Medicaid and other government third-party payors and contracted private insurance or commercial payors. Government payment rates are determined
according to published fee schedules established pursuant to statute, law or other regulatory processes and commercial payment rates are based on contractual line item pricing as reflected in the respective contracts. Fee schedule updates have
historically occurred on a prospective basis and have been made available to the Company in advance of the effective date of a change in reimbursement rates. The Companys proprietary billing system has features that allow the Company to timely
update



23



---

##### Table of Contents

payor price tables within the system as changes occur in order to accurately record revenues and accounts receivable at their expected realizable values.
Additional systems and manual controls and processes are used by management to evaluate the accuracy of these recorded amounts. Based on the Companys experience, it is unlikely that a change in estimate of unsettled amounts from third party
payors would have a material adverse impact on its financial position or results of operations.

Accounts receivable balance concentrations
by major payor category as of September 30, 2008 and December 31, 2007 were as follows:



|                                               |  |                   |   |  |                  |  
|---------------------------------------------- |  | ----------------- | - |  | ---------------- | -
|Percentage of Accounts Receivable Outstanding: |  | September 30,2008 |   |  | December 31,2007 |  
|Medicare                                       |  | 37.0              | % |  | 36.8             | %
|Medicaid/Other Government                      |  | 15.7              | % |  | 17.8             | %
|Private Insurance                              |  | 38.4              | % |  | 37.4             | %
|Self-Pay                                       |  | 8.9               | % |  | 8.0              | %
|                                               |  |                   |   |  |                  |  
|Total                                          |  | 100.0             | % |  | 100.0            | %
|                                               |  |                   |   |  |                  |  

Aged accounts receivable balances by major payor category as of September 30, 2008 and
December 31, 2007 were as follows:



|                                     |  |                    |   |  |        |   |  |          |  
|------------------------------------ |  | ------------------ | - |  | ------ | - |  | -------- | -
|                                     |  | September 30, 2008 |  
|Percentage of Accounts Aged in Days: |  | 0-60               |   |  | 61-120 |   |  | Over 120 |  
|Medicare                             |  | 82.5               | % |  | 8.2    | % |  | 9.3      | %
|Medicaid/Other Government            |  | 52.6               | % |  | 17.8   | % |  | 29.6     | %
|Private Insurance                    |  | 58.0               | % |  | 14.6   | % |  | 27.4     | %
|Self-Pay                             |  | 53.1               | % |  | 25.8   | % |  | 21.1     | %
|All Payors                           |  | 65.8               | % |  | 13.7   | % |  | 20.5     | %
|                                     | 
|                                     |  | December 31, 2007  |  
|Percentage of Accounts Aged in Days: |  | 0-60               |   |  | 61-120 |   |  | Over 120 |  
|Medicare                             |  | 77.0               | % |  | 10.5   | % |  | 12.5     | %
|Medicaid/Other Government            |  | 50.1               | % |  | 20.7   | % |  | 29.2     | %
|Private Insurance                    |  | 60.8               | % |  | 15.0   | % |  | 24.2     | %
|Self-Pay                             |  | 51.4               | % |  | 26.6   | % |  | 22.0     | %
|All Payors                           |  | 64.1               | % |  | 15.3   | % |  | 20.6     | %

We operate 33 regional billing and collection offices (RBCOs) that are responsible for
the billing and collection of accounts receivable. The RBCOs are aligned geographically to support the accounts receivable activity of the operating centers within their assigned territories. As of September 30, 2008, there were 1,357 full-time
employees in the RBCOs. Accounts receivable collections are performed by designated collectors within each of the RBCOs. The collectors use various reporting tools available within our proprietary billing system to identify claims that have been
denied or partially paid by the responsible party and claims that have not been processed by the third-party payor in a timely manner. Collections of accounts receivable are typically pursued using direct phone contact to determine the reason for
non-payment and, if necessary, corrected claims are prepared for resubmission and further follow-up with the responsible party. In some cases, third-party payors have developed electronic inquiry methods that we can access to determine the status of
individual claims. We have benefited from the increasing availability of electronic funds transfers from payors,



24



---

##### Table of Contents

which now account for approximately 68.4% of all payments received. We believe that our collection procedures contribute to our accounts receivable days
sales outstanding (DSO) of 44.1 days and bad debt expense of 1.5% being among the lowest in the industry, according to published industry data and public filings of some of our competitors.

The ultimate collection of accounts receivable may not be known for several months. We record bad debt expense based on a percentage of revenue using
historical Company-specific data. The percentage and amounts used to record bad debt expense and the allowance for doubtful accounts are supported by various methods and analyses including current and historical cash collections, bad debt
write-offs, aged accounts receivable and consideration of any payor-specific concerns. The ultimate write-off of an accounts receivable occurs once collection procedures are determined to have been exhausted by the collector and after appropriate
review of the specific account and approval by supervisory and/or management employees within the RBCOs. Management and RBCO supervisory and management employees also review accounts receivable write-off reports, correspondence from payors and
individual account information to evaluate and correct processes that might have contributed to an unsuccessful collection effort.

We do
not use an aging threshold for account receivable write-offs. However, the age of an account balance may provide an indication that collection procedures have been exhausted, and would be considered in the review and approval of an account balance
write-off.

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 credit facility and Series
Debentures as well as contractual lease payments for facility, vehicle, and equipment leases, deferred taxes and deferred acquisition obligations.

New
Accounting Standards

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair
value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair
value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. The provisions of SFAS
No. 157 were effective as of the beginning of the 2008 calendar year. The adoption of SFAS No. 157 did not have a material impact on our financial condition, results of operations or cash flows.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of FASB Statement No. 115, which permits an entity to choose to measure certain financial instruments and other items at fair value at specified election dates. A company will report unrealized gains and losses in earnings on
items for which the fair value option has been elected after adoption. The provisions of SFAS No. 159 were effective as of the beginning of the 2008 calendar year. The adoption of SFAS No. 159 had no impact on our financial condition,
results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, which
replaces SFAS No. 141. SFAS No. 141(R) requires an acquirer in a business combination to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair
values as of that date, with limited exceptions. It also requires the recognition of assets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values.
The provisions of SFAS No. 141(R) are effective as of the beginning of the 2009 calendar year. The Company is currently evaluating the potential future impact of this standard on its financial condition, results of operations and cash flows.

In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157, which delays the effective
date of FASB Statement No. 157, Fair Value Measurements, to calendar years beginning January 1, 2009. The scope of the proposed deferral applies to all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We do not expect the adoption of FSP FAS 157-2 to have a material impact on our financial condition, results of operations or cash flows.

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement). FSP APB 14-1 specifies that issuers of such instruments



25



---

##### Table of Contents

should separately account for the liability and equity components in a manner that will reflect the entitys nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company will adopt FSP APB 14-1
beginning in the first quarter of fiscal 2009, and this standard must be applied on a retrospective basis. The Company is currently evaluating the future impact the adoption of FSP APB 14-1 will have on its consolidated financial statements.

In October 2008, the FASB issued FSP FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That Is Not
Active, which clarifies the application of FASB Statement No. 157, Fair Value Measurements, in an inactive market and provides an illustrative example to demonstrate how the fair value of a financial asset is determined when
the market for that financial asset is inactive. Key existing principles of Statement 157 illustrated in the example include (a) fair value represents the price at which an orderly transaction would take place between market participants; even
if there is little or no market activity for an asset at the measurement date, the objective of determining fair value remains the same, (b) in determining fair value, the use of managements internal assumptions concerning future cash
flows discounted at an appropriate risk-adjusted interest rate is acceptable when relevant observable market data do not exist, (c) broker quotes may properly be included as an input when measuring fair value (but such quotes are not
necessarily determinative if an active market for the financial asset does not exist). The provisions of FSP FAS 157-3 are effective upon issuance. The adoption of FSP FAS 157-3 did not have a material impact on our financial condition, results of
operations or cash flows.

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



26



---

##### Table of Contents

beneficiaries for DME, such as oxygen equipment, respiratory assistance devices, continuous positive airway pressure devices, nebulizers and associated
inhalation medications, hospital beds and wheelchairs for the home setting. Approximately 68 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.

Recent legislation and coverage policy
revisions, including the Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), the Medicare, Medicaid and SCHIP Extension Act of 2007 (SCHIP Extension Act), the Deficit Reduction Act of 2005 (DRA)
and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) contain provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. MIPPA delays for up to 18
months the implementation of a Medicare competitive bidding program for oxygen equipment and certain other DME items that was scheduled to begin on July 1, 2008 and institutes a 9.5% price reduction nationwide for these items as of
January 1, 2009. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. DRA contains provisions that will negatively impact
reimbursement for oxygen equipment beginning in 2009 and negatively impacted reimbursement for DME items subject to capped rental payments beginning in 2007. MMA significantly reduced reimbursement for inhalation drug therapies beginning in 2005,
reduced payment amounts for five categories of DME, including oxygen, beginning in 2005, froze payment amounts for other covered DME items through 2007, established a competitive acquisition program for DME and implemented quality standards and
accreditation requirements for DME suppliers. The MIPPA, SCHIP Extension Act, DRA and MMA provisions, when fully implemented, will materially and adversely affect our business, financial condition, operating results and cash flows. See
MEDICARE REIMBURSEMENT for a full discussion of the MIPPA, SCHIP Extension Act, DRA and MMA provisions.

A SIGNIFICANT PERCENTAGE OF OUR
BUSINESS IS DERIVED FROM THE SALE AND RENTAL OF MEDICARE-COVERED OXYGEN AND DME ITEMS, AND RECENT LEGISLATIVE ACTS IMPOSE SUBSTANTIAL CHANGES IN THE MEDICARE PAYMENT METHODOLOGIES AND REDUCTIONS IN THE MEDICARE PAYMENT AMOUNTS FOR THESE ITEMS.

DRA changes the reimbursement methodology for oxygen equipment from continuous
monthly payment for as long as the equipment is in use by a Medicare beneficiary, which includes payment for oxygen contents and maintenance of equipment, to a capped rental arrangement whereby payment for oxygen equipment (including portable oxygen
equipment) may not extend over a period of continuous use of longer than 36 months. Separate payments for oxygen contents will continue to be made for the period of medical need beyond the 36thmonth. Additionally, payment for routine maintenance and service of the oxygen equipment, limited to 30 minutes of labor, will be made following each six-month period after the 36-month rental period
ends. The oxygen provisions contained in DRA became effective on January 1, 2006. In the case of beneficiaries receiving oxygen equipment prior to the effective date, the 36-month period of continuous use began on January 1, 2006.
Accordingly, the first month in which the new payment methodology will impact our net revenues is January 2009.

On November 1, 2006,
the Centers for Medicare and Medicaid Services (CMS) published rule CMS-1304-F, describing the Medicare regulations required to implement the DRA oxygen provisions. The rule codified the new payment methodology and related provisions
with respect to oxygen, including, but not limited to, defining the 36-month capped rental period of continuous use, payment for oxygen contents beyond the 36-month rental period, payment for maintenance and servicing of oxygen equipment and
procedures for replacement of oxygen equipment. The DRA oxygen provisions and related regulations represent a fundamental change in the Medicare payment system for oxygen. These provisions are complex, and are expected to result in profound changes
in the provider-customer relationship for oxygen equipment and related services.

The financial impact to the Company of the oxygen capped
rental regulations will be dependent upon a number of variables, including, (i) the number of Medicare oxygen customers reaching 36 months of continuous service, (ii) the number of patients receiving oxygen contents beyond the 36-month
rental period and the coverage and billing requirements established by CMS for suppliers to receive payment for such oxygen contents, (iii) the mortality rates of patients on service beyond 36 months, (iv) the incidence of patients with
equipment deemed to be beyond its useful life that may be eligible for new equipment and therefore a new rental episode and the coverage and billing requirements established by CMS for suppliers to receive payment for a new rental period, and
(v) payment amounts established by CMS to reimburse suppliers for maintenance of oxygen equipment. The Company continues to evaluate these factors in order to determine the expected impact of the regulations, which we believe will have a
material adverse effect on our revenues, operating income, cash flows and financial position in 2009 and beyond.



27



---

##### Table of Contents

Pursuant to provisions contained in CMS-1304-F, the monthly payment rate for stationary oxygen equipment
in 2008 was increased from $198.40 to $199.28, which is expected to increase our net revenues by approximately $3.0 million in 2008. CMS will revise payment rates for oxygen equipment in future years under the methodology specified in the rule based
on data on the distribution of beneficiaries using various modalities of oxygen equipment. We are unable to predict the oxygen payment revisions to be determined by CMS in future years.

DRA also changed the reimbursement methodology for items of DME in the capped rental payment
category, including but not limited to such items as continuous positive airway pressure (CPAP) devices, certain respiratory assist devices, nebulizers, hospital beds and wheelchairs. For such items of DME, payment may not extend over a
period of continuous use of longer than 13 months. On the first day that begins after the 13thcontinuous month during which payment is made for the
item, the supplier must transfer title of the item to the beneficiary. Additional payments for maintenance and service of the item are made for parts and labor not covered by a suppliers or manufacturers warranty. The DME capped rental
provisions contained in DRA applied to items furnished for which the first rental month occurred on or after January 1, 2006. Accordingly, the first month in which the new payment methodology impacted our net revenues was February 2007.

Included in rule CMS-1304-F is a discussion of the Medicare regulations necessary
to implement the DME capped rental changes contained in the DRA. In addition, on January 26, 2006, CMS announced a final rule revising the payment classification of certain respiratory assist devices (RADs). RADs with a backup rate
feature were reclassified as capped rental DME items effective April 1, 2006, whereby payments to providers of such devices cease after the 13thcontinuous month of rental. Prior to the rule, providers were paid a continuous monthly rental amount over the entire period of medical necessity. In cases where Medicare beneficiaries received the item prior to April 1, 2006, only
the rental payments for months after the effective date count toward the 13-month cap. Accordingly, the first month in which the new payment methodology impacted our net revenues was May 2007. We estimate that the capped rental changes to DME and
RADs reduced our net revenues by approximately $11.4 million in fiscal 2007 and will reduce net revenues in fiscal 2008 by approximately $22.9 million.

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

Recently enacted legislation negatively affected Medicare reimbursement amounts for covered Part B drugs, including
inhalation drugs that we provide, beginning April 1, 2008 (See MEDICARE REIMBURSEMENT). The SCHIP Extension Act required CMS to adjust the average sales price (ASP) calculation methodology used to determine Medicare
payment amounts for inhalation drugs by using volume-weighted ASPs based on actual sales volume rather than average sales price. The SCHIP Extension Act also specifically lowered reimbursement for the inhalation drug albuterol. Based on the payment
rates published quarterly by CMS for inhalation drugs dispensed in 2008, we estimate that our reimbursement for such drugs will be reduced by approximately $72.6 million in 2008. We can not determine whether quarterly updates in ASP pricing data
will continue to result in ongoing reductions in payment rates for inhalation drugs, and what impact such payment reductions could have on our business in the future.

On April 10, 2008, the Durable Medical Equipment Medicare Administrative Contractors (DME MACs) issued a revision of the Nebulizer Local Coverage Determination (LCD) that would have caused
claims for levalbuterol and commercially-available combinations of albuterol and ipratropium to be downcoded and reimbursed based on the allowances for less costly medications. According to the LCD, claims for levalbuterol would be paid based on the
allowance for albuterol and claims for commercially-available combinations of albuterol and ipratropium would be paid based on the allowances for individual vials of the component medications. The practical effect of the LCD, had it been
implemented, would have eliminated coverage and access to these medications for Medicare beneficiaries. CMS subsequently issued instructions to the DME MACs to delay the implementation of the LCD pending the outcome of a civil action brought in the
U.S. District Court for the District of Columbia challenging CMS authority to implement the LCD revision with respect to combinations of albuterol and ipratropium. On October 16, 2008, the U.S. District Court ruled in favor of the
plaintiffs, thereby permanently enjoining CMS from implementing or enforcing the April 2008 LCD or any local coverage determination that bases reimbursement on a least costly alternative standard. It is unclear at this time whether CMS will attempt
to implement the LCD with respect to levalbuterol, which was not the subject of the civil suit. We will continue to monitor any instructions that CMS issues to the DME MACs that might amend or rescind the LCD in order to assess the potential impact
on our ability to make these medications available to our pharmacy customers in the future.



28



---

##### Table of Contents

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

In February
2006, 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 payment for our equipment and services, or the effect that such payment adjustments would have on our financial position or operating results.

FUTURE IMPLEMENTATION OF A COMPETITIVE BIDDING PROCESS UNDER MEDICARE COULD REDUCE OUR REVENUES, NET INCOME AND CASH FLOWS.

CMS is required by law to establish and implement programs under which competitive acquisition areas will be established throughout the United States for contract award purposes for the furnishing of competitively
priced items of DME, including oxygen equipment (See MEDICARE REIMBURSEMENT). The program will be implemented in phases such that competition under the program will occur in ten of the largest MSAs in the first year, 80 of the largest
MSAs in the following year, and additional areas thereafter.

For each competitive acquisition area, CMS will conduct a competition under
which providers will submit bids to supply certain covered items of DME. Successful bidders will be expected to meet certain program quality standards in order to be awarded a contract and only successful bidders can 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 will be re-bid at least every three years. CMS will be required to
award contracts to multiple entities submitting bids in each area for an item or service, but will have the authority to limit the number of contractors in a competitive acquisition area to the number needed to meet projected demand. CMS may use
competitive bid pricing information to adjust the payment amounts otherwise in effect for an area that is not a competitive acquisition area.

CMS concluded the bidding process for the first round of MSAs in September 2007. On March 20, 2008, CMS completed the bid evaluation process and announced the payment amounts that would have taken effect in the ten competitive bidding
areas beginning July 1, 2008. Contracts to provide products within the competitive bid areas were awarded to selected suppliers and took effect on July 1, 2008. On July 15, 2008, Congress enacted the MIPPA legislation pursuant to an
override of a Presidential veto. MIPPA retroactively delays the implementation of competitive bidding for up to 18 months and reduces Medicare prices nationwide by 9.5% for the product categories, including oxygen, that were initially included in
competitive bidding. Pursuant to the delay, CMS cancelled all contract awards, retroactive to June 30, 2008. We will continue to monitor developments regarding the implementation of the competitive bidding program. We can not predict the
outcome of the competitive bidding program on our business when fully implemented nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding.

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
6% of our customers are eligible for primary Medicaid benefits, and State Medicaid programs fund approximately 13% 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.



29



---

##### Table of Contents

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 24% of our customers and approximately 33% 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 47% of our revenues are derived from Medicare, 33% from private insurance carriers, 13% 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 ensure 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 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.

WE ARE SUBJECT TO A CORPORATE INTEGRITY AGREEMENT WITH THE OFFICE OF INSPECTOR GENERAL, AND IF WE FAIL TO COMPLY WITH THE TERMS OF THE CORPORATE INTEGRITY AGREEMENT,
WE COULD SUFFER SEVERE CRIMINAL, CIVIL OR ADMINISTRATIVE SANCTIONS.

We are subject to a five-year corporate integrity agreement with
the Office of Inspector General that began in May 2006. Violations of the terms of the corporate integrity agreement could result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and
other reimbursement programs.



30



---

##### Table of Contents

COMPLIANCE WITH 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 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, regulatory compliance issues associated with the acquired business, 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.

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 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.



31



---

##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

There were no material changes to the information provided in Item 7A in our Annual Report on Form 10-K regarding our market risk.

Our revolving credit facility is subject to changing LIBOR-based interest rates. At September 30, 2008, we had $70.0 million of outstanding borrowings under the credit facility.



|Item 4. | Controls and Procedures
|------- | -----------------------

(a) Disclosure 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.

(b) Changes in Internal Control Over Financial Reporting

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, 2008, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



32



---

##### Table of Contents

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. 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 for purposes other than dismissal in all
unsealed qui tam actions of which we are aware and we are vigorously defending these suits.

Our operating centers are also subject
to federal and/or state laws regulating, among other things, interstate motor-carrier transportation, repackaging of oxygen, distribution of medical equipment, certain types of home health activities, pharmacy operations, nursing services and
respiratory services and apply to those locations involved in such activities. Certain of our employees are subject to state laws and regulations governing the ethics and professional practice of respiratory therapy, pharmacy and nursing. From time
to time, the Company receives inquiries and complaints from various government agencies related to its operations or personnel. It has been the Companys policy to cooperate with all such inquiries and vigorously defend any administrative
complaints. The Company can provide no assurances as to the duration or outcome of these inquiries and/or complaints.

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.

In May of 2006, the Company resolved several ongoing investigations by the Office of Inspector General and/or the U.S.
Department of Justice. The periods covered by these investigations varied, ranging from January 1995 through March 2004. As a part of the settlements, the Company entered into a five-year corporate integrity agreement with the Office of Inspector
General. Violations of the corporate integrity agreement can result in severe criminal, civil and administrative penalties and sanctions, including disqualification from Medicare and other reimbursement programs.



33



---

##### Table of Contents

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

During the three months ended September 30, 2008, the Company did not repurchase any shares of its common stock.

ISSUER PURCHASES OF EQUITY SECURITIES



|                                        |  |                                |  |                            |      |                                                               |   |                                                                                    |   |            
|--------------------------------------- |  | ------------------------------ |  | -------------------------- | ---- | ------------------------------------------------------------- | - | ---------------------------------------------------------------------------------- | - | -----------
|Period                                  |  | Total Numberof SharesPurchased |  | Average PricePaidPer Share |      | Total Numberof SharesPurchased asPart of theRepurchaseProgram |   | ApproximateDollar Value ofShares that MayYet BePurchasedUnder
theRepurchaseProgram
|July 1, 2008 to July 31, 2008           |  | 0                              |  | $                          | 0.00 |                                                               | 0 |                                                                                    | $ | 198,439,000
|August 1, 2008 to August 31, 2008       |  | 0                              |  |                            | 0.00 |                                                               | 0 |                                                                                    | $ | 234,578,000
|September 1, 2008 to September 30, 2008 |  | 0                              |  |                            | 0.00 |                                                               | 0 |                                                                                    | $ | 229,416,000
|                                        |  |                                |  |                            |      |                                                               |   |                                                                                    |   |            
|Total                                   |  | 0                              |  | $                          | 0.00 |                                                               | 0 |                                                                                    |   |            
|                                        |  |                                |  |                            |      |                                                               |   |                                                                                    |   |            

On February 14, 2006, the Board authorized a share repurchase plan whereby the Company may
repurchase shares of the Companys common stock in amounts determined pursuant to a formula (the share repurchase formula) that takes into account both the ratio of the Companys net debt to cash flow and its available cash
resources and borrowing availability. On January 23, 2007 and October 23, 2007, the Board approved modifications to the formula to increase the ratio of net debt to cash flow to allow additional share repurchases. As of September 30,
2008, $229.4 million of common stock was eligible for repurchase in accordance with the formula.



|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
|------- | --------



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



34



---

##### 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 6, 2008



35



---

##### Table of Contents

INDEX OF EXHIBITS



|               |  |                                                                                                                                                                                                                              
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | 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                                                                                                                                                
|               | 
|4.30(D)        |  | Lincare Holdings Inc. Series A Indenture dated as of October 31, 2007                                                                                                                                                        
|               | 
|4.40(D)        |  | Lincare Holdings Inc. Series B Indenture dated as of October 31, 2007                                                                                                                                                        
|               | 
|4.50(D)        |  | Lincare Holdings Inc. Registration Rights Agreement dated as of October 31, 2007                                                                                                                                             
|               | 
|4.60(D)        |  | First Amendment to Credit Agreement with Bank of America, N.A. as Agent and Calyon, New York Branch as Syndication Agent dated as of October 31, 2007                                                                        
|               | 
|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.
|- | ---------------------------------------------------------------------------

|D | Incorporated by reference to the Registrants Form 8-K dated November 6, 2007.
|- | ------------------------------------------------------------------------------



S-1