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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(MARK ONE)

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

For The Quarterly Period Ended June 30, 2006

OR



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

Commission File Number 0-19946



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LINCARE HOLDINGS INC.

(Exact name of registrant as specified in its charter)



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

Registrants telephone number, including area code:

(727) 530-7700



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or non-accelerated filer (as defined in Exchange Act
Rule 12b-2).



|                           |  |                    |  |                       
|-------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer  x |  | Accelerated filer ̈ |  | Non-accelerated filer ̈

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 atJuly 31, 2006
|Common Stock, $0.01 par value |  | 93,669,484                 



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

FORM 10-Q

For The Quarterly Period Ended June 30, 2006

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 |  | 15  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 30  
|Item 4.                       |  | Controls and Procedures                                                               |  | 31  
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                      
|                              |  |                                                                                      
|Item 1.                       |  | Legal Proceedings                                                                     |  | 32  
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 33  
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  | 33  
|Item 4.                       |  | Submission of Matters to a Vote of the Security Holders                               |  | 33  
|Item 5.                       |  | Other Information                                                                     |  | 33  
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  | 33  
|                              | 
|SIGNATURE                     |  | 34                                                                                   
|                              | 
|INDEX OF EXHIBITS             |  | S-1                                                                                  



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited)

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                      |  |              |           |   |                  |   |           |  
|----------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                      |  | June 30,2006 |           |   | December 31,2005 |  
|ASSETS                                                |  |              |           |   |                  |   |           |  
|Current assets:                                       |  |              |           |   |                  |   |           |  
|Cash and cash equivalents                             |  | $            | 2,546     |   |                  | $ | 8,544     |  
|Short-term investments                                |  |              | 37,305    |   |                  |   | 38,425    |  
|Restricted cash                                       |  |              | 0         |   |                  |   | 49        |  
|Accounts receivable, net                              |  |              | 158,312   |   |                  |   | 144,130   |  
|Inventories                                           |  |              | 4,234     |   |                  |   | 4,613     |  
|Prepaid and other current assets                      |  |              | 2,602     |   |                  |   | 2,920     |  
|                                                      |  |              |           |   |                  |   |           |  
|Total current assets                                  |  |              | 204,999   |   |                  |   | 198,681   |  
|                                                      |  |              |           |   |                  |   |           |  
|Property and equipment                                |  |              | 760,496   |   |                  |   | 732,775   |  
|Accumulated depreciation                              |  |              | (445,885  | ) |                  |   | (422,639  | )
|                                                      |  |              |           |   |                  |   |           |  
|Net property and equipment                            |  |              | 314,611   |   |                  |   | 310,136   |  
|                                                      |  |              |           |   |                  |   |           |  
|Other assets:                                         |  |              |           |   |                  |   |           |  
|Goodwill                                              |  |              | 1,169,684 |   |                  |   | 1,148,292 |  
|Covenants not-to-compete, net                         |  |              | 1,159     |   |                  |   | 1,885     |  
|Other                                                 |  |              | 7,521     |   |                  |   | 7,879     |  
|                                                      |  |              |           |   |                  |   |           |  
|Total other assets                                    |  |              | 1,178,364 |   |                  |   | 1,158,056 |  
|                                                      |  |              |           |   |                  |   |           |  
|Total assets                                          |  | $            | 1,697,974 |   |                  | $ | 1,666,873 |  
|                                                      |  |              |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                  |  |              |           |   |                  |   |           |  
|Current liabilities:                                  |  |              |           |   |                  |   |           |  
|Current installments on long-term obligations         |  | $            | 7,637     |   |                  | $ | 13,705    |  
|Accounts payable                                      |  |              | 36,228    |   |                  |   | 40,957    |  
|Accrued expenses:                                     |  |              |           |   |                  |   |           |  
|Compensation and benefits                             |  |              | 14,660    |   |                  |   | 16,609    |  
|Liability insurance                                   |  |              | 12,294    |   |                  |   | 11,886    |  
|Other current liabilities                             |  |              | 6,082     |   |                  |   | 3,843     |  
|Income taxes payable                                  |  |              | 3,801     |   |                  |   | 6,811     |  
|                                                      |  |              |           |   |                  |   |           |  
|Total current liabilities                             |  |              | 80,702    |   |                  |   | 93,811    |  
|                                                      |  |              |           |   |                  |   |           |  
|Long-term obligations, excluding current installments |  |              | 275,000   |   |                  |   | 275,436   |  
|Deferred income taxes                                 |  |              | 172,650   |   |                  |   | 159,750   |  
|                                                      |  |              |           |   |                  |   |           |  
|Total liabilities                                     |  |              | 528,352   |   |                  |   | 528,997   |  
|                                                      |  |              |           |   |                  |   |           |  
|Commitments and contingencies:                        |  |              |           |   |                  |   |           |  
|Stockholders equity:                                 |  |              |           |   |                  |   |           |  
|Common stock                                          |  |              | 943       |   |                  |   | 1,277     |  
|Additional paid-in capital                            |  |              | 362,540   |   |                  |   | 357,511   |  
|Unearned compensation                                 |  |              | 0         |   |                  |   | (3,322    | )
|Retained earnings                                     |  |              | 806,139   |   |                  |   | 1,629,300 |  
|Treasury stock                                        |  |              | 0         |   |                  |   | (846,890  | )
|                                                      |  |              |           |   |                  |   |           |  
|Total stockholders equity                            |  |              | 1,169,622 |   |                  |   | 1,137,876 |  
|                                                      |  |              |           |   |                  |   |           |  
|Total liabilities and stockholders equity            |  | $            | 1,697,974 |   |                  | $ | 1,666,873 |  
|                                                      |  |              |           |   |                  |   |           |  

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



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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 |         |   | For The Six Months Ended |  
|                                                                                  |  | June 30,        2006       |         |   | June 30,        2005     |   |         | June 30,        2006 |  |   | June 30,        2005 |  
|Net revenues                                                                      |  | $                          | 350,127 |   |                          | $ | 315,181 |                      |  | $ | 683,718              |   |  | $ | 620,358 |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Costs and expenses:                                                               |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Cost of goods and services                                                        |  |                            | 77,892  |   |                          |   | 67,571  |                      |  |   | 152,293              |   |  |   | 124,105 |  
|Operating expenses                                                                |  |                            | 81,804  |   |                          |   | 73,901  |                      |  |   | 160,911              |   |  |   | 143,905 |  
|Selling, general and administrative expenses                                      |  |                            | 73,560  |   |                          |   | 62,924  |                      |  |   | 144,053              |   |  |   | 124,484 |  
|Bad debt expense                                                                  |  |                            | 5,252   |   |                          |   | 4,727   |                      |  |   | 10,256               |   |  |   | 9,305   |  
|Depreciation expense                                                              |  |                            | 24,655  |   |                          |   | 22,800  |                      |  |   | 49,163               |   |  |   | 44,895  |  
|Amortization expense                                                              |  |                            | 422     |   |                          |   | 423     |                      |  |   | 841                  |   |  |   | 850     |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|                                                                                  |  |                            | 263,585 |   |                          |   | 232,346 |                      |  |   | 517,517              |   |  |   | 447,544 |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Operating income                                                                  |  |                            | 86,542  |   |                          |   | 82,835  |                      |  |   | 166,201              |   |  |   | 172,814 |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Other income (expense):                                                           |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Interest income                                                                   |  |                            | 701     |   |                          |   | 937     |                      |  |   | 1,258                |   |  |   | 1,946   |  
|Interest expense                                                                  |  |                            | (2,426  | ) |                          |   | (3,467  | )                    |  |   | (4,804               | ) |  |   | (6,892  | )
|Net gain on disposal of property and equipment                                    |  |                            | 23      |   |                          |   | 40      |                      |  |   | 36                   |   |  |   | 48      |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|                                                                                  |  |                            | (1,702  | ) |                          |   | (2,490  | )                    |  |   | (3,510               | ) |  |   | (4,898  | )
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Income before income taxes                                                        |  |                            | 84,840  |   |                          |   | 80,345  |                      |  |   | 162,691              |   |  |   | 167,916 |  
|Income tax expense                                                                |  |                            | 32,935  |   |                          |   | 30,234  |                      |  |   | 62,900               |   |  |   | 63,187  |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Net income                                                                        |  | $                          | 51,905  |   |                          | $ | 50,111  |                      |  | $ | 99,791               |   |  | $ | 104,729 |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Basic earnings per common share                                                   |  | $                          | 0.55    |   |                          | $ | 0.50    |                      |  | $ | 1.05                 |   |  | $ | 1.04    |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Diluted earnings per common share                                                 |  | $                          | 0.52    |   |                          | $ | 0.48    |                      |  | $ | 1.00                 |   |  | $ | 0.99    |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Weighted average number of common shares outstanding                              |  |                            | 95,037  |   |                          |   | 99,565  |                      |  |   | 95,412               |   |  |   | 100,271 |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  
|Weighted average number of common shares and common share equivalents outstanding |  |                            | 101,751 |   |                          |   | 107,072 |                      |  |   | 102,313              |   |  |   | 107,911 |  
|                                                                                  |  |                            |         |   |                          |   |         |                      |  |   |                      |   |  |   |         |  







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 Six Months Ended |         
|                                                                                  |  | June 30,2006             |          |   | June 30,2005 |  
|Cash flows from operating activities:                                             |  |                          |          |   |              |   |          |  
|Net income                                                                        |  | $                        | 99,791   |   |              | $ | 104,729  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                          |          |   |              |   |          |  
|Bad debt expense                                                                  |  |                          | 10,256   |   |              |   | 9,305    |  
|Depreciation expense                                                              |  |                          | 49,163   |   |              |   | 44,895   |  
|Net gain on disposal of property and equipment                                    |  |                          | (36      | ) |              |   | (48      | )
|Amortization expense                                                              |  |                          | 841      |   |              |   | 850      |  
|Amortization of debt issuance costs                                               |  |                          | 378      |   |              |   | 347      |  
|Stock-based compensation expense                                                  |  |                          | 9,468    |   |              |   | 1,144    |  
|Deferred income tax                                                               |  |                          | 10,051   |   |              |   | 8,096    |  
|Excess tax benefit from stock-based compensation                                  |  |                          | (178     | ) |              |   | 0        |  
|Minority interest in net earnings of subsidiary                                   |  |                          | 0        |   |              |   | 49       |  
|Change in assets and liabilities net of effects of acquired businesses:           |  |                          |          |   |              |   |          |  
|Increase in accounts receivable                                                   |  |                          | (25,342  | ) |              |   | (21,966  | )
|Decrease in inventories                                                           |  |                          | 404      |   |              |   | 57       |  
|Decrease in prepaid and other assets                                              |  |                          | 299      |   |              |   | 548      |  
|(Decrease) increase in accounts payable                                           |  |                          | (4,729   | ) |              |   | 7,679    |  
|(Decrease) increase in accrued expenses                                           |  |                          | (359     | ) |              |   | 10,479   |  
|(Decrease) increase in income taxes payable                                       |  |                          | (2,267   | ) |              |   | 16,379   |  
|                                                                                  |  |                          |          |   |              |   |          |  
|Net cash provided by operating activities                                         |  |                          | 147,740  |   |              |   | 182,543  |  
|                                                                                  |  |                          |          |   |              |   |          |  
|Cash flows from investing activities:                                             |  |                          |          |   |              |   |          |  
|Proceeds from sale of property and equipment                                      |  |                          | 76       |   |              |   | 131      |  
|Capital expenditures                                                              |  |                          | (52,911  | ) |              |   | (49,693  | )
|Purchases of short-term investments                                               |  |                          | (133,155 | ) |              |   | (237,975 | )
|Sales and maturities of short-term investments                                    |  |                          | 134,275  |   |              |   | 348,589  |  
|Business acquisitions, net of cash acquired and purchase price adjustments        |  |                          | (19,353  | ) |              |   | (66,753  | )
|Cash restricted for future payments                                               |  |                          | 23       |   |              |   | 12       |  
|                                                                                  |  |                          |          |   |              |   |          |  
|Net cash used in investing activities                                             |  |                          | (71,045  | ) |              |   | (5,689   | )
|                                                                                  |  |                          |          |   |              |   |          |  
|Cash flows from financing activities:                                             |  |                          |          |   |              |   |          |  
|Proceeds from issuance of debt                                                    |  |                          | 0        |   |              |   | 75       |  
|Payments of principal on debt                                                     |  |                          | (7,461   | ) |              |   | (22,223  | )
|Change in minority interest                                                       |  |                          | 0        |   |              |   | (79      | )
|Payments of debt issuance costs                                                   |  |                          | 0        |   |              |   | (260     | )
|Proceeds from exercise of stock options and issuance of common shares             |  |                          | 2,753    |   |              |   | 41,705   |  
|Excess tax benefit from stock-based compensation                                  |  |                          | 178      |   |              |   | 0        |  
|Payments to acquire treasury stock                                                |  |                          | (78,163  | ) |              |   | (155,216 | )
|                                                                                  |  |                          |          |   |              |   |          |  
|Net cash used in financing activities                                             |  |                          | (82,693  | ) |              |   | (135,998 | )
|                                                                                  |  |                          |          |   |              |   |          |  
|Net (decrease) increase in cash and cash equivalents                              |  |                          | (5,998   | ) |              |   | 40,856   |  
|Cash and cash equivalents, beginning of period                                    |  |                          | 8,544    |   |              |   | 33,614   |  
|                                                                                  |  |                          |          |   |              |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                        | 2,546    |   |              | $ | 74,470   |  
|                                                                                  |  |                          |          |   |              |   |          |  
|Supplemental disclosure of cash flow information:                                 |  |                          |          |   |              |   |          |  
|Cash paid for interest                                                            |  | $                        | 4,442    |   |              | $ | 6,549    |  
|                                                                                  |  |                          |          |   |              |   |          |  
|Cash paid for taxes                                                               |  | $                        | 55,115   |   |              | $ | 36,037   |  
|                                                                                  |  |                          |          |   |              |   |          |  

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
and Summary of Significant Accounting Policies

The accompanying condensed consolidated financial statements are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. They should be read in conjunction with the consolidated financial statements and related notes to
the financial statements of Lincare Holdings Inc. and Subsidiaries (the Company) on Form 10-K for the fiscal year ended December 31, 2005. 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.

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

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

Commitments and Contingencies: The Company
is involved in certain claims and legal matters arising in the ordinary course of its business. The Company uses Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, as guidance on the application of generally
accepted accounting principles related to contingencies. The Company evaluates and records liabilities for contingencies based on known claims and legal actions when it is probable a liability has been incurred and the liability can be reasonably
estimated.

Concentration of Credit Risk: The Companys revenues are generated through locations in 47 states. The Company
generally does not require collateral or other security in extending credit to patients; however, the Company routinely obtains assignment of (or is otherwise entitled to receive) benefits receivable under the health insurance programs, plans or
policies of its customers. Included in the Companys net revenues is reimbursement from government sources under Medicare, Medicaid and other federally funded programs, which aggregated approximately 66% of net revenues for the six months ended
June 30, 2006 and 2005. 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.

Note 2. Business Combinations

Lincare acquires
the business and related assets of local and regional companies as an ongoing strategy to increase revenue within its respective markets. Lincare arrives at a negotiated purchase price taking into account



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##### Table of Contents

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



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 six months ended June 30, 2006, the Company acquired certain assets of six
companies in separate transactions. Each acquisition was accounted for as a purchase of a business. The results of the acquired businesses are included in the accompanying condensed consolidated statements of operations since their respective dates
of acquisition.

The aggregate cost of the acquisitions through the six months ended June 30, 2006 described above was as follows:



|                                                       |  |                |       
|------------------------------------------------------ |  | -------------- | ------
|                                                       |  | (In thousands)
|Cash                                                   |  | $              | 19,353
|Deferred acquisition obligations                       |  |                | 4,967 
|Assumption of liabilities                              |  |                | 70    
|                                                       |  |                |       
|                                                       |  | $              | 24,390
|                                                       |  |                |       
|The aggregate purchase price was allocated as follows: |  |                |       
|Current assets                                         |  | $              | 904   
|Property and equipment                                 |  |                | 767   
|Intangible assets                                      |  |                | 115   
|Goodwill                                               |  |                | 22,604
|                                                       |  |                |       
|                                                       |  | $              | 24,390
|                                                       |  |                |       

Unaudited pro forma supplemental information on the results of operations for the six months ended
June 30, 2006 and June 30, 2005, is provided below and reflects the acquisitions as if they had been completed at the beginning of each period.



|                         |  |                                       |         |      |   |        
|------------------------ |  | ------------------------------------- | ------- | ---- | - | -------
|                         |  | For The Six Months Ended June 30,    
|                         |  | 2006                                  |         | 2005
|                         |  | (In thousands, except per share data)
|Net revenues             |  | $                                     | 688,990 |      | $ | 627,579
|                         |  |                                       |         |      |   |        
|Net income               |  | $                                     | 100,949 |      | $ | 106,314
|                         |  |                                       |         |      |   |        
|Income per common share: |  |                                       |         |      |   |        
|Basic                    |  | $                                     | 1.06    |      | $ | 1.06   
|                         |  |                                       |         |      |   |        
|Diluted                  |  | $                                     | 1.01    |      | $ | 1.01   
|                         |  |                                       |         |      |   |        

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

Note 3. Income Per Common Share

Basic income
per common share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted income per common share reflects the potential dilution of securities that could
share in the Companys earnings, including securities that



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



may be issued upon conversion of convertible debentures and exercise of outstanding stock options. When the exercise of stock options would be anti-dilutive,
they are excluded from the calculation. For the three and six months ended June 30, 2006, the number of excluded shares underlying anti-dilutive stock options was 96,100 and 23,768, respectively. There were no such shares excluded in 2005.

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

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 June 30,   |         | For The Six MonthsEnded June 30,    
|                                                                                   |  | 2006                                 |         | 2005                                 |   | 2006    |  | 2005
|                                                                                   |  | (In thousands,except per share data) |         | (In thousands,except per share data)
|Numerator:                                                                         |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|BasicIncome available to common stockholders                                      |  | $                                    | 51,905  |                                      | $ | 50,111  |  | $    | 99,791  |  | $ | 104,729
|Adjustment for assumed dilution:                                                   |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|Interest on convertible debt, net of tax                                           |  |                                      | 1,261   |                                      |   | 1,287   |  |      | 2,530   |  |   | 2,573  
|                                                                                   |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|DilutedIncome available to common stockholders and holders of dilutive securities |  | $                                    | 53,166  |                                      | $ | 51,398  |  | $    | 102,321 |  | $ | 107,302
|                                                                                   |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|Denominator:                                                                       |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|Weighted average shares                                                            |  |                                      | 95,037  |                                      |   | 99,565  |  |      | 95,412  |  |   | 100,271
|Effect of dilutive securities:                                                     |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|Incremental shares under stock compensation plans                                  |  |                                      | 1,557   |                                      |   | 2,350   |  |      | 1,744   |  |   | 2,483  
|Incremental shares from assumed conversion of convertible debt                     |  |                                      | 5,157   |                                      |   | 5,157   |  |      | 5,157   |  |   | 5,157  
|                                                                                   |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|Adjusted weighted average shares                                                   |  |                                      | 101,751 |                                      |   | 107,072 |  |      | 102,313 |  |   | 107,911
|                                                                                   |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|Per share amount:                                                                  |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|Basic                                                                              |  | $                                    | 0.55    |                                      | $ | 0.50    |  | $    | 1.05    |  | $ | 1.04   
|                                                                                   |  |                                      |         |                                      |   |         |  |      |         |  |   |        
|Diluted (1)                                                                        |  | $                                    | 0.52    |                                      | $ | 0.48    |  | $    | 1.00    |  | $ | 0.99   
|                                                                                   |  |                                      |         |                                      |   |         |  |      |         |  |   |        

---

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

Note 4. Stock Plans

The Company issues stock options and other stock-based awards to key employees and directors under stock-based compensation plans. The Company also
sponsors an employee stock purchase plan.

Through December 31, 2005, the Company historically accounted for stock-based compensation
using the intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Employees(APB 25), and, accordingly, recognized no compensation expense related to stock options and employee stock purchases. For grants
of restricted stock, other than those awarded under long-term incentive agreements, the fair value of the shares at the date of grant was amortized to compensation expense over the awards vesting period. The Company has historically reported
pro forma results under the disclosure-only provisions of SFAS No. 123, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure.

Adoption of Statement of Financial Accounting Standards No. 123R, Share Based Payment (SFAS No. 123R)

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

Prior to adopting SFAS No. 123R, the Company presented all tax benefits resulting from the exercise of stock options as operating
cash flows in the statements of cash flows. SFAS No. 123R requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax
deductions for exercised options in excess of the deferred tax asset attributable to stock compensation costs for such options. The total tax benefit of stock-based awards recognized for the six months ended June 30, 2006 was $0.7 million. As a
result of adopting SFAS No. 123R, $0.2 million of excess tax benefits for the six months ended June 30, 2006 have been classified as a financing cash inflow and $0.5 million has been included in the decrease in income taxes payable and
excess tax benefit from stock-based compensation as operating cash inflows.

For the three months ended June 30, 2006 and 2005, the
Company recognized total stock-based compensation costs of $5.2 million and $0.3 million, respectively, as well as related tax benefits of $1.7 million and $0.1 million, respectively. For the six months ended June 30, 2006 and 2005, the Company
recognized total stock-based compensations costs of $9.5 million and $1.1 million, respectively, as well as related tax benefits of $3.1 million and $0.3 million, respectively. All stock-based compensation costs are classified within selling,
general and administrative expenses on the attached condensed consolidated statements of operations. As a result of the adoption of SFAS No. 123R effective January 1, 2006, the Companys income before income taxes and net income for
the three months ended June 30, 2006 were $4.5 million and $2.9 million lower, respectively, than if the Company had continued to account for the stock-based compensation programs under APB 25. The Companys income before income taxes
and net income for the six months ended June 30, 2006 were $8.0 million and $5.1 million lower, respectively, than if the Company had continued to account for the stock-based compensation programs under APB 25. Accordingly, the reported basic
and diluted earnings per share for the three and six months ended June 30, 2006 were $0.03 and $0.05 lower, respectively, than had the Company not adopted SFAS No. 123R effective January 1, 2006.

Stock Options

The Company has seven outstanding
stock option plans that provide for the grant of options and other stock-based awards to officers, employees and directors. To date, stock options have been granted with an exercise price equal to the fair value of the stock at the date of grant.
Stock options generally have eight to ten year expiration terms and generally vest over one to five years depending on the particular grant.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



The Company believes that the Black-Scholes valuation model provides a reasonable estimate of the
fair value of the Companys stock options, particularly in view of the absence of any market-based or performance-based vesting conditions attached to those stock options. The Black-Scholes option pricing model requires, among other things, an
estimate of expected share price volatility. The Company considered the use of both historical and implied volatility assumptions in calculating the fair value of stock options issued in 2005 and 2006. In years prior to 2005, the Company had used
only historical volatility in calculating the fair value of its stock options. In estimating the fair value of stock options granted during 2005, the Company used implied volatility derived from its publicly-traded options as the volatility input in
the option valuation model. In using implied volatility in 2005, the Company considered SFAS No. 123R and the guidance provided in Staff Accounting Bulletin No. 107, Share-Based Payment, and determined that using implied volatility
provides the most reliable estimate of expected volatility. Expected dividend yield is 0% as the Company has not paid any cash dividends on its capital stock and does not anticipate it will pay cash dividends in the foreseeable future.

Following are the specific valuation assumptions, where applicable, used for each respective period:



|                                     |  |                            |   |  |                          |   |  |         |   |  |         |  
|------------------------------------ |  | -------------------------- | - |  | ------------------------ | - |  | ------- | - |  | ------- | -
|                                     |  | Three Months EndedJune 30, |   |  | Six Months EndedJune 30, |  
|                                     |  | 2006                       |   |  | 2005                     |   |  | 2006    |   |  | 2005    |  
|Expected dividend yield              |  | 0.0                        | % |  | 0.0                      | % |  | 0.0     | % |  | 0.0     | %
|Risk-free interest rate              |  | 5.03                       | % |  | 2.80                     | % |  | 5.03    | % |  | 2.80    | %
|Weighted-average expected volatility |  | 26.21                      | % |  | 55.30                    | % |  | 26.21   | % |  | 55.30   | %
|Expected life                        |  | 5 years                    |   |  | 3 years                  |   |  | 5 years |   |  | 3 years |  

During the six months ended June 30, 2006, the Company granted 874,400 stock options. During
the six months ended June 30, 2005, the Company granted no new stock options.

Stock option activity for the six months ended
June 30, 2006 is summarized below:



|                                 |  |                  |   |  |                              |       |                                                  |      |                          |   |           
|-------------------------------- |  | ---------------- | - |  | ---------------------------- | ----- | ------------------------------------------------ | ---- | ------------------------ | - | ----------
|                                 |  | Number ofOptions |   |  | WeightedAverageExercisePrice |       | Weighted AverageRemainingContractual Life(Years) |      | AggregateIntrinsic Value
|Outstanding at December 31, 2005 |  | 9,446,685        |   |  | $                            | 29.31 |                                                  |      |                          |   |           
|Options granted in 2006          |  | 874,400          |   |  |                              |      |                                                  |      |                          |   |           
|Exercised in 2006                |  | (71,800          | ) |  |                              | 25.72 |                                                  |      |                          |   |           
|Forfeited in 2006                |  | (121,850         | ) |  |                              | 39.00 |                                                  |      |                          |   |           
|Expired in 2006                  |  | (0               | ) |  |                              |      |                                                  |      |                          |   |           
|                                 |  |                  |   |  |                              |       |                                                  |      |                          |   |           
|Outstanding at June 30, 2006     |  | 10,127,435       |   |  | $                            | 30.01 |                                                  | 4.67 |                          | $ | 89,189,552
|                                 |  |                  |   |  |                              |       |                                                  |      |                          |   |           
|Exercisable at June 30, 2006     |  | 6,281,440        |   |  | $                            | 24.55 |                                                  | 3.25 |                          | $ | 83,462,319
|                                 |  |                  |   |  |                              |       |                                                  |      |                          |   |           

The intrinsic value of options exercised during the three months ended June 30, 2006 and
2005, amounted to $0.1 million and $30.2 million, respectively. The intrinsic value of options exercised during the six months ended June 30, 2006 and 2005 amounted to $1.1 million and $55.3 million, respectively.

Restricted Stock

Under the 2004 Stock Plan, certain
key employees may be granted restricted stock at nominal cost to them. Restricted stock is measured at fair value on the date of the grant, based on the number of shares granted and the



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



quoted price of the Companys common stock. Such value is recognized as compensation expense ratably over the corresponding employees specified
service period. Restricted stock vests upon the employees fulfillment of specified performance and service-based conditions. On July 1, 2004, the Company granted 260,000 shares of restricted stock to certain key employees. These shares
were issued at the fair value of the stock on the grant date. The restrictions lapse in three equal annual installments. Prior to the adoption of SFAS No. 123R, unearned compensation for grants of restricted stock equivalent to the fair value
of the shares at the date of grant was recorded as a separate component of stockholders equity and subsequently amortized to compensation expense over the vesting period of the awards. All unamortized unearned compensation at January 1,
2006 was reclassified to additional paid-in capital. During the three months ended June 30, 2006 and June 30, 2005, the Company recognized $0.7 million and $0.3 million, respectively, of stock-based compensation expense related to
restricted stock in each of the two quarters. During the six months ended June 30, 2006 and June 30, 2005, the Company recognized $1.5 million and $1.1 million, respectively, of stock-based compensation expense related to restricted stock.

A summary of the status of unvested restricted stock as of June 30, 2006 and changes during the period then ended is presented below:



|                            |  |         |  |                                               |      
|--------------------------- |  | ------- |  | --------------------------------------------- | -----
|                            |  | Shares  |  | Weighted-Average GrantDate FairValue PerShare
|Unvested at January 1, 2006 |  | 173,333 |  | $                                             | 31.72
|Granted                     |  | 0       |  |                                               | 0.00 
|Vested                      |  | 86,667  |  |                                               | 31.72
|Forfeited                   |  | 0       |  |                                               | 0.00 
|                            |  |         |  |                                               |      
|Unvested at June 30, 2006   |  | 86,666  |  | $                                             | 31.72
|                            |  |         |  |                                               |      

Employee Stock Purchase Plan

The Companys Employee Stock Purchase Plan (Stock Purchase Plan) provides a means to encourage and assist employees in acquiring a stock ownership interest in Lincare. Payroll deductions are
accumulated during each quarter and applied toward the purchase of stock on the last trading day of each quarter. The Stock Purchase Plan defines purchase price per share as 85% of the lower of the fair value of a share of common stock on the last
trading day of the previous plan quarter, or the last trading day of the current plan quarter.

During the three months ended June 30,
2006, 9,855 shares of common stock were purchased under the Stock Purchase Plan resulting in compensation cost of $0.1 million. During the six months ended June 30, 2006, 21,541 shares of common stock were purchased under the Stock Purchase
Plan resulting in compensation cost of $0.2 million.



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Total Stock-Based Compensation

SFAS No. 123R requires the disclosure of pro-forma information for periods prior to the adoption. The following table illustrates the effect on net income and earnings per share for the three and six months ended
June 30, 2005 as if the Company had recognized compensation expense for all stock-based payments to employees based on their fair values:



|                                                                                                                                      |  |                                       |        |   |            |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---------- | - | ------- | -
|                                                                                                                                      |  | For The Period Ended June 30, 2005    |       
|                                                                                                                                      |  | Three Months                          |        |   | Six Months |  
|                                                                                                                                      |  | (In thousands, except per share data) |       
|Net income:                                                                                                                           |  |                                       |        |   |            |   |         |  
|As reported                                                                                                                           |  | $                                     | 50,111 |   |            | $ | 104,729 |  
|Add: Stock-based employee compensation expense included in net income, net of related tax effects                                     |  |                                       | 215    |   |            |   | 714     |  
|Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax
effects |  |                                       | (1,779 | ) |            |   | (4,122  | )
|                                                                                                                                      |  |                                       |        |   |            |   |         |  
|Pro forma                                                                                                                             |  | $                                     | 48,547 |   |            | $ | 101,321 |  
|                                                                                                                                      |  |                                       |        |   |            |   |         |  
|Earnings per common share:                                                                                                            |  |                                       |        |   |            |   |         |  
|Basicas reported                                                                                                                     |  | $                                     | 0.50   |   |            | $ | 1.04    |  
|                                                                                                                                      |  |                                       |        |   |            |   |         |  
|Dilutedas reported (1)                                                                                                               |  | $                                     | 0.48   |   |            | $ | 0.99    |  
|                                                                                                                                      |  |                                       |        |   |            |   |         |  
|Basicpro forma                                                                                                                       |  | $                                     | 0.49   |   |            | $ | 1.01    |  
|                                                                                                                                      |  |                                       |        |   |            |   |         |  
|Dilutedpro forma (1)                                                                                                                 |  | $                                     | 0.47   |   |            | $ | 0.96    |  
|                                                                                                                                      |  |                                       |        |   |            |   |         |  

---

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

The following weighted-average per share
fair values were determined for stock-based compensation grants or purchases occurring within the three and six months ended June 30, 2006 and 2005:



|                                          |  |                                    |       |                                  |   |      |  |      |       |  |   |     
|----------------------------------------- |  | ---------------------------------- | ----- | -------------------------------- | - | ---- |  | ---- | ----- |  | - | ----
|                                          |  | For The Three MonthsEnded June 30, |       | For The Six MonthsEnded June 30,
|                                          |  | 2006                               |       | 2005                             |   | 2006 |  | 2005
|Options granted                           |  | $                                  | 11.94 |                                  | $ | 0    |  | $    | 11.94 |  | $ | 0   
|                                          |  |                                    |       |                                  |   |      |  |      |       |  |   |     
|Restricted stock and stock awards granted |  | $                                  | 0     |                                  | $ | 0    |  | $    | 0     |  | $ | 0   
|                                          |  |                                    |       |                                  |   |      |  |      |       |  |   |     
|Employee stock purchases                  |  | $                                  | 7.72  |                                  | $ | 8.45 |  | $    | 8.35  |  | $ | 8.69
|                                          |  |                                    |       |                                  |   |      |  |      |       |  |   |     

During the three months ended June 30, 2006 and 2005, the Company received cash of $0.6
million and $29.1 million, respectively, from exercises of stock options and recognized related tax benefits of $39,704 and $11.9 million, respectively. During the six months ended June 30, 2006 and 2005, the Company received cash of $2.8
million and $41.7 million, respectively, from exercises of stock options and recognized related tax benefits of $0.4 million and $21.1 million, respectively. There were no stock options settled for cash during the six months ended June 30, 2006
and 2005.



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



As of June 30, 2006, the total remaining unrecognized compensation cost related to nonvested
stock options and restricted stock amounted to $30.8 million and $1.8 million, respectively, which will be amortized over the weighted-average remaining requisite service period of 2 years and 8 months, respectively.

The Company issues new shares to satisfy stock-based awards upon exercise. As of June 30, 2006, approximately 1.0 million shares are available
for issuance under the Companys shareholder-approved stock plans.

Note 5. Comprehensive Income

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

The Company had no unrealized gains or losses on short-term investments
available-for-sale for the six months ended June 30, 2006 and June 30, 2005.

Note 6. Noncash Financing and Investing Activities

In the normal course of business, the Company obtains seller financing on business acquisitions and also makes adjustments to seller
financing from business acquisitions obtained in prior periods based on terms of the original purchase agreements. Terms of the financing are typically principal only. Seller financing relating to business acquisitions in the six months ended
June 30, 2006 and 2005, was $5.0 million and $24.2 million, respectively.

Note 7. New Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognizes in its financial
statements, the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the 2007 calendar
year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company does not expect the adoption of FIN 48 to have a material impact on its financial condition, results of
operations or cash flows.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment, which replaces SFAS No. 123, Accounting for Share-Based Compensation, and supersedes APB
Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement
recognition. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(Unaudited)



Under the regulations promulgated by the Securities and Exchange Commission, the Company is applying SFAS No. 123R as of January 1, 2006.
Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The
transition methods include modified prospective and modified retrospective adoption options. The modified prospective method requires compensation cost to be recognized beginning January 1, 2006 based on the requirements of
SFAS No. 123R for all share-based payments granted after December 31, 2005 and based on the requirements of SFAS No. 123 for all awards granted to employees prior to January 1, 2006 that remain unvested on
January 1, 2006. The modified retrospective method includes the requirements of the modified prospective method described above, but also permits companies to restate, based on the amounts previously recognized under SFAS No. 123 for
purposes of pro forma disclosures. The Company adopted SFAS No. 123R using the modified prospective method. Refer to Note 4 for a description of the impact to the Companys financial position, results of operations and liquidity
relating to the adoption of SFAS 123R.



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LINCARE HOLDINGS INC. AND SUBSIDIARIES

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

Medicare Reimbursement

As a supplier of home oxygen and other respiratory therapy services 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.

On
February 1, 2006, Congress passed the Deficit Reduction Act of 2005 (DRA). DRA contains provisions that will impact reimbursement for oxygen equipment and DME in 2007 and beyond. DRA changes the reimbursement methodology for oxygen
equipment from continuous monthly payment for as long as the equipment is in use by a Medicare beneficiary, which includes payment for oxygen contents and maintenance of equipment, to a capped rental arrangement whereby payment for oxygen equipment
(including portable oxygen equipment) may not extend over a period of continuous use of longer than 36 months. On the first day that begins after the 36thcontinuous month during which payment is made for the oxygen equipment, the supplier would transfer title of the equipment to the beneficiary. Separate payments for oxygen contents would continue to
be made for the period of medical need beyond the 36thmonth. According to the legislation, additional payments for
maintenance and service of the oxygen equipment would be made for parts and labor not covered by a suppliers or manufacturers warranty. 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 begins on January 1, 2006. Accordingly, the first month in which the new payment methodology will impact our financial results is
January 2009.

On July 27, 2006, the Centers for Medicare and Medicaid Services (CMS) issued proposed rule CMS-1304-P,
describing proposed changes in Medicare regulations, as interpreted by CMS, required to implement the DRA oxygen provisions. The proposed rule seeks to codify the new payment methodology and related provisions with respect to oxygen, including, but
not limited to, defining the 36-month capped rental period of continuous use, transfer of title, payment for oxygen contents for beneficiary-owned oxygen equipment, payment for maintenance and servicing of oxygen equipment and procedures for
replacement of beneficiary-owned equipment. A copy of the proposed rule can be located at http://www.cms.hhs.gov/HomeHealthPPS/downloads/CMS1304Pdisplay.pdf. Comments to the proposed rule must be submitted to CMS by September 25, 2006.
Until CMS issues a final rule implementing the DRA provisions, we will be unable to determine the impact that these provisions will have on our financial condition or results of operations. The Presidents 2007 budget proposes a reduction in
the maximum continuous oxygen rental period from 36 months to 13 months. No further information on this proposal is available and we can not predict whether or not the proposal will be included in the final budget approved by Congress.

Included in proposed rule CMS-1304-P are planned regulatory changes to the Medicare payment rates for oxygen and oxygen equipment which, if
implemented, would take effect on January 1, 2007. CMS is exercising its authority under the Social Security Act (the Act) to establish separate classes and monthly payment rates for items of oxygen and oxygen equipment. In summary,
CMS proposes to establish new payment classes for oxygen contents for beneficiary-owned stationary equipment, oxygen contents for beneficiary-owned portable equipment, and oxygen generating portable equipment. Payments for oxygen contents for
beneficiary-owned portable equipment and oxygen generating portable equipment would exceed what is currently paid for these items to ensure access to portable oxygen regardless of the type of equipment used. In order to achieve budget neutrality as
required by the Act for the new classes of oxygen and increase payment amounts for furnishing portable oxygen contents, CMS proposes to reduce other Medicare oxygen payment rates. Specifically, CMS proposes to reduce the current monthly payment
amounts for stationary oxygen equipment and oxygen contents made during the rental period. CMS proposes to eliminate the current statewide monthly payment amounts and



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establish new national monthly payment rates as follows: (1) Stationary Payment, $177 (statewide rates currently average $199), (2) Portable
Add-On, $32 (currently average $32), (3) Oxygen Generating Portable Equipment Add-On (portable concentrators or transfilling systems), $64 (currently average $32), (4) Stationary Contents Delivery (for beneficiary-owned stationary
equipment), $101, and (5) Portable Contents Delivery (for beneficiary-owned portable equipment, $55 (the stationary and portable contents delivery fees when both systems are beneficiary-owned would effectively remain at the statewide average of
$156). There is no assurance that the proposal will achieve budget neutrality since CMS factors into its calculations an expected increase in the prevalence of more expensive oxygen generating portable oxygen equipment. Until CMS issues a final rule
implementing the separate classes and monthly payment rates for items of oxygen and oxygen equipment, we will be unable to determine the impact that these changes will have on our financial condition or results of operations.

DRA also changes 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.
The option for a supplier to retain ownership of the item after a 15-month rental period and receive semi-annual maintenance and service payments would be eliminated. On the first day that begins after the 13thcontinuous month during which payment is made for the item, the supplier would transfer title of the item to the beneficiary. According to the
legislation, additional payments for maintenance and service of the item would be made for parts and labor not covered by a suppliers or manufacturers warranty. The DME capped rental provisions contained in DRA apply to items furnished
for which the first rental month occurs on or after January 1, 2006. Accordingly, the first month in which the new payment methodology will impact our financial results is February 2007. Included in proposed rule CMS-1304-P is a discussion of
the changes in Medicare regulations, as interpreted by CMS, necessary to implement the DME capped rental changes contained in the DRA. Until CMS issues a final rule implementing the DRA provisions, we can not predict the impact that these provisions
will have on our financial condition or results of operations.

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

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

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

In accordance with the provisions of MMA, on
November 2, 2005, the Centers for Medicare and Medicaid Services (CMS) issued rule CMS-1502-FC, establishing the dispensing fee amount for inhalation drugs for 2006. The final rule establishes a dispensing fee of $57.00 for the
first 30-day period in which a Medicare beneficiary uses inhalation drugs and a reduced fee of $33.00 for a 30-day supply of inhalation drugs for all other months. We estimate that the reduction in the dispensing fee to



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$33.00 will reduce net revenues by approximately $42.0 to $46.0 million in 2006. Additionally, fluctuations in the payment rates for inhalation drugs
established by CMS during each quarter of 2006 (based on available manufacturer ASP data) may result in further reductions in our net revenues in 2006.

We continue to evaluate the impact of the reduced Medicare payment rates on our business. We can not determine the outcome of any future rulemaking by CMS nor the impact that such rulemaking might have on our ability
to continue to provide inhalation drugs to Medicare beneficiaries. Further, we can not determine whether quarterly updates in ASP pricing data submitted by drug manufacturers and adopted by CMS will result in further reductions in payment rates for
inhalation drugs, and what impact such payment reductions could have on our financial position and results of operations in 2006 and beyond.

(2) Reduced payment amounts for five categories of DME, including oxygen, beginning in 2005 and froze payment amounts for other Medicare-covered DME items through 2007. MMA contains provisions that reduced
payment amounts, beginning in 2005, for oxygen equipment, standard wheelchairs (including standard power wheelchairs), nebulizers, diabetic supplies consisting of lancets and testing strips, hospital beds and air mattresses to the median prices paid
under the Federal Employee Health Plan (FEHP). Reductions in payment rates for 2005 established by CMS for the non-oxygen items subject to the FEHP provisions went into effect as of January 1, 2005. MMA also froze payment amounts
for other Medicare-covered DME items through 2007.

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

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

For each competitive acquisition area, the Secretary will conduct a competition under which providers will submit bids to supply certain
covered items of DME. Successful bidders will be expected to meet certain program quality standards in order to be awarded a contract and only successful bidders can supply the covered items to Medicare beneficiaries in the acquisition area. The
applicable contract award prices are expected to be less than would be paid under current Medicare fee schedules and contracts will be re-bid at least every three years. The Secretary 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. The Secretary may use competitive bid pricing
information to adjust the payment amount otherwise in effect for an area that is not a competitive acquisition area.

On
April 24, 2006, CMS issued its proposed rule, CMS-1270-P, which would implement the DME competitive bidding program. Comments on the proposed rule were due to CMS by June 30, 2006. We will evaluate the final regulation once it is issued by
CMS. We can not predict the effect of the competitive acquisition program or the Medicare payment rates that will be in effect in 2007 and beyond for the items ultimately subjected to competitive bidding.

(4) Implements quality standards and accreditation requirements for DME suppliers. MMA instructs the Secretary to establish and
implement quality standards for DME suppliers to be monitored by



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recognized independent accreditation organizations. Suppliers will be required to comply with these standards in order to receive payment for furnishing any
covered item of DME to a Medicare beneficiary and to receive or retain a supplier number used to submit claims for reimbursement. CMS has indicated that it expects to issue final quality standards pursuant to a program instruction memorandum by the
end of this year. We can not predict the nature or extent of the final quality standards to be implemented by CMS or the effect such standards would have on our ability to continue to provide products to Medicare beneficiaries.

On January 26, 2006, CMS announced a final rule revising the payment classification of certain respiratory assist devices (RADs). RADs
with a backup rate feature were reclassified as capped rental DME items effective April 1, 2006, whereby payments to providers of such devices will cease after the 13thcontinuous month of rental. Prior to the rule, providers were paid a continuous monthly rental amount over the entire period of medical necessity. In cases
where Medicare beneficiaries received the item prior to April 1, 2006, only the rental payments for months after the effective date will count toward the 13-month cap. Accordingly, the first month in which the new payment methodology will
impact our financial results is May 2007. RADs with a backup rate feature accounted for approximately $4.0 million of our net revenues in the three months ended June 30, 2006.

In January 2006, pursuant to the contracting reform provisions of MMA, CMS announced the selection of four specialty carriers, or DME Medicare
Administrative Contractors (the DME MACs), which will soon be responsible for the processing and payment of claims for DME items provided to Medicare Part B beneficiaries. The DME MACs will replace the four Durable Medical Equipment
Regional Carriers (the DMERCs) pursuant to a transition schedule beginning July 1, 2006, with two of the four DME MACs not expected to transition until October 1, 2006. The transition of claims processing from the DMERCs to the
DME MACs may cause disruptions in the payment of DME claims and could thereby have a negative impact on the timing of collections of our accounts receivable. In addition, the DRA mandated that a brief hold will be placed on Medicare payments for all
claims for the last nine days of the federal fiscal year (i.e., September 22, 2006 through September 30, 2006). This payment hold is expected to significantly reduce our cash provided by operating activities in the third quarter and
significantly increase our accounts receivable balances as of September 30, 2006. This impact is expected to reverse in the fourth quarter upon the release of Medicare payments on October 2, 2006.

On February 13, 2006, a final rule governing CMSs Inherent Reasonableness (IR) authority became effective. The IR rule establishes
a process for adjusting payments for Medicare Part B services when existing payment amounts are determined to be either grossly excessive or deficient. The rule describes the factors CMS or its contractors will consider in making such determinations
and the procedures that will be followed in establishing new payment amounts. To date, no payment adjustments have occurred or been proposed as a result of the IR rule.

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

On
March 24, 2006, the Durable Medical Equipment Program Safeguard Contractors (DME PSCs), entities contracted with CMS for purposes of developing and updating medical policies applicable to processing and reviewing Medicare claims for
DME items, proposed certain revisions to Medicares Local Coverage Determination policy for nebulizers (the Nebulizer LCD). These revisions include significant changes that would, if implemented, adversely effect reimbursement for
two commonly prescribed inhalation drugs, levalbuterol and DuoNeb, and eliminate Medicare coverage for certain other respiratory medications.



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Specifically, the Nebulizer LCD proposes, among other things, to reduce the payment amount for levalbuterol to the allowance for albuterol and the payment
amount for DuoNeb to the allowance for separate unit dose vials of albuterol and ipratropium. These changes would result in reimbursement reductions for levalbuterol and DuoNeb of approximately 95% and 73%, respectively. The DME PSCs are soliciting
comments on the proposed changes from physicians, manufacturers, suppliers and other professionals involved in the treatment of Medicare beneficiaries with chronic lung disease. Written comments on the proposal were due by May 8, 2006, and the
DME PSCs also held public meetings to receive comments on the draft policy. We can not determine whether the proposed Nebulizer LCD will be implemented in its current form and what impact the policy might have on our financial position or operating
results and our ability to provide these inhalation drugs to Medicare beneficiaries.

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

Government Regulation

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

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

Numerous federal and state laws and regulations, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA), govern the collection, dissemination, use and confidentiality of
patient-identifiable health information. As part of Lincares provision of, and billing for, health care equipment and services, we are required to collect and maintain patient-identifiable health information. New health information standards,
whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we handle health care related data and communicate with payors, and the cost of complying with these standards could be
significant. If we do not comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions.

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



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Operating Results

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



|                                     |  |                                    |         |                                  |   |         |  |      |         |  |   |        
|------------------------------------ |  | ---------------------------------- | ------- | -------------------------------- | - | ------- |  | ---- | ------- |  | - | -------
|                                     |  | For The Three MonthsEnded June 30, |         | For The Six MonthsEnded June 30,
|                                     |  | 2006                               |         | 2005                             |   | 2006    |  | 2005
|                                     |  | (In thousands)                     |         | (In thousands)                  
|Oxygen and other respiratory therapy |  | $                                  | 322,223 |                                  | $ | 286,136 |  | $    | 627,586 |  | $ | 561,851
|Home medical equipment and other     |  |                                    | 27,904  |                                  |   | 29,045  |  |      | 56,132  |  |   | 58,507 
|                                     |  |                                    |         |                                  |   |         |  |      |         |  |   |        
|Total                                |  | $                                  | 350,127 |                                  | $ | 315,181 |  | $    | 683,718 |  | $ | 620,358
|                                     |  |                                    |         |                                  |   |         |  |      |         |  |   |        

Net revenues for the three months ended June 30, 2006, increased by $34.9 million (or 11.1%)
compared with the three months ended June 30, 2005, and for the six months ended June 30, 2006, increased $63.4 million (or 10.2%) compared with the six months ended June 30, 2005. The 11.1% increase in net revenues in the three-month
period was comprised of 11.7% internal growth and 2.6% acquisition growth partially offset by a 3.3% revenue reduction from lower Medicare payment rates (see Medicare Reimbursement). The 10.2% increase in net revenues in the six-month
period was comprised of 13.3% internal growth and 3.0% acquisition growth partially offset by a 6.1% revenue reduction from lower Medicare payment rates. Net revenues for the three and six months ended June 30, 2006 were negatively impacted by
$10.3 million (or 3.3%) and $37.6 million (or 6.1%), respectively, as a result of the Medicare reimbursement reductions. The internal growth in net revenues, excluding price reductions, is attributable to underlying demographic growth in the markets
for our products and gains in customer counts resulting primarily from our sales and marketing efforts that emphasize high-quality equipment and customer service. Growth in net revenues from acquisitions is attributable to the effects of
acquisitions of local and regional companies and is based on the estimated contribution to net revenues for the four quarters following such acquisitions. During the first half of 2006, we completed the acquisition of six companies with
aggregate annual revenues of approximately $14.4 million.

The contribution of oxygen and other respiratory therapy products to our net
revenues was 92.0% and 91.8%, respectively, during the three and six months ended June 30, 2006. Our strategy is to focus on the provision of oxygen and other respiratory therapy services to patients in the home and to provide home medical
equipment and other services where we believe such services will enhance our core respiratory business.

Cost of goods and services as a
percentage of net revenues increased to 22.2% and 22.3%, respectively, for the three and six months ended June 30, 2006, compared with 21.4% and 20.0% for the comparable prior year periods. The relationships of costs to net revenues during the
periods were impacted by the Medicare price reductions discussed above (see also Medicare Reimbursement). The increase in costs of goods and services in 2006 is attributable primarily to increased drug shipment volumes and an increase in
drug purchasing costs due to a product mix shift to higher cost branded products in our inhalation drug business over the past year. We also experienced significant growth in our sleep therapy product lines during the first six months of 2006, which
generally carry a lower gross margin than other products we provide.

Operating expenses as a percentage of net revenues for the three
months ended June 30, 2006, remained stable at 23.4% compared to the prior year period. Operating expenses for the six months ended June 30, 2006 increased to 23.5% compared to 23.2% for the comparable prior year period. The relationships
of expenses to net revenues during the period were impacted by the Medicare price reductions discussed above (see also Medicare Reimbursement). Operating expenses for the three and six months ended June 30, 2006 increased by $7.9
million, or 10.7% and $17.0 million, or 11.8%, respectively, when compared with the prior year periods. The increase in operating expenses for the quarter and year to date periods compares favorably to the increase in net revenues from internal
growth (11.7% and 13.3%, respectively) and acquisitions (2.6% and 3.0%, respectively) before considering the effect of the Medicare price reductions. Gains in productivity at our operating centers and modest growth in office rent and related
facility expenses helped to offset higher freight charges due to gains in customer shipment volumes in our drug and sleep accessory product lines and significant vehicle related cost increases attributable to higher fuel prices and vehicle lease
expenses.



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Selling, general and administrative (SG&A) expenses as a percentage of net revenues were
21.0% and 21.1% for the three and six months ended June 30, 2006, compared with 20.0% and 20.1% for the comparable prior year periods. The relationships of expenses to net revenues during the period were impacted by the Medicare price
reductions discussed above (see also Medicare Reimbursement). SG&A expenses for the three and six months ended June 30, 2006 increased by $10.6 million, or 16.9%, and $19.6 million, or 15.7%, respectively, compared with the
prior year periods. SG&A expenses in 2006 were impacted by the adoption of SFAS No. 123R (see Notes 4 and 7 to the condensed consolidated financial statements) effective January 1, 2006, resulting in the recognition of $5.2 million and
$9.5 million of stock-based compensation expense during the second quarter and year to date, respectively. Contributing to the increase in SG&A expenses in 2006 were higher payroll costs included in selling expenses and higher legal expenses
partially offset by cost controls at our field overhead and billing office locations.

Included in depreciation expense in the three and
six months ended June 30, 2006 is depreciation of patient service equipment of $17.0 million and $33.2 million, respectively and depreciation of other property and equipment of $7.7 million and $16.0 million, respectively. Included in
depreciation expense in the three and six months ended June 30, 2005 is depreciation of patient service equipment of $16.3 million and $31.8 million, respectively and depreciation of other property and equipment of $6.5 million and $13.1
million, respectively. The growth in depreciation expense in the 2006 periods compared with the 2005 periods is attributed to increased purchases of medical equipment necessary to support the growth in the Companys customer base during 2006.

Operating income for the three and six months ended June 30, 2006, was $86.5 million (24.7% of net revenues) and $166.2 million
(24.3% of net revenues), respectively, compared with $82.8 million (26.3% of net revenues) and $172.8 million (27.9%) for the comparable three and six months of the prior year. The increases in operating income in the second quarter and first
half of 2006 are attributable primarily to revenue growth from increases in customer volumes which more than offset reduced Medicare payment rates for respiratory medications and related dispensing fees that took effect on January 1, 2006 and
the reduction of Medicare reimbursement rates for oxygen equipment that took effect on April 1, 2005. We estimate that the reductions in Medicare reimbursement rates reduced net revenues and operating income by approximately $10.3 million and
$37.6 million, respectively, in the three and six month periods ended June 30, 2006. Costs and expenses were favorably impacted by gains in labor productivity during the periods and adversely affected by the implementation of SFAS 123(R)
effective January 1, 2006, increased costs of purchased inhalation drugs, higher fuel costs and legal expenses.

Liquidity and Capital Resources

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

Net cash provided by operating activities decreased by 19.1% to $147.7 million for the six months ended June 30, 2006, compared with $182.5 million
for the six months ended June 30, 2005. The decrease in net cash from operating activities was due primarily to a decrease in net income attributable to the reductions in Medicare reimbursement for respiratory medications and related
dispensing fees that took effect on January 1, 2006 and the reduction in Medicare reimbursements for oxygen equipment that took effect on April 1, 2005, and to decreases in accounts payable, accrued expenses and income taxes payable.

Net cash used in investing and financing activities was $153.7 million for the six months ended June 30, 2006. Activity during the
six-month period ended June 30, 2006 included our investment of $19.4 million in business acquisitions, net investment in capital equipment of $52.8 million, payments of principal on debt of $7.5 million and repurchases of our common stock of
$78.2 million.



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As of June 30, 2006, our principal sources of liquidity consisted of $124.3 million of working
capital and up to $200.0 million available under our revolving bank credit facility.

On October 24, 2005, the Board of Directors
authorized a plan to repurchase up to $100.0 million of the Companys common stock. As of March 31, 2006, we had repurchased all amounts authorized under this plan, including 683,748 shares repurchased for $28.1 million in the quarter
ended March 31, 2006. On February 14, 2006, the Board authorized a new 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 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 quarter ended June 30, 2006, the
Company repurchased an additional 1,318,845 shares for $50.1 million and retired 33.6 million shares held in treasury.

In June 2003,
we completed the sale of $275.0 million aggregate principal amount of 3.0% Convertible Senior Debentures due 2033 (the Debentures) in a private placement. The Debentures are convertible into shares of our common stock based on a
conversion rate of 18.7515 shares for each $1,000 principal amount of Debentures. The conversion rate is equivalent to a conversion price of approximately $53.33 per share of common stock. The Debentures are convertible into common stock in any
calendar quarter if, among other circumstances, the last reported sale price of our common stock for at least 20 trading days during the period of 30 consecutive trading days ending on the last trading day of our previous calendar quarter is greater
than or equal to $64.00 (120% of the applicable conversion price per share of our common stock) on such last trading day. Interest on the Debentures is payable at the rate of 3.0% per annum on June 15 and December 15 of each year. The
Debentures are senior unsecured obligations and will mature on June 15, 2033. The Debentures are redeemable by us on or after June 15, 2008 and may be put to us for repurchase on June 15, 2008, 2010, 2013, or 2018.

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

Future Minimum Obligations

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



|                          |  |                         |        |      |   |        |  |      |         |      |   |            |  |       |       |  |   |   |  |   |        
|------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | ---- | ------- | ---- | - | ---------- |  | ----- | ----- |  | - | - |  | - | -------
|                          |  | Fiscal Years            |        |      |   |       
|                          |  | (remaining6 months)2006 |        | 2007 |   | 2008   |  | 2009 |         | 2010 |   | Thereafter |  | Total
|Short-term debt           |  | $                       | 4,287  |      | $ | 2,880  |  | $    | 0       |      | $ | 0          |  | $     | 0     |  | $ | 0 |  | $ | 7,167  
|Long-term debt (1)        |  |                         | 0      |      |   | 0      |  |      | 275,000 |      |   | 0          |  |       | 0     |  |   | 0 |  |   | 275,000
|Capital lease commitments |  |                         | 34     |      |   | 436    |  |      | 0       |      |   | 0          |  |       | 0     |  |   | 0 |  |   | 470    
|Interest expense          |  |                         | 4,355  |      |   | 8,367  |  |      | 4,125   |      |   | 0          |  |       | 0     |  |   | 0 |  |   | 16,847 
|Operating leases          |  |                         | 17,956 |      |   | 28,709 |  |      | 17,960  |      |   | 8,098      |  |       | 2,198 |  |   | 8 |  |   | 74,929 
|Employment agreements     |  |                         | 683    |      |   | 1,821  |  |      | 1,821   |      |   | 1,821      |  |       | 0     |  |   | 0 |  |   | 6,146  
|                          |  |                         |        |      |   |        |  |      |         |      |   |            |  |       |       |  |   |   |  |   |        
|Total                     |  | $                       | 27,315 |      | $ | 42,213 |  | $    | 298,906 |      | $ | 9,919      |  | $     | 2,198 |  | $ | 8 |  | $ | 380,559
|                          |  |                         |        |      |   |        |  |      |         |      |   |            |  |       |       |  |   |   |  |   |        

---

|(1) | Amounts represent Debentures due 2033. The Debentures are redeemable by us on or after June 15, 2008 and may be put to us for repurchase on June 15, 2008, 2010, 2013, or
2018.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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New Accounting Standards

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement
No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognizes in its financial statements, the impact of a tax position, if that position is
more likely than not of being sustained upon examination, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the 2007 calendar year, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company does not expect the adoption of FIN 48 to have a material impact on its financial condition, results of operations or cash flows.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004) (SFAS No. 123R), Share-Based Payment, which replaces SFAS No. 123, Accounting for Share-Based Compensation, and supersedes APB Opinion
No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of Cash Flows. SFAS No. 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement recognition.
SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. Under the regulations
promulgated by the Securities and Exchange Commission, the Company is applying SFAS No. 123R as of January 1, 2006. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing
share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include modified prospective and modified retrospective adoption options. The modified prospective
method requires compensation cost to be recognized beginning January 1, 2006 based on the requirements of SFAS No. 123R for all share-based payments granted after December 31, 2005 and based on the requirements of
SFAS No. 123 for all awards granted to employees prior to January 1, 2006 that remain unvested on January 1, 2006. The modified retrospective method includes the requirements of the modified prospective method described above,
but also permits companies to restate, based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures. The Company adopted SFAS No. 123R using the modified prospective method. Refer to Note 4
for a description of the impact to the Companys financial position, results of operations and liquidity relating to the adoption of SFAS 123R.

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.



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

Certain Risk Factors Relating to the Companys Business

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

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

As a provider of home
oxygen and other respiratory therapy services for the home health care market, we have historically depended heavily on Medicare reimbursement as a result of the high proportion of elderly persons suffering from respiratory disease. Medicare Part B,
the Supplementary Medical Insurance Program, provides coverage to eligible beneficiaries for DME, such as oxygen equipment, respiratory assistance devices, continuous positive airway pressure devices, nebulizers and associated respiratory
medications, hospital beds and wheelchairs for the home setting. Approximately 78 percent of our customers have primary coverage under Medicare Part B. There are increasing pressures on Medicare to control health care costs and to reduce or limit
reimbursement rates for home medical equipment and services. Medicare reimbursement is subject to statutory and regulatory changes, retroactive rate adjustments, administrative and executive orders and governmental funding restrictions, all of which
could materially decrease payments to us for the services and equipment we provide.

Recent legislation, including DRA and MMA, contain
provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. DRA contains provisions that will negatively impact reimbursement for oxygen equipment beginning in 2009 and 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, freezes payment amounts for
other covered DME items through 2007, establishes a competitive acquisition program for DME beginning in 2007, and implements quality standards and accreditation requirements for DME suppliers. The DRA and MMA provisions, when fully implemented,
could materially and adversely affect our business, financial condition, operating results and cash flows. See MEDICARE REIMBURSEMENT for a full discussion of the DRA and MMA provisions.

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

DRA changes the
reimbursement methodology for oxygen equipment from continuous monthly payment for as long as the equipment is in use by a Medicare beneficiary, which includes payment for oxygen contents and maintenance of equipment, to a capped rental arrangement
whereby payment for oxygen equipment (including portable oxygen equipment) may not extend over a period of continuous use of longer than 36 months. On the first day that begins after the 36thcontinuous month during which payment is made for the oxygen equipment, the supplier would transfer title of the equipment to the beneficiary. Separate
payments for oxygen contents would continue to be made for the period of medical need beyond the 36thmonth.
According to the legislation,



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additional payments for maintenance and service of the oxygen equipment would be made for parts and labor not covered by a suppliers or
manufacturers warranty. 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 begins on
January 1, 2006. Accordingly, the first month in which the new payment methodology will impact our financial results is January 2009.

On July 27, 2006, the Centers for Medicare and Medicaid Services (CMS) issued proposed rule CMS-1304-P, describing proposed changes in Medicare regulations, as interpreted by CMS, required to implement the DRA oxygen
provisions. The proposed rule seeks to codify the new payment methodology and related provisions with respect to oxygen, including, but not limited to, defining the 36-month capped rental period of continuous use, transfer of title, payment for
oxygen contents for beneficiary-owned oxygen equipment, payment for maintenance and servicing of oxygen equipment and procedures for replacement of beneficiary-owned equipment. A copy of the proposed rule can be located at
http://www.cms.hhs.gov/HomeHealthPPS/downloads/CMS1304Pdisplay.pdf. Comments to the proposed rule must be submitted to CMS by September 25, 2006. Until CMS issues a final rule implementing the DRA provisions, we will be unable to
determine the impact that these provisions will have on our financial condition or results of operations. The Presidents 2007 budget proposes a reduction in the maximum continuous oxygen rental period from 36 months to 13 months. No further
information on this proposal is available and we can not predict whether or not the proposal will be included in the final budget approved by Congress.

Included in proposed rule CMS-1304-P are planned regulatory changes to the Medicare payment rates for oxygen and oxygen equipment which, if implemented, would take effect on January 1, 2007. CMS is exercising its
authority under the Social Security Act (the Act) to establish separate classes and monthly payment rates for items of oxygen and oxygen equipment. In summary, CMS proposes to establish new payment classes for oxygen contents for
beneficiary-owned stationary equipment, oxygen contents for beneficiary-owned portable equipment, and oxygen generating portable equipment. Payments for oxygen contents for beneficiary-owned portable equipment and oxygen generating portable
equipment would exceed what is currently paid for these items to ensure access to portable oxygen regardless of the type of equipment used. In order to achieve budget neutrality as required by the Act for the new classes of oxygen and increase
payment amounts for furnishing portable oxygen contents, CMS proposes to reduce other Medicare oxygen payment rates. Specifically, CMS proposes to reduce the current monthly payment amounts for stationary oxygen equipment and oxygen contents made
during the rental period. CMS proposes to eliminate the current statewide monthly payment amounts and establish new national monthly payment rates as follows: (1) Stationary Payment, $177 (statewide rates currently average $199),
(2) Portable Add-On, $32 (currently average $32), (3) Oxygen Generating Portable Equipment Add-On (portable concentrators or transfilling systems), $64 (currently average $32), (4) Stationary Contents Delivery (for beneficiary-owned
stationary equipment), $101, and (5) Portable Contents Delivery (for beneficiary-owned portable equipment, $55 (the stationary and portable contents delivery fees when both systems are beneficiary-owned would effectively remain at the statewide
average of $156). There is no assurance that the proposal will achieve budget neutrality since CMS factors into its calculations an expected increase in the prevalence of more expensive oxygen generating portable oxygen equipment. Until CMS issues a
final rule implementing the separate classes and monthly payment rates for items of oxygen and oxygen equipment, we will be unable to determine the impact that these changes will have on our financial condition or results of operations.

DRA also changes 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.
The option for a supplier to retain ownership of the item after a 15-month rental period and receive semi-annual maintenance and service payments would be eliminated. On the first day that begins after the 13thcontinuous month during which payment is made for the item, the supplier would transfer title of the item to the beneficiary. According to the
legislation, additional payments for maintenance and service of the item would be made for parts and labor not covered by a suppliers or manufacturers warranty. The DME capped rental provisions contained in DRA apply to items



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furnished for which the first rental month occurs on or after January 1, 2006. Accordingly, the first month in which the new payment methodology will
impact our financial results is February 2007. Included in proposed rule CMS-1304-P is a discussion of the changes in Medicare regulations, as interpreted by CMS, necessary to implement the DME capped rental changes contained in the DRA. Until CMS
issues a final rule implementing the DRA provisions, we can not predict the impact that these provisions will have on our financial condition or results of operations.

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

Historically, prescription drug coverage under Medicare has been limited to drugs furnished incident to a physicians
services and certain self-administered drugs, including inhalation drug therapies. Prior to MMA, Medicare reimbursement for covered Part B drugs, including inhalation drugs that we provide, was limited to 95 percent of the published average
wholesale price (AWP) for the drug. MMA established new payment limits and procedures for drugs reimbursed under Medicare Part B (See MEDICARE REIMBURSEMENT). Beginning in 2005, inhalation drugs furnished to Medicare
beneficiaries are reimbursed at 106 percent of the volume-weighted average selling price (ASP) of the drug, as determined from data provided each quarter by drug manufacturers under a specific formula described in MMA.

On November 2, 2005, CMS issued rule CMS-1502-FC, establishing the dispensing fee amount for inhalation drugs for 2006. The final rule establishes a
dispensing fee of $57.00 for the first 30-day period in which a Medicare beneficiary uses inhalation drugs and a reduced fee of $33.00 for a 30-day supply of inhalation drugs for all other months. We estimate that the reduction in the dispensing fee
to $33.00 will reduce net revenues by approximately $42.0 to $46.0 million in 2006. Additionally, fluctuations in the payment rates for inhalation drugs established by CMS during each quarter of 2006 (based on available manufacturer ASP data) may
result in further reductions in our net revenues in 2006.

On March 24, 2006, the Durable Medical Equipment Program Safeguard
Contractors (DME PSCs) proposed certain revisions to Medicares Local Coverage Determination policy for nebulizers (the Nebulizer LCD) which include significant changes that would, if implemented, adversely affect reimbursement for
two commonly prescribed inhalation drugs, levalbuterol and DuoNeb, and eliminate Medicare coverage for certain other respiratory medications. Specifically, the Nebulizer LCD proposes, among other things, to reduce the payment amount for levalbuterol
to the allowance for albuterol and the payment amount for DuoNeb to the allowance for separate unit dose vials of albuterol and ipratropium. These changes would result in reimbursement reductions for levalbuterol and DuoNeb of approximately 95% and
73%, respectively. The DME PSCs are soliciting comments on the proposed changes from physicians, manufacturers, suppliers and other professional involved in the treatment of Medicare beneficiaries with chronic lung disease. Written comments on the
proposal were due by May 8, 2006, and the DME PSCs also held public meetings to receive comments on the draft policy. We can not determine whether the proposed Nebulizer LCD will be implemented in its current form and what impact the policy
might have on our financial position or operating results and our ability to provide these inhalation drugs to Medicare beneficiaries.

We
continue to evaluate the impact of the reduced Medicare payment rates on our business. We can not determine the outcome of any future rulemaking by CMS nor the impact that such rulemaking might have on our ability to continue to provide inhalation
drugs to Medicare beneficiaries. Further, we can not determine whether quarterly updates in ASP pricing data submitted by drug manufacturers and adopted by CMS will continue to result in further reductions in payment rates for inhalation drugs, and
what impact such payment reductions could have on Lincare in 2006 and beyond. Such payment adjustments could have a material adverse effect on our financial position and operating results.



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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.

On
January 26, 2006, CMS announced a final rule revising the payment classification of certain respiratory assist devices (RADs). RADs with a backup rate feature were reclassified as capped rental DME items effective April 1,
2006, whereby payments to providers of such devices will cease after the 13thcontinuous month of rental. Prior to
the rule, providers were paid a continuous monthly rental amount over the entire period of medical necessity. In cases where Medicare beneficiaries received the item prior to April 1, 2006, only the rental payments for months after the
effective date will count toward the 13-month cap. Accordingly, the first month is which the new payment methodology will impact our financial results is May 2007. RADs with a backup rate feature accounted for approximately $4.0 million of our net
revenues in the three months ended June 30, 2006.

In February 2006, a final rule governing CMS Inherent Reasonableness, or IR,
authority became effective. The IR rule establishes a process for adjusting fee schedule amounts for Medicare Part B services when existing payment amounts are determined to be either grossly excessive or deficient. The rule describes the factors
that CMS or its contractors will consider in making such determinations and the procedures that will be followed in establishing new payment amounts. To date, no payment adjustments have occurred or been proposed as a result of the IR rule.

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

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

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

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



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On April 24, 2006, CMS issued its proposed rule, CMS-1270-P, which would implement the DME
competitive bidding program. Comments on the proposed rule were due to CMS by June 30, 2006. We will evaluate the final regulation once it is issued by CMS. We can not predict the effect of the competitive acquisition program or the Medicare
payment rates that will be in effect in 2007 and beyond for the items ultimately subjected to competitive bidding. Competitive bidding, when implemented, could have a material adverse effect on our financial position and operating results.

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

Due to budgetary shortfalls, many states are considering, or have enacted, cuts to their Medicaid programs, including funding for our equipment and
services. These cuts have included, or may include, elimination or reduction of coverage for some or all of our equipment and services, amounts eligible for payment under co-insurance arrangements, or payment rates for covered items. Approximately
5% of our customers are eligible for primary Medicaid benefits, and State Medicaid programs fund approximately 10% 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 15% of our customers and approximately 27% 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 56% of our revenues are derived from Medicare, 27% from private
insurance carriers, 10% from Medicaid and the balance directly from individual customers and commercial entities.

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

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

The
federal government and all states in which we operate regulate many aspects of our business. In particular, our operating centers are subject to federal laws that regulate the repackaging of drugs (including



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oxygen) and interstate motor-carrier transportation. Our operations also are subject to state laws governing, among other things, pharmacies, nursing
services, distribution of medical equipment and certain types of home health activities. Certain of our employees are subject to state laws and regulations governing the ethics and professional practices of respiratory therapy, pharmacy and nursing.

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

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

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

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

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

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

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

The implementation of an acquisition strategy entails certain risks, including inaccurate assessment of disclosed liabilities, the existence of
undisclosed liabilities, 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



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indebtedness and a limitation in the ability to access additional capital on favorable terms. The successful integration of an acquired business may be
dependent on the size of the acquired business, condition of the customer billing records, and complexity of system conversions and execution of the integration plan by local management. If we do not successfully integrate the acquired business, the
acquisition could fail to achieve its expected revenue contribution or there could be delays in the billing and collection of claims for services rendered to customers, which may have a material adverse effect on our financial position and operating
results.

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

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

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

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

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

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



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The following table sets forth the estimated fair value of our long-term obligations and our estimate of
the impact from a 10% decrease in interest rates on the fair value of our long-term obligations and the associated change in annual interest expense. We had no derivative securities as of June 30, 2006.

Market Risk Sensitive InstrumentsInterest Rate Sensitivity



|                               |  |            |         |                |   |                                          |  |                                 |         |  |   |      
|------------------------------ |  | ---------- | ------- | -------------- | - | ---------------------------------------- |  | ------------------------------- | ------- |  | - | -----
|                               |  |            |         |                |   | (Assuming 10% Decreasein Interest Rates)
|(dollars in thousands)         |  | FaceAmount |         | CarryingAmount |   | Fair Value                               |  | HypotheticalChange inFair Value
|As of June 30, 2006:           |  |            |         |                |   |                                          |  |                                 |         |  |   |      
|Convertible debt               |  | $          | 275,000 |                | $ | 275,000                                  |  | $                               | 269,143 |  | $ | 1,861
|Deferred obligations           |  |            | 7,167   |                |   | 7,167                                    |  |                                 | 7,167   |  |   | 0    
|Capital lease obligations      |  |            | 470     |                |   | 470                                      |  |                                 | 470     |  |   | 0    
|Revolving bank credit facility |  |            | 0       |                |   | 0                                        |  |                                 | 0       |  |   | 0    
|                               |  |            |         |               
|As of December 31, 2005:       |  |            |         |                |   |                                          |  |                                 |         |  |   |      
|Convertible debt               |  | $          | 275,000 |                | $ | 275,000                                  |  | $                               | 276,375 |  | $ | 1,786
|Deferred obligations           |  |            | 13,357  |                |   | 13,357                                   |  |                                 | 13,357  |  |   | 0    
|Capital lease obligations      |  |            | 784     |                |   | 784                                      |  |                                 | 784     |  |   | 0    
|Revolving bank credit facility |  |            | 0       |                |   | 0                                        |  |                                 | 0       |  |   | 0    

Item 4.Controls and Procedures

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

No change in the Companys internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended) occurred during the fiscal quarter ended June 30, 2006, that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.



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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

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

From time to time, the Company receives inquiries from various government agencies requesting customer records and other documents. It has been the
Companys policy to cooperate with all such requests for information. However, the Company can provide no assurances as to the duration or outcome of these inquiries.

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

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

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

In May, the Company resolved several ongoing investigations by the Office of Inspector General and/or the U.S. Department of
Justice. The combined settlements provide for the Company to pay a total of $12,026,000 to the government, without any admission of wrongdoing by the Company. The first investigation was the Florida investigation previously disclosed by the Company
in June 2000. The investigation focused on the Companys relationships with certain physicians and other referral sources during the period from January 1993 through December 2000. The Office of Inspector General of the U.S. Department of
Health and Human Services had contended that certain items of value were improperly provided to physicians and others in violation of federal law. The remaining three investigations were separate investigations conducted in Massachusetts, Tennessee
and Idaho and involved allegations that the Company had inappropriately sought reimbursement under Medicare and other government healthcare programs or otherwise violated federal healthcare laws. The periods covered by these investigations varied,
ranging from January 1995 through March 2004. As a part of the above four settlements, the Company has entered into a corporate integrity agreement with the Office of Inspector General.



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

During the three months ended June 30, 2006, the Company repurchased approximately 1.3 million shares of its common stock in the open market at a cost of approximately $50.1 million under a previously announced
repurchase program approved by its Board of Directors.

ISSUER PURCHASES OF EQUITY SECURITIES



|                                |  |                                |  |                             |       |                                                               |           |                                                                                    |   |            
|------------------------------- |  | ------------------------------ |  | --------------------------- | ----- | ------------------------------------------------------------- | --------- | ---------------------------------------------------------------------------------- | - | -----------
|Period                          |  | Total Numberof SharesPurchased |  | Average PricePaid Per Share |       | Total Numberof SharesPurchased asPart of theRepurchaseProgram |           | ApproximateDollar Value ofShares that MayYet BePurchasedUnder
theRepurchaseProgram
|April 1, 2006 to April 30, 2006 |  | 0                              |  |                             |      |                                                               | 0         |                                                                                    | $ | 169,700,000
|May 1, 2006 to May 31, 2006     |  | 854,371                        |  | $                           | 38.23 |                                                               | 854,371   |                                                                                    | $ | 144,779,000
|June 1, 2006 to June 30, 2006   |  | 464,474                        |  |                             | 37.54 |                                                               | 464,474   |                                                                                    | $ | 120,900,000
|                                |  |                                |  |                             |       |                                                               |           |                                                                                    |   |            
|Total                           |  | 1,318,845                      |  | $                           | 37.99 |                                                               | 1,318,845 |                                                                                    |   |            
|                                |  |                                |  |                             |       |                                                               |           |                                                                                    |   |            

No further purchases are anticipated under the approved repurchase program dated October 24,
2005. On February 14, 2006, the Board authorized a new 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 June 30, 2006, $120.9 million of common stock was eligible for repurchase in accordance with the formula.

Item 3.Defaults Upon Senior SecuritiesNot Applicable

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

Our
Annual Meeting of Shareholders was held on May 15, 2006. The following matters were voted on at the Annual Meeting, with the number of votes cast for, against or withheld, number of abstentions and broker non-votes, as applicable in each case,
indicated next to such matter.



|                         |  |            |  |           |  |         |  |                
|------------------------ |  | ---------- |  | --------- |  | ------- |  | ---------------
|                         |  | For        |  | Withheld  |  | Abstain |  | Broker Non-Vote
|1. Election of Directors |  |            |  |           |  |         |  |                
|J. P. Byrnes             |  | 86,030,964 |  | 2,303,699 |  | 0       |  | 0              
|S. H. Altman, Ph.D.      |  | 86,465,601 |  | 1,869,062 |  | 0       |  | 0              
|C. B. Black              |  | 83,107,200 |  | 5,227,463 |  | 0       |  | 0              
|F. D. Byrne, M.D.        |  | 85,796,309 |  | 2,538,354 |  | 0       |  | 0              
|W. F. Miller, III        |  | 83,145,164 |  | 5,189,499 |  | 0       |  | 0              

Item 5.Other InformationNot Applicable

Item 6.Exhibits and Reports on Form 8-K

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

(b) Furnished April 25, 2006: Announcement of the financial results for the
quarter ended March 31, 2006.

(c) Filed May 15, 2006: Announced resolution of several ongoing investigations by
the Office of Inspector General and/or the Department of Justice.



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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


August 9, 2006



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INDEX OF EXHIBITS



|              |     |  |                                                                                                                                                                                                                              
|------------- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |     |  | Exhibit                                                                                                                                                                                                                      
|3.10          | (A) |  | Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.                                                                                                                                                   
|              |    
|3.11          | (A) |  | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.                                                                                                                   
|              |    
|3.20          | (B) |  | Amended and Restated By-Laws of Lincare Holdings Inc.                                                                                                                                                                        
|              |    
|4.10          | (C) |  | Lincare Holdings Inc. Indenture dated as of June 11, 2003                                                                                                                                                                    
|              |    
|4.20          | (C) |  | Lincare Holdings Inc. Registration Rights Agreement dated as of June 11, 2003                                                                                                                                                
|              |    
|31.1          |     |  | Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by John P.
Byrnes, Chief Executive Officer
|              |    
|31.2          |     |  | Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Paul G.
Gabos, Chief Financial Officer 
|              |    
|32.1          |     |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John P. Byrnes, Chief Executive Officer                                                  
|              |    
|32.2          |     |  | Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Paul G. Gabos, Chief Financial Officer                                                   
|              |    
|              | A   |  | Incorporated by reference to the Registrants Form 10-Q dated August 12, 1998.                                                                                                                                               
|              |    
|              | B   |  | Incorporated by reference to the Registrants Form 10-Q dated August 13, 2002.                                                                                                                                               
|              |    
|              | C   |  | Incorporated by reference to the Registrants Form 8-K dated June 12, 2003.                                                                                                                                                  



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