##### 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 March 31, 2010

OR



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

Commission File Number 0-19946





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 has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).
(Registrant is not subject to the requirements of Rule 405 of Regulation S-T at this
time)    Yes   ̈    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See 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
April 30, 2010
|Common Stock, $0.01 par value |  | 66,253,270                   









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LINCARE HOLDINGS INC. AND SUBSIDIARIES

FORM 10-Q

For The Quarterly Period Ended March 31, 2010

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 |  | 18
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 31
|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.                       |  | Removed and Reserved                                                                  |  | 34
|Item 5.                       |  | Other Information                                                                     |  | 34
|Item 6.                       |  | Exhibits                                                                              |  | 34
|SIGNATURE                     |  | 35                                                                                   
|INDEX OF EXHIBITS             |  | S-1                                                                                  



2



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PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements (Unaudited)
|------- | --------------------------------

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                           |  |               |           |                  |   |          
|---------------------------------------------------------- |  | ------------- | --------- | ---------------- | - | ---------
|                                                           |  | March 31,2010 |           | December 31,2009
|ASSETS                                                     |  |               |           |                  |   |          
|Current assets:                                            |  |               |           |                  |   |          
|Cash and cash equivalents                                  |  | $             | 80,935    |                  | $ | 20,428   
|Short-term investments                                     |  |               | 55,600    |                  |   | 58,650   
|Restricted cash                                            |  |               | 5,345     |                  |   | 0        
|Accounts receivable, net                                   |  |               | 195,847   |                  |   | 159,542  
|Income tax receivable                                      |  |               | 0         |                  |   | 3,325    
|Inventories                                                |  |               | 10,112    |                  |   | 13,617   
|Prepaid and other current assets                           |  |               | 3,156     |                  |   | 3,742    
|Deferred income taxes                                      |  |               | 25,430    |                  |   | 25,646   
|                                                           |  |               |           |                  |   |          
|Total current assets                                       |  |               | 376,425   |                  |   | 284,950  
|                                                           |  |               |           |                  |   |          
|Property and equipment, net                                |  |               | 340,450   |                  |   | 339,250  
|Goodwill                                                   |  |               | 1,254,826 |                  |   | 1,243,404
|Other                                                      |  |               | 9,136     |                  |   | 9,590    
|                                                           |  |               |           |                  |   |          
|Total assets                                               |  | $             | 1,980,837 |                  | $ | 1,877,194
|                                                           |  |               |           |                  |   |          
|                                                           |  |              
|LIABILITIES AND STOCKHOLDERS EQUITY                       |  |               |           |                  |   |          
|                                                           |  |              
|Current liabilities:                                       |  |               |           |                  |   |          
|Current installments of long-term obligations              |  | $             | 4,451     |                  | $ | 2,767    
|Accounts payable                                           |  |               | 54,644    |                  |   | 49,959   
|Accrued expenses:                                          |  |               |           |                  |   |          
|Compensation and benefits                                  |  |               | 43,756    |                  |   | 42,016   
|Liability insurance                                        |  |               | 19,331    |                  |   | 19,461   
|Other current liabilities                                  |  |               | 54,325    |                  |   | 49,264   
|Income taxes payable                                       |  |               | 18,021    |                  |   | 0        
|                                                           |  |               |           |                  |   |          
|Total current liabilities                                  |  |               | 194,528   |                  |   | 163,467  
|                                                           |  |               |           |                  |   |          
|Long-term obligations, net, excluding current installments |  |               | 488,674   |                  |   | 482,104  
|Deferred income taxes and other taxes                      |  |               | 334,846   |                  |   | 329,708  
|                                                           |  |               |           |                  |   |          
|Total liabilities                                          |  |               | 1,018,048 |                  |   | 975,279  
|                                                           |  |               |           |                  |   |          
|Commitments and contingencies:                             |  |               |           |                  |   |          
|Stockholders equity:                                      |  |               |           |                  |   |          
|Common stock                                               |  |               | 660       |                  |   | 654      
|Additional paid-in capital                                 |  |               | 650,211   |                  |   | 632,979  
|Retained earnings                                          |  |               | 311,918   |                  |   | 268,282  
|                                                           |  |               |           |                  |   |          
|Total stockholders equity                                 |  |               | 962,789   |                  |   | 901,915  
|                                                           |  |               |           |                  |   |          
|Total liabilities and stockholders equity                 |  | $             | 1,980,837 |                  | $ | 1,877,194
|                                                           |  |               |           |                  |   |          

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



3



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                                                  |  |                            |         |   |               |   |         |  
|--------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------- | - | ------- | -
|                                                                                  |  | For The Three Months Ended |        
|                                                                                  |  | March 31,2010              |         |   | March 31,2009 |  
|Net revenues                                                                      |  | $                          | 410,040 |   |               | $ | 371,674 |  
|                                                                                  |  |                            |         |   |               |   |         |  
|Costs and expenses:                                                               |  |                            |         |   |               |   |         |  
|Cost of goods and services                                                        |  |                            | 110,926 |   |               |   | 102,580 |  
|Operating expenses                                                                |  |                            | 98,527  |   |               |   | 97,097  |  
|Selling, general and administrative expenses                                      |  |                            | 84,051  |   |               |   | 85,554  |  
|Bad debt expense                                                                  |  |                            | 6,151   |   |               |   | 5,575   |  
|Depreciation and amortization expense                                             |  |                            | 29,526  |   |               |   | 29,054  |  
|                                                                                  |  |                            |         |   |               |   |         |  
|                                                                                  |  |                            | 329,181 |   |               |   | 319,860 |  
|                                                                                  |  |                            |         |   |               |   |         |  
|Operating income                                                                  |  |                            | 80,859  |   |               |   | 51,814  |  
|                                                                                  |  |                            |         |   |               |   |         |  
|Other income (expense):                                                           |  |                            |         |   |               |   |         |  
|Interest income                                                                   |  |                            | 93      |   |               |   | 396     |  
|Interest expense                                                                  |  |                            | (8,934  | ) |               |   | (8,619  | )
|                                                                                  |  |                            |         |   |               |   |         |  
|                                                                                  |  |                            | (8,841  | ) |               |   | (8,223  | )
|                                                                                  |  |                            |         |   |               |   |         |  
|Income before income taxes                                                        |  |                            | 72,018  |   |               |   | 43,591  |  
|Income tax expense                                                                |  |                            | 28,382  |   |               |   | 17,607  |  
|                                                                                  |  |                            |         |   |               |   |         |  
|Net income                                                                        |  | $                          | 43,636  |   |               | $ | 25,984  |  
|                                                                                  |  |                            |         |   |               |   |         |  
|Basic earnings per common share                                                   |  | $                          | 0.68    |   |               | $ | 0.36    |  
|                                                                                  |  |                            |         |   |               |   |         |  
|Diluted earnings per common share                                                 |  | $                          | 0.67    |   |               | $ | 0.36    |  
|                                                                                  |  |                            |         |   |               |   |         |  
|Weighted average number of common shares outstanding                              |  |                            | 63,807  |   |               |   | 72,074  |  
|                                                                                  |  |                            |         |   |               |   |         |  
|Weighted average number of common shares and common share equivalents outstanding |  |                            | 64,871  |   |               |   | 72,316  |  
|                                                                                  |  |                            |         |   |               |   |         |  

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



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|--------------------------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------- | - | -------- | - |  | 
|                                                                                  |  | For The Three Months Ended |        
|                                                                                  |  | March 31,2010              |         |   | March 31,2009 |  
|Cash flows from operating activities:                                             |  |                            |         |   |               |   |          |  
|Net income                                                                        |  | $                          | 43,636  |   |               | $ | 25,984   |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                            |         |   |               |   |          |   |  | 
|Bad debt expense                                                                  |  |                            | 6,151   |   |               |   | 5,575    |  
|Depreciation and amortization expense                                             |  |                            | 29,526  |   |               |   | 29,054   |  
|Net (gain) loss on disposal of property and equipment                             |  |                            | (16     | ) |               |   | 14       |  
|Amortization of debt issuance costs                                               |  |                            | 442     |   |               |   | 443      |  
|Amortization of discount on bonds payable                                         |  |                            | 4,503   |   |               |   | 4,199    |  
|Stock-based compensation expense                                                  |  |                            | 6,484   |   |               |   | 10,434   |  
|Deferred income taxes                                                             |  |                            | 5,913   |   |               |   | 8,544    |  
|Excess tax benefit from stock-based compensation                                  |  |                            | (9      | ) |               |   | 0        |  
|Change in assets and liabilities net of effects of acquired businesses:           |  |                            |         |   |               |   |          |   |  | 
|Accounts receivable                                                               |  |                            | (42,456 | ) |               |   | (10,692  | )
|Inventories                                                                       |  |                            | 4,117   |   |               |   | 321      |  
|Prepaid and other assets                                                          |  |                            | 571     |   |               |   | 221      |  
|Accounts payable                                                                  |  |                            | 2,973   |   |               |   | (4,176   | )
|Accrued expenses                                                                  |  |                            | 4,886   |   |               |   | 840      |  
|Income taxes payable                                                              |  |                            | 21,892  |   |               |   | 7,507    |  
|Long-term obligations                                                             |  |                            | (750    | ) |               |   | 0        |  
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Net cash provided by operating activities                                         |  |                            | 87,863  |   |               |   | 78,268   |  
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Cash flows from investing activities:                                             |  |                            |         |   |               |   |          |   |  | 
|Proceeds from sale of property and equipment                                      |  |                            | 18      |   |               |   | 2        |  
|Capital expenditures                                                              |  |                            | (24,155 | ) |               |   | (36,795  | )
|Sales and maturities of investments                                               |  |                            | 3,050   |   |               |   | 500      |  
|Business acquisitions, net of cash acquired and purchase price adjustments        |  |                            | (11,128 | ) |               |   | 0        |  
|Cash restricted for future payments                                               |  |                            | (5,345  | ) |               |   | 0        |  
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Net cash used in investing activities                                             |  |                            | (37,560 | ) |               |   | (36,293  | )
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Cash flows from financing activities:                                             |  |                            |         |   |               |   |          |   |  | 
|Payments of principal on debt                                                     |  |                            | (13     | ) |               |   | (275     | )
|Proceeds from exercise of stock options and issuance of common shares             |  |                            | 10,208  |   |               |   | 0        |  
|Excess tax benefit from stock-based compensation                                  |  |                            | 9       |   |               |   | 0        |  
|Payments to acquire treasury stock                                                |  |                            | 0       |   |               |   | (100,207 | )
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Net cash provided by (used in) financing activities                               |  |                            | 10,204  |   |               |   | (100,482 | )
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Net increase (decrease) in cash and cash equivalents                              |  |                            | 60,507  |   |               |   | (58,507  | )
|Cash and cash equivalents, beginning of period                                    |  |                            | 20,428  |   |               |   | 72,651   |  
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Cash and cash equivalents, end of period                                          |  | $                          | 80,935  |   |               | $ | 14,144   |  
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Supplemental disclosure of cash flow information:                                 |  |                            |         |   |               |   |          |   |  | 
|Cash paid for interest                                                            |  | $                          | 0       |   |               | $ | 1        |  
|                                                                                  |  |                            |         |   |               |   |          |   |  | 
|Cash paid for income taxes                                                        |  | $                          | 1,135   |   |               | $ | 1,007    |  
|                                                                                  |  |                            |         |   |               |   |          |   |  | 

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



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note
1. Basis of Presentation, Summary of Significant Accounting Policies and Change in Accounting Principle

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 (Lincare or the Company) on Form 10-K for
the fiscal year ended December 31, 2009. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been
reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from those estimates. It is at least reasonably possible that a change in those estimates will occur in the near term. The Company evaluated subsequent events after the balance sheet date of
March 31, 2010 through the financial statement issuance date.

Investments:At March 31, 2010,
the Company held $55.6 million in face amount of 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. The investments are classified as trading securities and are carried at fair value, estimated at $51.8 million as of March 31, 2010, with any realized and unrealized
gains and losses included in other income and expense. At March 31, 2010, the Company held a $3.8 million put option from UBS Financial Services, Inc. related to its investment in auction rate securities. The put option is carried at fair
value, with any realized and unrealized gains and losses included in other income and expense (see Note 3, Investments).

Restricted Cash:Restricted cash was held in a non-interest-bearing escrow account for the purposes of complying with and
performing certain contractual obligations in connection with the February 1, 2010, purchase of the respiratory therapy, home medical equipment and infusion therapy business of Gentiva Health Services, Inc. (see Note 4, Business
Combinations).

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 represented approximately 58% and 61% of net
revenues for the three months ended March 31, 2010 and 2009, 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 sales adjustments.



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



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 which limit the rental payment periods in some instances and which 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 and/or services 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. Such sales 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 Companys 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,
generally ranging from several days to several weeks, 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 for payment for the products or services. 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, the Company 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 medical equipment (excluding depreciation of $26.3
million in 2010 and $26.7 million in 2009, 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



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



customer service, distribution and administrative costs relating to the respiratory drug product line of approximately $13.2 million and $12.5 million for the three-month periods ended
March 31, 2010 and 2009, respectively. Included in cost of goods and services in the three-month periods ended March 31, 2010 and 2009 are salary and related expenses of pharmacists and pharmacy technicians of approximately $3.1 million
and $2.7 million, respectively.

Operating Expenses:The Company manages 1,071 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 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 2010 and 2009 within these major categories were as follows:

|                                  |  |                             |        |      |   |       
|--------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|Operating Expenses (in thousands) |  | Three Months EndedMarch 31,
|                                  |  | 2010                        |        | 2009
|Salary and related                |  | $                           | 62,958 |      | $ | 64,102
|Facilities                        |  |                             | 15,901 |      |   | 15,060
|Vehicles                          |  |                             | 11,645 |      |   | 9,817 
|General supplies/miscellaneous    |  |                             | 8,023  |      |   | 8,118 
|                                  |  |                             |        |      |   |       
|Total                             |  | $                           | 98,527 |      | $ | 97,097
|                                  |  |                             |        |      |   |       

Included in operating expenses during the three months
ended March 31, 2010 are salary and related expenses for Service Reps in the amount of $26.4 million. Such salary and related expenses for the three months ended March 31, 2009 were $26.1 million.

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 months ended March 31, 2010 and 2009 are salary and related expenses of $63.3 million and $67.7 million,
respectively. These salary and related expenses include the cost of the Companys respiratory therapists for the three months ended March 31, 2010 and 2009 of $16.3 million and $16.0 million, respectively. The Companys respiratory
therapists generally provide non-reimbursable clinical follow-up with the customer and communication, as appropriate, to the prescribing physician with respect to the customers prescribed 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. Fair Value of Assets and Liabilities

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e. the exit
price) in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various valuation approaches, including quoted market prices and discounted cash flows. A hierarchy for inputs is
used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would
use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect a companys judgment concerning the assumptions that market participants would use in pricing
the asset or liability developed based on the best information available under the circumstances. The fair value hierarchy is broken down into three levels based on the reliability of inputs as follows:



| |  |  | Level 1  Valuations based on quoted prices in active markets for identical instruments that the Company is able to access. Since valuations are
based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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(Unaudited)



| |  |  | Level 2  Valuations based on quoted prices in active markets for instruments that are similar, or quoted prices in markets that are not active
for identical or similar instruments, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
| | - |  | -----------------------------------------------------------------------------------------------------------------

The Company utilizes Level 3 fair value measurements to value its investments in auction rate securities (ARS) consisting of
securities collateralized by student loans, a related put option (see Note 3, Investments) and acquisition-related contingent consideration.

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of
fair value requires more judgment. Accordingly, the Companys degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into
different levels of the fair value hierarchy. In such cases an asset or liability is classified in its entirety based on the lowest level of input that is significant to the measurement of fair value.

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability
rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Companys own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the
measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation, such as the recent illiquidity in the auction rate securities market. In periods of market dislocation, the
observability of prices and inputs may be reduced for many instruments. This condition has caused, and in the future may cause, the Companys financial instruments to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3.

Valuation techniques used by the Company must be consistent with at least one of the three possible approaches: the market
approach, income approach and/or cost approach. The Companys Level 3 valuations of auction rate securities and acquisition-related contingent consideration are based on the income approach, specifically, discounted cash flow analyses which
utilize significant inputs based on the Companys estimates and assumptions. Inputs include current coupon rates and expected maturity dates. The Companys valuation of the UBS Put Option uses a discounted cash flow approach that takes
into account certain estimates for interest rates and the timing and amount of expected future cash flows, adjusted for any bearer risk associated with UBSs financial ability to repurchase the ARS beginning June 30, 2010 (see Note 3,
Investments). These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change.

We estimated the fair value of acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This
fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement as defined by ASC 820, Fair Value Measurements and Disclosures. Level 3 instruments are valued based on
unobservable inputs that are supported by little or no market activity and reflect the Companys own assumptions in measuring fair value. The fair values of the contingent consideration arrangements were estimated by applying the income
approach.

Contingent consideration of $4.2 million was recognized in connection with a business acquisition in February 2010.
Contingent consideration of $6.1 million was outstanding at December 31, 2009 related to a business acquisition in May 2009. At March 31, 2010, the amounts recognized for the contingent consideration arrangements, the range of outcomes,
and the assumptions used to develop the estimates had not materially changed.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The following tables present the valuation of the Companys financial assets and liabilities as of March 31, 2010 and
December 31, 2009, measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

Fair
value measurements at March 31, 2010 were as follows:



|                                                          |  |                                         |        |    
|--------------------------------------------------------- |  | --------------------------------------- | ------ | ---
|                                                          |  | SignificantUnobservableInputs(Level
 3) |       
|                                                          |  | (In thousands)                          |       
|Assets                                                    |  |                                         |        |    
|Short-term investments  trading securities               |  | $                                       | 51,840 |    
|Short-term investments  UBS Put Option                   |  |                                         | 3,760  |    
|                                                          |  |                                         |        |    
|Total                                                     |  | $                                       | 55,600 |    
|                                                          |  |                                         |        |    
|                                                          | 
|Liabilities                                               |  |                                         |        |    
|Acquisition-related contingent consideration  short-term |  | $                                       | 1,654  | (1)
|Acquisition-related contingent consideration  long-term  |  |                                         | 8,611  | (2)
|                                                          |  |                                         |        |    
|Total                                                     |  | $                                       | 10,265 |    
|                                                          |  |                                         |        |    

Fair value measurements at December 31, 2009 were as follows:



|                                                          |  |                                         |        |    
|--------------------------------------------------------- |  | --------------------------------------- | ------ | ---
|                                                          |  | SignificantUnobservableInputs(Level
 3) |       
|                                                          |  | (In thousands)                          |       
|Assets                                                    |  |                                         |        |    
|Short-term investments  trading securities               |  | $                                       | 54,215 |    
|Short-term investments  UBS Put Option                   |  |                                         | 4,435  |    
|                                                          |  |                                         |        |    
|Total                                                     |  | $                                       | 58,650 |    
|                                                          |  |                                         |        |    
|                                                          | 
|Liabilities                                               |  |                                         |        |    
|Acquisition-related contingent consideration  short-term |  | $                                       | 276    | (1)
|Acquisition-related contingent consideration  long-term  |  |                                         | 5,794  | (2)
|                                                          |  |                                         |        |    
|Total                                                     |  | $                                       | 6,070  |    
|                                                          |  |                                         |        |    



|(1) | Included in current installments of long-term obligations on the accompanying condensed consolidated balance sheets.
|--- | --------------------------------------------------------------------------------------------------------------------

|(2) | Included in long-term obligations, net, excluding current installments on the accompanying condensed consolidated balance sheets.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The following table presents the changes in the estimated fair values of the Companys financial assets and liabilities that are
measured using significant unobservable inputs (Level 3) for the three months ended March 31, 2010:



|                                                          |  |                                          |        |   |             |   |       
|--------------------------------------------------------- |  | ---------------------------------------- | ------ | - | ----------- | - | ------
|                                                          |  | Significant UnobservableInputs (Level 3)
|                                                          |  | (In thousands)                          
|                                                          |  | Assets                                   |        |   | Liabilities
|Balance on December 31, 2009                              |  | $                                        | 58,650 |   |             | $ | 6,070 
|Unrealized gain  trading securities included in earnings |  |                                          | 674    |   |             |   | 0     
|Unrealized loss  UBS Put Option included in earnings     |  |                                          | (674   | ) |             |   | 0     
|Redemptions at par                                        |  |                                          | (3,050 | ) |             |   | 0     
|Acquisition-related contingent consideration              |  |                                          | 0      |   |             |   | 4,195 
|                                                          |  |                                          |        |   |             |   |       
|Balance on March 31, 2010                                 |  | $                                        | 55,600 |   |             | $ | 10,265
|                                                          |  |                                          |        |   |             |   |       

Fair Value of Financial Instruments

The Company believes that the book values of its cash equivalents, investments, accounts receivable, income taxes receivable, accounts
payable, accrued expenses and income taxes payable approximate fair value. The Company utilizes Level 3 fair value measurements to value its investments and acquisition-related contingent considerations. The book value of the Companys
revolving credit facility and deferred acquisition obligations approximate their fair value as the applicable interest rates approximate rates at which similar types of borrowing arrangements could be currently obtained by the Company. The fair
value of the Companys 2.75% Series A Debentures due 2037 and 2.75% Series B Debentures due 2037 are estimated based on several standard market variables, including the Companys stock price, yield to put/call through conversion and yield
to maturity. The estimated fair values of the Series A and Series B Debentures at March 31, 2010 were $317,638,750 and $321,406,250, respectively, and $291,170,000 and $289,437,500, respectively, at December 31, 2009.

Note 3. Investments

All of the auction rate securities held as of March 31, 2010, are secured by pools of student loans guaranteed by state-designated
guaranty agencies or monoline insurers or reinsured by the United States government. 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 March 31, 2010, 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 of these securities, at par, in the amount of $3.1 million in January 2010.

The auction rate securities owned by the Company were purchased from UBS Financial Services, Inc., a subsidiary of UBS AG
(UBS), and are held by UBS for the benefit of the Company. 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 November 2008, the Company accepted an offer (the UBS Put Option) from UBS to sell to it at par value all of the Companys remaining auction
rate securities 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 Company elected to measure the UBS Put Option under the fair value option using a discounted cash flow approach that takes
into account certain estimates for interest rates and the timing and amount of expected future cash flows, adjusted for any bearer risk associated with UBSs financial ability to repurchase the auction rate securities beginning June 30,
2010. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change. The Company anticipates that any future changes in the fair value of the UBS Put Option will be offset by the
changes in the fair value of the related auction rate securities with no material net impact



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(Unaudited)



to the consolidated statements of operations. The fair value option enables some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities
differently without applying complex hedge accounting to achieve similar results. The UBS Put Option will continue to be measured at fair value until the earlier of its maturity or exercise, with any realized and unrealized gains and losses included
in other income and expense. At March 31, 2010, the estimated fair value of the UBS Put Option was $3.8 million.

During
the three month periods ending March 31, 2010 and March 31, 2009, the Company recognized a $0.7 million and a $7.9 million unrealized gain on the auction rate securities, respectively, recorded to other income, and recorded a corresponding
increase to short-term investments and long-term investments, respectively. This was offset by recognizing a $0.7 million and a $7.9 million unrealized loss on the UBS Put Option, respectively, recorded to other expense, and recorded a corresponding
decrease to short-term investments and long-term investments, respectively. Accordingly, the change in valuations for the auction rate securities and UBS Put Option had no effect on the Consolidated Statements of Operations for the three month
periods ending March 31, 2010 and March 31, 2009.

The Company will continue to monitor credit market conditions to
assess the liquidity of its investments. Due to the Companys 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.

Note 4. 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 three-month period ended March 31, 2010, the Company acquired
certain assets of three companies. During the three-month period ended March 31, 2009, the Company did not acquire the business or assets of any companies.

The acquisition date fair value of the total consideration transferred for the 2010 acquisitions was $15.9 million, which consisted of
the following:



|                                 |  |                |       
|-------------------------------- |  | -------------- | ------
|                                 |  | (In thousands)
|Cash                             |  | $              | 11,128
|Contingent consideration         |  |                | 4,195 
|Deferred acquisition obligations |  |                | 319   
|Assumption of liabilities        |  |                | 259   
|                                 |  |                |       
|                                 |  | $              | 15,901
|                                 |  |                |       

The following table summarizes the estimated fair
values of the assets acquired at the acquisition date for the 2010 acquisitions:



|                       |  |                |        |  
|---------------------- |  | -------------- | ------ | -
|                       |  | (In thousands) |       
|Current assets         |  | $              | 611    |  
|Property and equipment |  |                | 4,784  |  
|Intangible assets      |  |                | 50     |  
|Goodwill               |  |                | 11,422 |  
|Deferred revenue       |  |                | (966   | )
|                       |  |                |        |  
|                       |  | $              | 15,901 |  
|                       |  |                |        |  

The results of the 2010 acquisitions have been included in the Companys financial statements from the
acquisition dates forward and were immaterial for the first three months of 2010. Pro forma information for the comparable period of 2009 would not be materially different from amounts reported.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Note 5. Accounts Receivable, Net

Accounts receivable, net at March 31, 2010 and December 31, 2009 consist of:



|                                                                |  |                |         |   |                  |   |         |  
|--------------------------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                                                |  | March 31,2010  |         |   | December 31,2009 |  
|                                                                |  | (In thousands) |        
|Trade accounts receivable                                       |  | $              | 239,224 |   |                  | $ | 201,102 |  
|Less allowance for sales adjustments and uncollectible accounts |  |                | (43,377 | ) |                  |   | (41,560 | )
|                                                                |  |                |         |   |                  |   |         |  
|Accounts receivable, net                                        |  | $              | 195,847 |   |                  | $ | 159,542 |  
|                                                                |  |                |         |   |                  |   |         |  

Note 6. Property and Equipment, Net

Property and equipment, net at March 31, 2010 and December 31, 2009 consist of:



|                               |  |                |           |   |                  |   |           |  
|------------------------------ |  | -------------- | --------- | - | ---------------- | - | --------- | -
|                               |  | March 31,2010  |           |   | December 31,2009 |  
|                               |  | (In thousands) |          
|Property and equipment at cost |  | $              | 1,104,264 |   |                  | $ | 1,080,406 |  
|Less accumulated depreciation  |  |                | (763,814  | ) |                  |   | (741,156  | )
|                               |  |                |           |   |                  |   |           |  
|Property and equipment, net    |  | $              | 340,450   |   |                  | $ | 339,250   |  
|                               |  |                |           |   |                  |   |           |  

Note 7. Long-Term Obligations

Long-term obligations at March 31, 2010 and December 31, 2009 consist of:



|                                                                                                                                      |  |                |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                      |  | March 31,2010  |         |   | December 31,2009 |  
|                                                                                                                                      |  | (In thousands) |        
|Convertible debt to mature in 2037, bearing fixed interest of 2.75%, with a put/call option in 2012                                   |  | $              | 275,000 |   |                  | $ | 275,000 |  
|Original issue discount                                                                                                               |  |                | (26,489 | ) |                  |   | (28,814 | )
|Convertible debt to mature in 2037, bearing fixed interest of 2.75%, with a put/call option in 2014                                   |  |                | 275,000 |   |                  |   | 275,000 |  
|Original issue discount                                                                                                               |  |                | (47,729 | ) |                  |   | (49,907 | )
|Other long-term liabilities                                                                                                           |  |                | 4,281   |   |                  |   | 5,031   |  
|Capital lease obligations due through 2010                                                                                            |  |                | 0       |   |                  |   | 13      |  
|Unsecured acquisition obligations and contingent consideration, net of imputed interest, payable in various installments through
2011 |  |                | 13,062  |   |                  |   | 8,548   |  
|                                                                                                                                      |  |                |         |   |                  |   |         |  
|Total long-term obligations                                                                                                           |  |                | 493,125 |   |                  |   | 484,871 |  
|Less: current installments                                                                                                            |  |                | 4,451   |   |                  |   | 2,767   |  
|                                                                                                                                      |  |                |         |   |                  |   |         |  
|Long-term obligations, excluding current installments                                                                                 |  | $              | 488,674 |   |                  | $ | 482,104 |  
|                                                                                                                                      |  |                |         |   |                  |   |         |  

The Companys 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 revolving credit facility contains a $60.0 million letter of credit sub-facility, which reduces the principal amount
available under the facility by the amount of outstanding letters of credit on the sub-facility. As of March 31, 2010 and December 31, 2009, no borrowings were outstanding under the credit facility and $33.6 million in standby letters of
credit were issued as of those dates. The revolving credit agreement has a maturity date of December 1, 2011. The Company pays an annual administration agency fee along with a quarterly facility fee. The facility fee is based on the



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



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 March 31, 2010 and December 31, 2009. 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.

On October 31, 2007, the Company completed the
sale of $275.0 million principal amount of convertible senior debentures due 2037  Series A (the Series A Debentures) and $275.0 million principal amount 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 will be 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 the Companys common stock or in a combination of cash and shares of common stock, at the
Companys 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 the Companys common stock exceeds the base conversion price, holders of the Series A Debentures and Series B Debentures will receive an additional number of shares of common stock
per $1,000 principal amount of the Debentures, as determined pursuant to a specified formula. The Company will 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 the Company 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.

The Company has estimated the fair value of the liability components of the Series Debentures by calculating the present value of the
cash flows of similar liabilities without associated equity components. In performing those calculations, the Company estimated that instruments similar to the Series A and B Debentures without a conversion feature as of the date of issuance would
have had 7.0% and 7.4% rates of return (respectively) and expected lives of five and seven years (respectively). These estimated rates of return were based on the Companys nonconvertible debt borrowing rate at the time of issuance and the
expected lives were based on the holders put option features embedded in the notes. The initial proceeds from the instruments exceeded the estimated fair value of the liability components, and as a result, the Company reclassified $47.4
million and $67.2 million, respectively, of the carrying value of the Series A and B convertible debentures to equity as of the October 31, 2007 issuance date. These amounts represent the equity components of the proceeds from the
debentures. The Company also recognized debt discounts equal to the equity components which will be accreted to interest expense over the respective five and seven year terms of the first put option dates specified in the indentures underlying the
debentures. The accreted interest plus the cash interest payments based on the stated coupon rates results in interest cost being recognized in the income statement that reflect the interest rates on similar instruments without a conversion
feature.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The debt and equity components recognized for our Series A and Series B convertible debentures were as follows (in thousands):



|                                           |  |                |         |   |                   |   |         |          |  |   |          |   |  |   |         |  
|------------------------------------------ |  | -------------- | ------- | - | ----------------- | - | ------- | -------- |  | - | -------- | - |  | - | ------- | -
|                                           |  | March 31, 2010 |         |   | December 31, 2009 |  
|                                           |  | Series A       |         |   | Series B          |   |         | Series A |  |   | Series B |  
|Principal amount of convertible debentures |  | $              | 275,000 |   |                   | $ | 275,000 |          |  | $ | 275,000  |   |  | $ | 275,000 |  
|Unamortized discount                       |  |                | (26,489 | ) |                   |   | (47,729 | )        |  |   | (28,814  | ) |  |   | (49,907 | )
|Net carrying amount                        |  |                | 248,511 |   |                   |   | 227,271 |          |  |   | 246,186  |   |  |   | 225,093 |  
|Additional paid-in capital                 |  |                | 29,065  |   |                   |   | 41,238  |          |  |   | 29,065   |   |  |   | 41,238  |  

At March 31,
2010, the remaining period over which the discount on the liability components will be amortized is 31 months and 55 months for the Series A and Series B convertible debentures, respectively.

The amount of interest expense recognized for the three months ended March 31, 2010 and 2009 was as follows (in thousands):



|                                                   |  |                |       |                |   |          |  |          |       |  |   |      
|-------------------------------------------------- |  | -------------- | ----- | -------------- | - | -------- |  | -------- | ----- |  | - | -----
|                                                   |  | March 31, 2010 |       | March 31, 2009
|                                                   |  | Series A       |       | Series B       |   | Series A |  | Series B
|Contractual coupon interest                        |  | $              | 1,890 |                | $ | 1,890    |  | $        | 1,890 |  | $ | 1,890
|Amortization of discount on convertible debentures |  |                | 2,325 |                |   | 2,178    |  |          | 2,172 |  |   | 2,027
|                                                   |  |                |       |                |   |          |  |          |       |  |   |      
|Interest expense                                   |  | $              | 4,215 |                | $ | 4,068    |  | $        | 4,062 |  | $ | 3,917
|                                                   |  |                |       |                |   |          |  |          |       |  |   |      

Note 8. Income Taxes

The Company conducts business nationally and, as a result, files a U.S. federal income tax return 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, and state and local income tax
examinations for years before 2006 and 2005, respectively.

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.

The Internal Revenue Service (IRS) has completed its examination of the Companys U.S. income tax returns through 2008.
The U.S. federal statute of limitations remains open for the years 2006 and forward. There are no material disputes for the open tax years. The year 2009 is currently under examination.

Note 9. Earnings Per Common Share

Basic earnings 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 earnings per common share reflects the potential dilution of securities that could share in the Companys earnings, including exercise of outstanding stock options and non-vested restricted stock using
the treasury stock method. When the exercise of stock options or the inclusion of awards would be anti-dilutive, they are excluded from the earnings per common share calculation. For the three months ended March 31, 2010 and 2009, the number of
excluded shares underlying anti-dilutive stock options and awards was 2,068,146 and 7,423,770, respectively.



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



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



|                                                                           |  |                                       |        |      |   |       
|-------------------------------------------------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------
|                                                                           |  | For The Three MonthsEnded March 31,  
|                                                                           |  | 2010                                  |        | 2009
|                                                                           |  | (In thousands, except per share data)
|Numerator:                                                                 |  |                                       |        |      |   |       
|Income available to common stockholders and holders of dilutive securities |  | $                                     | 43,636 |      | $ | 25,984
|                                                                           |  |                                       |        |      |   |       
|                                                                           |  |                                      
|Denominator:                                                               |  |                                       |        |      |   |       
|Weighted average shares                                                    |  |                                       | 63,807 |      |   | 72,074
|Effect of dilutive securities:                                             |  |                                       |        |      |   |       
|Incremental shares under stock compensation plans                          |  |                                       | 1,064  |      |   | 242   
|                                                                           |  |                                       |        |      |   |       
|Adjusted weighted average shares                                           |  |                                       | 64,871 |      |   | 72,316
|                                                                           |  |                                       |        |      |   |       
|                                                                           |  |                                      
|Per share amount:                                                          |  |                                       |        |      |   |       
|Basic                                                                      |  | $                                     | 0.68   |      | $ | 0.36  
|                                                                           |  |                                       |        |      |   |       
|Diluted                                                                    |  | $                                     | 0.67   |      | $ | 0.36  
|                                                                           |  |                                       |        |      |   |       

Note 10. Stock-Based Compensation

For the three months ended March 31, 2010 and 2009, the Company recognized total stock-based compensation expenses of $6.5 million
and $10.4 million, respectively, as well as related tax benefits of $1.7 million and $3.3 million, respectively. All stock-based compensation expenses are recognized using a graded method approach and are either classified within operating expenses
or selling, general and administrative expenses on the accompanying condensed consolidated statements of operations, with substantially all of the expense being in selling, general and administrative expenses.

Stock Options

Stock
option activity for the three months ended March 31, 2010 is summarized below:



|                                                              |  |                  |   |  |                              |       |                                                  |      |                          |   |           
|------------------------------------------------------------- |  | ---------------- | - |  | ---------------------------- | ----- | ------------------------------------------------ | ---- | ------------------------ | - | ----------
|                                                              |  | Number ofOptions |   |  | WeightedAverageExercisePrice |       | Weighted AverageRemainingContractual Life(Years) |      | AggregateIntrinsic Value
|Outstanding at December 31, 2009                              |  | 5,324,587        |   |  | $                            | 36.64 |                                                  |      |                          |   |           
|Options granted in 2010                                       |  | 0                |   |  |                              |      |                                                  |      |                          |   |           
|Exercised in 2010                                             |  | (307,166         | ) |  | $                            | 32.30 |                                                  |      |                          |   |           
|Cancelled in 2010                                             |  | (2,250           | ) |  | $                            | 42.33 |                                                  |      |                          |   |           
|                                                              |  |                  |   |  |                              |       |                                                  |      |                          |   |           
|Outstanding at March 31, 2010                                 |  | 5,015,171        |   |  | $                            | 36.90 |                                                  | 4.04 |                          | $ | 40,006,262
|                                                              |  |                  |   |  |                              |       |                                                  |      |                          |   |           
|Exercisable at March 31, 2010                                 |  | 3,890,412        |   |  | $                            | 38.04 |                                                  | 3.24 |                          | $ | 26,601,167
|                                                              |  |                  |   |  |                              |       |                                                  |      |                          |   |           
|Vested or expected to vest in the future as of March 31, 2010 |  | 5,006,425        |   |  | $                            | 36.90 |                                                  | 4.04 |                          | $ | 39,950,240
|                                                              |  |                  |   |  |                              |       |                                                  |      |                          |   |           

Of the stock options outstanding at March 31, 2010, options for 3,890,412 shares were
exercisable and options for 1,124,759 shares were unvested. Of the total stock options outstanding at March 31, 2010, 5,006,425 were vested or expected to vest in the future, net of expected cancellations and forfeitures of 8,746. The intrinsic
value of options exercised during the three months ended March 31, 2010 amounted to $2.7 million. There were no options exercised during the three months ended March 31, 2009.



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



As of March 31, 2010, the total remaining unrecognized compensation cost related to unvested stock options amounted to $7.2 million,
which will be amortized over the weighted-average remaining requisite service period of 1.4 years.

Restricted Stock

The following table summarizes information about restricted stock activity for the three months ended March 31, 2010:



|                              |  |           |   |  |                                               |      
|----------------------------- |  | --------- | - |  | --------------------------------------------- | -----
|                              |  | Shares    |   |  | Weighted-Average GrantDate FairValue PerShare
|Unvested at December 31, 2009 |  | 1,671,050 |   |  | $                                             | 32.29
|Granted                       |  | 361,600   |   |  | $                                             | 35.37
|Vested                        |  | 0         |   |  |                                               |     
|Forfeited                     |  | (1,000    | ) |  | $                                             | 35.37
|                              |  |           |   |  |                                               |      
|Unvested at March 31, 2010    |  | 2,031,650 |   |  | $                                             | 32.84
|                              |  |           |   |  |                                               |      

As of March 31, 2010, the total remaining unrecognized compensation cost related to
restricted stock amounted to $43.7 million, which will be amortized over the weighted-average remaining requisite service period of 2.4 years.

Note 11. Comprehensive Income

The objective for the reporting and display of comprehensive income and its components in the Companys condensed consolidated
financial statements 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-month periods ended March 31, 2010 and
2009.



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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 Patient Protection and Affordable Care Act (PPACA), 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. PPACA, as amended, is a comprehensive health care reform law that contains a
large number of health-related provisions to take effect over the next several years, including various cost containment and program integrity changes that will apply to the home medical equipment industry. MIPPA delayed 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 instituted 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 provisions negatively impacted 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. These legislative
provisions, as currently in effect and when fully implemented, have had and will have a material adverse effect on our business, financial condition, operating results and cash flows.

PPACA was signed into law on March 23, 2010. Together with the Health Care and Education Reconciliation Act of
2010 (signed into law on March 30, 2010) which amended the statute, PPACA is a comprehensive health care law that is intended to expand access to health insurance, reform the health insurance market to provide additional consumer protections,
and improve the health care delivery system to reduce costs and produce better outcomes through a combination of cost controls, subsidies and mandates. Among other things, PPACA:



|(1) | Introduces a productivity adjustment factor that will be applied to Medicare price updates (covered item updates) for 2011 and each subsequent year.
Specifically, Medicare payment amounts would be updated each year by the percentage increase in the consumer price index for all urban consumers (CPI-U) for the 12-month period ending with June of the previous year, reduced by a productivity
adjustment (as projected by the Secretary of Health and Human Services). The application of the productivity adjustment may result in the covered item update being negative for a year, and may result in payment rates being less than such payment
rates for the preceding year.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Makes adjustments to the Medicare DME Competitive Acquisition Program (competitive bidding). PPACA expands the second round of DME competitive
bidding from 70 markets under existing law to 91 markets. The additional competitive bidding areas will include the next 21 largest metropolitan statistical areas beyond the 79 markets previously identified under the program. PPACA also adds a
requirement to competitively bid all areas or use competitive bid information to set prices in all areas by 2016, effectively expanding the program to all geographic markets.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(3) | Makes important changes to key fraud and abuse statutes and increases funding for fraud and abuse enforcement. PPACA increases funding for program integrity
initiatives, improves screening of providers and suppliers before and after granting Medicare billing privileges and establishes new and enhanced penalties and procedures to deter fraud and abuse. PPACA also specifically adds a requirement that
physician orders for covered items of DME must be written by a physician and must document that a physician, a physician assistant, a nurse practitioner, or a clinical nurse specialist has had a face-to-face encounter (including through the use of
telehealth) with the individual involved during the six-month period preceding such written order, or other reasonable timeframe as determined by the Secretary of Health and Human Services.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PPACA is a complex, sweeping health care reform law that will dramatically alter the structure of health insurance markets and the
practice of medicine in the United States. Due to the complex nature of the legislation and the extended time period over which various provisions of the new law will be implemented (pursuant to yet unwritten regulations), we can not predict at this
time what effects PPACA and related regulations will have on our business in the future.

The MIPPA legislation imposed a 9.5%
reduction in Medicare payment rates for certain specified product categories, including oxygen, effective January 1, 2009. In addition to the 9.5% reduction, the Centers for Medicare and Medicaid Services (CMS), as required by
statute, subjected the monthly payment amount for stationary oxygen equipment to additional cuts of 2.3%, thereby reducing the monthly payment rate from $199.28 in 2008 to $175.79 in 2009. On November 13, 2009, CMS announced the revised
national monthly payment amount for stationary oxygen equipment furnished to Medicare beneficiaries in 2010 of $173.17, a reduction of 1.5%. We estimate that this reduction will negatively impact our revenues in 2010 by approximately $9.0 million.

The SCHIP Extension Act, which became law on December 29, 2007, required 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. CMS publishes payment rates for inhalation drugs each calendar quarter, representing the unit reimbursement rates in effect for inhalation drugs dispensed within that quarter. These payment rates may be subject to
volatility as a result of the underlying ASP data used to determine the rates in effect each quarter. While these payment rates have been relatively stable in the past twelve months, we can not determine whether quarterly updates in ASP pricing data
will continue to result in ongoing reductions in payment rates for inhalation drugs, or what impact such payment reductions could have on our business in the future.

On February 1, 2006, Congress passed the DRA legislation which changed 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, related disposable supplies and accessories and maintenance of equipment, to a capped rental
arrangement whereby payment for oxygen equipment may not extend over a period of continuous use of longer than 36 months. Separate payments for oxygen contents continue to be made for the period of medical need beyond the
36thmonth. Additionally, payment for routine maintenance
and service of the oxygen equipment is 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 impacted our net revenues was January 2009. We anticipate that the new
oxygen payment rules will continue to negatively affect our net revenues on an ongoing basis, as each month additional customers reach the 36-month capped service period, resulting in up to two or more years without rental income on these customers.

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 first impacted our net revenues in February 2007.

On December 8, 2003, MMA was signed into
law. The MMA legislation directly impacted reimbursement for the primary respiratory and other DME products that we provide. Among other things, MMA:



|(1) | Significantly reduced reimbursement for inhalation drug therapies. Prior to MMA, Medicare reimbursement for covered drugs, including the
inhalation drugs that we provide, was limited to 95% of the published average wholesale price (AWP) for the drug. MMA established new payment limits and procedures for drugs reimbursed under
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Medicare Part B. Beginning in 2005, inhalation drugs furnished to Medicare beneficiaries are reimbursed at 106% 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Established a competitive acquisition program for DME that was expected to commence in 2008, but was subsequently delayed by further legislation.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 was initially intended to be implemented in phases such that competition under the program would occur in nine of the largest metropolitan statistical areas (MSAs) in the first year and an additional 70 of the largest MSAs in a
second, subsequent round of bidding.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For each competitive acquisition area, CMS is to 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 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, including the
Company, and took effect on July 1, 2008. On July 15, 2008, Congress enacted the MIPPA legislation which retroactively delayed the implementation of competitive bidding and reduced Medicare prices nationwide by 9.5% beginning in 2009 for
the product categories, including oxygen, that were initially included in competitive bidding. As a result of the delay, CMS cancelled all contract awards retroactively to June 30, 2008.

On April 18, 2009, the interim final rule (IFR) for competitive bidding became effective. The IFR outlined the process
for rebidding the first round of competitive bidding in nine metropolitan markets in 2009, including tentative timelines and bidding requirements. Bidder registration began August 17, 2009 and contract bidding occurred from October 21,
2009 through December 21, 2009. Reimbursement rates from the bidding process are expected to be announced by CMS in June 2010 and contract suppliers will be announced in September 2010. The reimbursement rates resulting from the bidding process
will go into effect in each competitive acquisition area on January 1, 2011.

CMS will undertake a second round of
competitive bidding in up to 91 additional markets, with contracts expected to be effective as of January 1, 2013. It is not certain at this time whether CMS intends to implement competitive bidding in all 91 markets simultaneously, or whether
the program will be phased in over several years. The PPACA legislation requires CMS to expand competitive bidding further to all geographic markets (certain markets may be excluded at the discretion of CMS) or to use competitive bid pricing
information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.

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 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 practice of respiratory therapy, pharmacy and nursing.



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As a health care provider, 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, Medicaid and other regulations, regional health insurance carriers and state agencies often conduct audits and request customer records and other documents to support our 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, which could have a material adverse effect on our business.

Numerous federal and state laws and regulations, including the Federal Health Insurance Portability And Accountability Act of 1996
(HIPAA) and the Health Information Technology For Economic And Clinical Health Act (HITECH Act), govern the collection, dissemination, security, 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, the HITECH Act,
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, or possible changes in national health care policies. Future legislative and regulatory changes could have a material adverse effect on our business.

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 March 31,
|                                     |  | 2010                                |         | 2009
|                                     |  | (In thousands)                     
|Oxygen and other respiratory therapy |  | $                                   | 368,187 |      | $ | 336,342
|Home medical equipment and other     |  |                                     | 41,853  |      |   | 35,332 
|                                     |  |                                     |         |      |   |        
|Total                                |  | $                                   | 410,040 |      | $ | 371,674
|                                     |  |                                     |         |      |   |        

Net revenues for the three months ended March 31,
2010, increased by $38.4 million (or 10.3%), compared with the three months ended March 31, 2009. The Company estimates that the 10.3% increase in net revenues in the first quarter of 2010 was comprised of approximately 11.3% internal and
acquisition growth offset by approximately 1.0% negative impact from $3.6 million of Medicare payment changes taking effect in 2010 (see Medicare Reimbursement above). 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.

The contribution of oxygen and other respiratory therapy products to our net revenues was 89.8% and 90.5%, respectively, during the three
months ended March 31, 2010 and 2009. 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, was 27.1%
for the three months ended March 31, 2010, compared with 27.6% for the comparable prior year period. Cost of goods and services for the three months ended March 31, 2010,



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increased $8.3 million, or 8.1%, when compared with the prior year period. The increase in cost of goods and services in 2010 is attributable to an increase in the number of oxygen customers
served and higher volumes in our inhalation drug, sleep therapy, enteral nutrition and infusion therapy product lines.

Cost
of goods and services for the three-month periods includes the cost of medical equipment (excluding depreciation of $26.3 million in 2010 and $26.7 million in 2009, 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 $13.2 million and $12.5 million for the
three-month periods of 2010 and 2009, respectively. Included in cost of goods and services in the three months ended March 30, 2010 are salary and related expenses of pharmacists and pharmacy technicians of $3.1 million. Such salary and related
expenses for the three months ended March 31, 2009, were $2.7 million.

Operating expenses, as a percentage of net
revenues, were 24.0% for the three months ended March 31, 2010, compared with 26.1% for the comparable prior year period. Operating expenses for the three months ended March 31, 2010, increased by $1.4 million, or 1.5%, over the prior year
period. The Company has been successful in achieving productivity gains that have contributed to containment of the growth in wage expenses and in managing the growth of its employee health benefit costs. These positive developments were partially
offset by increases in vehicle related expenses during the first quarter of 2010, most significantly fuel costs.

The Company
manages 1,071 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 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 2010 and 2009 within these major categories were as follows:



|                                  |  |                                     |        |      |   |       
|--------------------------------- |  | ----------------------------------- | ------ | ---- | - | ------
|Operating Expenses (in thousands) |  | For The Three MonthsEnded March 31,
|                                  |  | 2010                                |        | 2009
|Salary and related                |  | $                                   | 62,958 |      | $ | 64,102
|Facilities                        |  |                                     | 15,901 |      |   | 15,060
|Vehicles                          |  |                                     | 11,645 |      |   | 9,817 
|General supplies/miscellaneous    |  |                                     | 8,023  |      |   | 8,118 
|                                  |  |                                     |        |      |   |       
|Total                             |  | $                                   | 98,527 |      | $ | 97,097
|                                  |  |                                     |        |      |   |       

Included in operating expenses during the three months
ended March 31, 2010 are salary and related expenses for Service Reps in the amount of $26.4 million. Such salary and related expenses for the three months ended March 31, 2009 were $26.1 million.

Selling, general and administrative (SG&A) expenses, as a percentage of net revenues, were 20.5% for the three months
ended March 31, 2010, compared with 23.0% for the comparable prior year period. SG&A expenses for the three months ended March 31, 2010 decreased by $1.5 million, or 1.8%, compared to the prior year period. Contributing to the decrease
in SG&A expenses during the three months ended March 31, 2010 were lower share-based compensation costs and containment of the growth in payroll and related expenses in the Companys overhead locations. These positive developments were
partially offset by an increase in casualty insurance claim costs during the first quarter of 2010.

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 months ended March 31, 2010 and 2009 are salary and related



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expenses of $63.3 million and $67.7 million, respectively. These salary and related expenses include the cost of the Companys respiratory therapists for the three months ended
March 31, 2010 and 2009 of $16.3 million and $16.0 million, respectively. The Companys respiratory therapists generally provide non-reimbursable clinical follow-up with the customer and communication, as appropriate, to the prescribing
physician with respect to the customers prescribed 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 months ended March 31, 2010 is depreciation of medical equipment of
$26.3 million and depreciation of other property and equipment of $3.2 million. Included in depreciation and amortization expense in the three months ended March 31, 2009 is depreciation of medical equipment of $26.7 million and depreciation of
other property and equipment of $2.3 million.

Operating income for the three months ended March 31, 2010, was $80.9
million (19.7% of net revenues), compared with $51.8 million (13.9% of net revenues) for the comparable prior year period. The increase in operating income in 2010 is attributed to the increase in net revenues from the Companys core product
lines and the management of the growth in costs and expenses in the first quarter of 2010 as compared with the prior year period.

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 12.3% to $87.9 million for the three months ended March 31, 2010, compared
with $78.3 million for the three months ended March 31, 2009. Net cash used in investing and financing activities was $27.4 million for the three months ended March 31, 2010. Investing and financing activities during the three-month period
ended March 31, 2010 included our net investment in property and equipment of $24.1 million and $11.1 million of business acquisition expenditures (excluding $5.3 million of cash restricted for future contingent payments) and proceeds of $3.1
million from the sale of investments and proceeds of $10.2 million from the exercise of stock options.

As of March 31,
2010, our principal sources of liquidity consisted of approximately $80.9 million of cash and equivalents, $55.6 million of short-term investments and $356.4 million available under our revolving credit agreement. The revolving credit agreement,
dated December 1, 2006, makes available to us up to $390.0 million over a five-year period, subject to certain terms and conditions set forth in the agreement. As of March 31, 2010, there were $33.6 million of standby letters of credit
issued under the credit facility.

At March 31, 2010, the Company held $55.6 million in face amount of 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. The investments are classified as trading securities and are carried at fair value, estimated at $51.8 million as of March 31, 2010. At March 31, 2010, the Company held a put option from UBS Financial Services, Inc. with an
estimated fair value of $3.8 million related to its investment in auction rate securities.

We will continue to monitor credit
market conditions to assess the liquidity of our investments and access to external sources of capital. 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.

Our Board of Directors has
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 three months ended March 31, 2010, the Company did
not repurchase any shares of its common stock. As of March 31, 2010, $328.1 million of the Companys common stock was eligible for repurchase in accordance with the plans formula.



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On October 31, 2007, we completed the sale of $275.0 million principal amount of
convertible senior debentures, due 2037  Series A (the Series A Debentures) and $275.0 million principal amount 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.

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 sales 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 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.



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Accounts receivable balance concentrations by major payor category as of March 31, 2010
and December 31, 2009 were as follows:



|                                               |  |               |   |  |                  |  
|---------------------------------------------- |  | ------------- | - |  | ---------------- | -
|Percentage of Accounts Receivable Outstanding: |  |               |   |  |                  |  
|                                               |  | March 31,2010 |   |  | December 31,2009 |  
|Medicare                                       |  | 32.6          | % |  | 34.0             | %
|Medicaid/Other Government                      |  | 14.8          | % |  | 15.6             | %
|Private Insurance                              |  | 38.5          | % |  | 38.8             | %
|Customer Pay                                   |  | 14.1          | % |  | 11.6             | %
|                                               |  |               |   |  |                  |  
|Total                                          |  | 100.0         | % |  | 100.0            | %
|                                               |  |               |   |  |                  |  

Aged accounts receivable balances by major payor category as of March 31, 2010 and December 31,
2009 were as follows:



|                                     |  |                |   |  |        |   |  |          |  
|------------------------------------ |  | -------------- | - |  | ------ | - |  | -------- | -
|Percentage of Accounts Aged in Days: |  |                |  
|                                     |  | March 31, 2010 |  
|                                     |  | 0-60           |   |  | 61-120 |   |  | Over 120 |  
|Medicare                             |  | 82.9           | % |  | 9.0    | % |  | 8.1      | %
|Medicaid/Other Government            |  | 60.3           | % |  | 18.6   | % |  | 21.1     | %
|Private Insurance                    |  | 65.5           | % |  | 16.0   | % |  | 18.5     | %
|Customer Pay                         |  | 55.5           | % |  | 17.7   | % |  | 26.8     | %
|All Payors                           |  | 69.0           | % |  | 14.3   | % |  | 16.7     | %



|                                     |  |                   |   |  |        |   |  |          |  
|------------------------------------ |  | ----------------- | - |  | ------ | - |  | -------- | -
|Percentage of Accounts Aged in Days: |  |                   |  
|                                     |  | December 31, 2009 |  
|                                     |  | 0-60              |   |  | 61-120 |   |  | Over 120 |  
|Medicare                             |  | 81.0              | % |  | 10.2   | % |  | 8.8      | %
|Medicaid/Other Government            |  | 60.4              | % |  | 17.8   | % |  | 21.8     | %
|Private Insurance                    |  | 65.9              | % |  | 13.3   | % |  | 20.8     | %
|Customer Pay                         |  | 44.2              | % |  | 22.6   | % |  | 33.2     | %
|All Payors                           |  | 67.6              | % |  | 14.1   | % |  | 18.3     | %

We operate 34
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 March 31, 2010, there were 1,387 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, which now account for approximately 68.3% of all
payments received. We believe that our collection procedures contribute to our accounts receivable days sales outstanding (DSO) of 43 days at March 31, 2010 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.



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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 acquisition obligations.

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.



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As a provider of home oxygen and other respiratory therapy services for the home health care
market, we have historically depended heavily on Medicare reimbursement as a result of the high proportion of elderly persons suffering from respiratory disease. Medicare Part B, the Supplementary Medical Insurance Program, provides coverage to
eligible beneficiaries for DME, such as oxygen equipment, respiratory assistance devices, continuous positive airway pressure devices, nebulizers and associated inhalation medications, hospital beds and wheelchairs for the home setting.
Approximately 64% 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, including the Patient Protection and Affordable Care Act (PPACA), 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. PPACA, as amended, is a comprehensive
health care reform law that contains a large number of health-related provisions to take effect over the next several years, including various cost containment and program integrity changes that will apply to the home medical equipment industry.
MIPPA delayed 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 instituted 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 provisions negatively impacted 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. These legislative provisions, as currently in effect and when fully implemented, have had and will have a material adverse effect on our business, financial condition, operating results and cash flows. See MEDICARE
REIMBURSEMENT for a full discussion of the PPACA, 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 changed 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, related disposable supplies and accessories and maintenance of equipment, to a capped rental arrangement whereby payment for oxygen equipment may
not extend over a period of continuous use of longer than 36 months. Separate payments for oxygen contents continue to be made for the period of medical need beyond the
36thmonth. Additionally, payment for routine maintenance
and service of the oxygen equipment is 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 impacted our net revenues was January 2009. We anticipate that the new
oxygen payment rules will continue to negatively affect our net revenues on an ongoing basis, as each month additional customers reach the 36-month capped service period, resulting in up to two or more years without rental income from these
customers

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 first impacted our net revenues in February 2007.

On July 15, 2008, Congress enacted the
MIPPA legislation which reduced Medicare payment rates nationwide for certain DME items, including oxygen equipment, by 9.5% beginning in 2009. In addition to the 9.5% reduction, CMS



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subjected the monthly payment amount for stationary oxygen equipment to additional cuts of 2.3%, thereby reducing the monthly payment rate from $199.28 in 2008 to $175.79 in 2009. On
November 13, 2009, CMS announced the revised national monthly payment amount for stationary oxygen equipment furnished to Medicare beneficiaries in 2010 of $173.17, a reduction of 1.5%. We estimate that this reduction will negatively impact our
revenues in 2010 by approximately $9.0 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. CMS publishes payment rates for
inhalation drugs each calendar quarter, representing the unit reimbursement rates in effect for inhalation drugs dispensed within that quarter. These payment rates may be subject to volatility as a result of the underlying ASP data used to determine
the rates in effect each quarter. While these payment rates have been relatively stable in the past twelve months, we can not determine whether quarterly updates in ASP pricing data will continue to result in ongoing reductions in payment rates for
inhalation drugs, or what impact such payment reductions could have on our business in the future.

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 did 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 was initially intended to be implemented in phases such that competition under the program would occur in nine of the largest MSAs in the first year, and an additional 70 of the largest MSAs in a second, subsequent
round of bidding. The PPACA legislation expands the second round of DME competitive bidding from 70 markets under existing law to 91 markets. The additional competitive bidding areas will include the next 21 largest metropolitan statistical areas
beyond the 79 markets previously identified under the program. PPACA also adds a requirement to competitively bid all areas or use competitive bid information to set prices in all areas by 2016, effectively expanding the program to all geographic
markets.

For each competitive acquisition area, CMS is to 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.



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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, including the Company, and took effect on July 1, 2008. On July 15, 2008, Congress enacted the MIPPA legislation which retroactively delayed the implementation of competitive bidding and reduced
Medicare prices nationwide by 9.5% beginning in 2009 for the product categories, including oxygen, that were initially included in competitive bidding. As a result of the delay, CMS cancelled all contract awards retroactively to June 30, 2008.

On April 18, 2009, the interim final rule (IFR) for competitive bidding became effective. The IFR outlined
the process for rebidding the first round of competitive bidding in nine metropolitan markets in 2009, including tentative timelines and bidding requirements. Bidder registration began August 17, 2009 and contract bidding occurred from
October 21, 2009 through December 21, 2009. Reimbursement rates from the bidding process are expected to be announced by CMS in June 2010 and contract suppliers will be announced in September 2010. The reimbursement rates resulting from
the bidding process will go into effect in each competitive acquisition area on January 1, 2011.

CMS will undertake a
second round of competitive bidding in up to 91 additional markets, with contracts expected to be effective as of January 1, 2013. It is not certain at this time whether CMS intends to implement competitive bidding in all 91 markets
simultaneously, or whether the program will be phased in over several years. The PPACA legislation requires CMS to expand competitive bidding further to all geographic markets (certain markets may be excluded at the discretion of CMS) or to use
competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.

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 7% of our customers are eligible for primary Medicaid benefits, and State Medicaid programs fund approximately 12% of our payments from primary and secondary insurance benefits. Continued state budgetary pressures could lead to further
reductions in funding for the reimbursement for our equipment and services which, in turn, could have a material adverse effect on our financial position and operating results.

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

Payors such as private insurance companies and employers are under pressure to increase profitability and reduce costs.
In response, certain payors are limiting coverage or reducing reimbursement rates for the equipment and services we provide. Approximately 28% of our customers and approximately 35% 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 46% of our revenues are derived from Medicare, 35% 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



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payors have filing deadlines and they will not pay claims submitted after such time. We are also subject to extensive pre-payment and post-payment audits by governmental and private payors that
could result in material refunds of monies received or denials of claims submitted for payment under such third-party payor programs and contracts. 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 currently operate regulate various 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 provider, 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,
Medicaid and other regulations, regional health insurance carriers and state agencies often conduct audits and request customer records and other documents to support our 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, which could have a material adverse effect on our business.

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, 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.

COMPLIANCE WITH REGULATIONS UNDER THE FEDERAL HEALTH INSURANCE
PORTABILITY AND ACCOUNTABILITY ACT OF 1996 (HIPAA), THE HEALTH INFORMATION TECHNOLOGY FOR ECONOMIC AND CLINICAL HEALTH ACT (HITECH ACT) AND RELATED RULES, RELATING TO THE TRANSMISSION, SECURITY AND PRIVACY OF HEALTH INFORMATION COULD IMPOSE
ADDITIONAL SIGNIFICANT COSTS ON OUR OPERATIONS.

Numerous federal and state laws and regulations, including HIPAA and the
HITECH Act, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information. HIPAA and the HITECH Act require us to comply with standards for the use and disclosure of health information within
our company and with third parties. HIPAA and the HITECH Act also include 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. HIPAA 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. The HITECH Act expands the notification requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information
and provides a tiered system for civil monetary penalties for HIPAA violations.



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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, the HITECH Act, 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.

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 is 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.



|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 March 31, 2010, we had no
outstanding borrowings under the credit facility.



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

(a)
Evaluation of Disclosure Controls and Procedures

The Company has conducted an evaluation, under the supervision and with
the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Changes in Internal Control Over Financial Reporting

There has been no change in the Companys internal control over financial reporting (as such term is defined in Exchange Act Rule
13a-15(f)) during the fiscal quarter ended March 31, 2010, that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

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

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 inquiries and requests
for information from government agencies and to vigorously defend any administrative complaints. The Company can provide no assurances as to the duration or outcome of these inquiries and/or complaints.

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. From time to time we are named as a defendant in such qui tam proceedings. We vigorously defend these suits. The
government has declined to intervene for purposes other than dismissal in all unsealed qui tam actions of which we are aware.

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.

The Company is subject to a five-year corporate integrity
agreement with the Office of Inspector General that began in May 2006. 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.

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.



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

During the three months ended March 31, 2010, the Company did not repurchase any shares of its common stock.

Our Board of Directors has authorized a share repurchase plan whereby the Company may repurchase shares of the Companys common
stock in amounts determined pursuant to a 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. As of March 31, 2010, $328.1 million of common
stock was eligible for repurchase in accordance with the plans formula.



|Item 3. | Defaults Upon Senior Securities - Not Applicable
|------- | ------------------------------------------------



|Item 4. | Removed and Reserved
|------- | --------------------



|Item 5. | Other Information - Not Applicable
|------- | ----------------------------------



|Item 6. | Exhibits
|------- | --------



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



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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


May 6, 2010



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INDEX OF EXHIBITS



|              |  |                                                                                                                                                                                                                              
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit                                                                                                                                                                                                                      
|              | 
|3.10(A)       |  | Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.                                                                                                                                                   
|              | 
|3.11(A)       |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.                                                                                                                   
|              | 
|3.20(B)       |  | Amended and Restated By-Laws of Lincare Holdings Inc.                                                                                                                                                                        
|              | 
|4.10(C)       |  | Lincare Holdings Inc. Indenture dated as of June 11, 2003                                                                                                                                                                    
|              | 
|4.20(C)       |  | Lincare Holdings Inc. Registration Rights Agreement dated as of June 11, 2003                                                                                                                                                
|              | 
|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 8-K dated November 26, 2007.
| | - | -------------------------------------------------------------------------------



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



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