10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

For The Quarterly Period Ended September 30, 2010

OR

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

Commission File Number 0-19946

LINCARE HOLDINGS INC.

(Exact name of registrant as specified in its charter)

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

Registrant’s telephone number, including area code:

(727) 530-7700

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

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

Class	Outstanding at October 26, 2010
Common Stock, $0.01 par value	97,615,722

LINCARE HOLDINGS INC. AND SUBSIDIARIES

FORM 10-Q

For The Quarterly Period Ended September 30, 2010

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		3
	Condensed consolidated balance sheets		3
	Condensed consolidated statements of operations		4
	Condensed consolidated statements of cash flows		5
	Notes to condensed consolidated financial statements (unaudited)		6
Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition		20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		35
Item 4.	Controls and Procedures		35
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		37
Item 3.	Defaults Upon Senior Securities		37
Item 4.	Removed and Reserved		37
Item 5.	Other Information		37
Item 6.	Exhibits		37
SIGNATURE			38
INDEX OF EXHIBITS			S-1

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)

ASSETS	September 30, 2010		December 31, 2009
Current assets:
Cash and cash equivalents	$	177,098	$	20,428
Short-term investments		20,000		58,650
Restricted cash		5,345		0
Accounts receivable, net		192,666		159,542
Income tax receivable		15,742		3,325
Inventories		9,042		13,617
Prepaid and other current assets		2,241		3,742
Deferred income taxes		25,407		25,646
Total current assets		447,541		284,950
Property and equipment, net		339,223		339,250
Goodwill		1,255,070		1,243,404
Other		8,103		9,590
Total assets	$	2,049,937	$	1,877,194
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current installments of long-term obligations	$	6,005	$	2,767
Accounts payable		52,866		49,959
Accrued expenses:
Compensation and benefits		47,108		42,016
Liability insurance		18,624		19,461
Other current liabilities		57,570		49,264
Total current liabilities		182,173		163,467
Long-term obligations, net, excluding current installments		490,006		482,104
Deferred income taxes and other taxes		363,020		329,708
Total liabilities		1,035,199		975,279
Commitments and contingencies:
Stockholders’ equity:
Common stock		981		980
Additional paid-in capital		677,072		632,653
Retained earnings		336,685		268,282
Total stockholders’ equity		1,014,738		901,915
Total liabilities and stockholders’ equity	$	2,049,937	$	1,877,194

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

3

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	For The Three Months Ended						For The Nine Months Ended
	September 30, 2010			September 30, 2009			September 30, 2010			September 30, 2009
Net revenues	$	418,673		$	392,644		$	1,247,079		$	1,144,677
Costs and expenses:
Cost of goods and services		115,215			109,810			339,730			317,874
Operating expenses		100,464			98,440			298,664			292,282
Selling, general and administrative expenses		79,405			82,090			247,736			247,360
Bad debt expense		10,980			5,890			23,406			17,170
Depreciation and amortization expense		28,924			30,303			87,847			89,353
		334,988			326,533			997,383			964,039
Operating income		83,685			66,111			249,696			180,638
Other income (expense):
Interest income		133			160			368			738
Interest expense		(9,098	)		(8,773	)		(27,048	)		(26,106	)
		(8,965	)		(8,613	)		(26,680	)		(25,368	)
Income before income taxes		74,720			57,498			223,016			155,270
Income tax expense		29,268			21,470			87,513			59,785
Net income	$	45,452		$	36,028		$	135,503		$	95,485
Basic earnings per common share	$	0.48		$	0.36		$	1.42		$	0.92
Diluted earnings per common share	$	0.47		$	0.36		$	1.39		$	0.92
Dividends declared per common share	$	0.00		$	0.00		$	0.20		$	0.00
Weighted average number of common shares outstanding		95,214			100,481			95,666			103,353
Weighted average number of common shares and common share equivalents outstanding		96,705			101,377			97,489			103,970

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

4

LINCARE HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	For The Nine Months Ended
	September 30, 2010			September 30, 2009
Cash flows from operating activities:
Net income	$	135,503		$	95,485
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense		23,406			17,170
Depreciation and amortization expense		87,847			89,353
Net gain on disposal of property and equipment		(26	)		(21	)
Amortization of debt issuance costs		1,327			1,327
Amortization of discount on bonds payable		13,750			12,821
Stock-based compensation expense		19,793			19,417
Deferred income taxes		34,589			26,662
Excess tax benefit from stock-based compensation		(394	)		0
Change in assets and liabilities net of effects of acquired businesses:
Accounts receivable		(56,530	)		(9,520	)
Inventories		5,187			448
Prepaid and other assets		1,514			(641	)
Accounts payable		488			(9,082	)
Accrued expenses and other current liabilities		10,271			6,966
Income taxes payable		(11,437	)		4,128
Long-term obligations		(6,125	)		0
Net cash provided by operating activities		259,163			254,513
Cash flows from investing activities:
Proceeds from sale of property and equipment		49			82
Capital expenditures		(80,380	)		(84,570	)
Purchases of investments		(20,000	)		0
Sales and maturities of investments		58,650			1,300
Business acquisitions, net of cash acquired and purchase price adjustments		(11,375	)		(5,067	)
Cash restricted for future payments		(5,345	)		0
Net cash used in investing activities		(58,401	)		(88,255	)
Cash flows from financing activities:
Payments of principal on debt		(1,034	)		(3,227	)
Payment of cash dividends		(19,617	)		0
Proceeds from exercise of stock options and issuance of common shares		26,126			6,812
Excess tax benefit from stock-based compensation		394			0
Payments to acquire treasury stock		(49,961	)		(150,276	)
Net cash used in financing activities		(44,092	)		(146,691	)
Net increase in cash and cash equivalents		156,670			19,567
Cash and cash equivalents, beginning of period		20,428			72,651
Cash and cash equivalents, end of period	$	177,098		$	92,218
Supplemental disclosure of cash flow information:
Cash paid for interest	$	7,563		$	7,585
Cash paid for income taxes	$	65,504		$	31,557

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

5

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Description of Business: Lincare Holdings Inc. and subsidiaries (“Lincare” or the “Company”) provides oxygen, respiratory therapy services, infusion therapy services and home medical equipment such as hospital beds, wheelchairs and other medical supplies to the home health care market. The Company’s customers are serviced from locations in 48 states. The Company’s equipment and supplies are readily available and the Company is not dependent on a single supplier or even a few suppliers.

Basis of Presentation: The accompanying condensed consolidated financial statements are unaudited and have been prepared in accordance with generally accepted accounting principles accepted in the United States for interim financial information and with the instructions to Form 10-Q. They should be read in conjunction with the consolidated financial statements and related notes to the financial statements of Lincare Holdings Inc. and Subsidiaries on Form 10-K for the fiscal year ended December 31, 2009. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the entire year.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates. It is at least reasonably possible that a change in those estimates will occur in the near term.

On May 14, 2010, the Company’s Board of Directors declared a three-for-two stock split effected in the form of a 50% stock dividend on the Company’s common stock. The additional shares were distributed to stockholders on June 15, 2010. All share and per share information has been adjusted retrospectively for all periods presented to reflect this stock split.

Investments: The Company determines the appropriate classification of investments at the time of purchase based upon management’s intent with regard to such investments. Based upon the Company’s intentions and ability to hold certain assets until maturity, the Company classifies certain debt securities as held-to-maturity and measures them at amortized cost. The Company classifies certain other debt securities as available-for-sale and measures them at fair value with unrealized gains or losses recorded in other comprehensive income. The Company classifies certain other debt securities as trading securities and measures them at fair value with unrealized gains or losses recorded in net income. Realized gains and losses from the sale of all three categories of investments are included in net income and are determined on a specific identification basis. Interest income and dividend income, if any, for all three categories of investments are included in net income.

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

Concentration of Credit Risk: The Company’s revenues are generated through locations in 48 states. The Company generally does not require collateral or other security in extending credit to customers; however, the Company routinely obtains assignment of (or is otherwise entitled to receive) benefits receivable under the health insurance programs, plans or policies of its customers. Included in the Company’s net revenues is reimbursement from government sources under Medicare, Medicaid and other federally and state funded programs, which represented approximately 60% of net revenues for the nine months ended September 30, 2010 and 2009. The exclusion of the Company from participating in state and federally funded programs would have a material adverse effect on the Company’s business, financial condition, operating results and cash flows.

Revenue Recognition and Accounts Receivable: The Company’s revenues are recognized on an accrual basis in the period in which services and related products are provided to customers and are recorded at net realizable amounts estimated to be paid by customers and third-party payors. The Company’s billing system contains payor-specific price tables that reflect the fee schedule amounts in effect or contractually agreed upon by various government and commercial payors for each item of

6

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

equipment or supply provided to a customer. The Company has established an allowance to account for sales adjustments that result from differences between the payment amount received and the expected realizable amount. Actual adjustments that result from differences between the payment amount received and the expected realizable amount are recorded against the allowance for sales adjustments and are typically identified and ultimately recorded at the point of cash application or when otherwise determined pursuant to the Company’s collection procedures. The Company reports revenues in its financial statements net of such sales adjustments.

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

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

• persuasive evidence of an arrangement exists;

• delivery has occurred;

• the seller’s price to the buyer is fixed or determinable; and

• collectibility is reasonably assured.

Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their net realizable values at the time products and/or services are provided. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such sales adjustments are typically identified and recorded by the Company at the point of cash application, claim denial or account review. Included in accounts receivable are earned but unbilled accounts receivable from earned revenues. Unbilled accounts receivable represent charges for equipment and supplies delivered to customers for which invoices have not yet been generated by the Company’s billing system. Prior to the delivery of equipment and supplies to customers, the Company performs certain certification and approval procedures to ensure collection is reasonably assured. Once the items are delivered, unbilled accounts receivable are recorded at net amounts expected to be paid by customers and third-party payors. Billing delays, generally ranging from several days to several weeks, can occur due to delays in obtaining certain required payor-specific documentation from internal and external sources as well as interim transactions occurring between cycle billing dates established for each customer within the billing system, and business acquisitions awaiting assignment of new provider enrollment identification numbers. In the event that a third-party payor does not accept the claim, the customer is ultimately responsible for payment for the products or services. Accounts receivable are reported net of allowances for sales adjustments and uncollectible accounts. Sales adjustments are recorded against revenues and result from differences between the payment amount received and the expected realizable amount. Bad debt is recorded as an operating expense and consists of billed charges that are ultimately deemed uncollectible due to the customer’s or third-party payor’s inability or refusal to pay.

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

7

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)				(In thousands)
Oxygen and other respiratory therapy	$	371,023	$	353,938	$	1,110,783	$	1,033,463
Home medical equipment and other		47,650		38,706		136,296		111,214
Total	$	418,673	$	392,644	$	1,247,079	$	1,144,677

Included in net revenues in the three and nine months ended September 30, 2010 are rental items that comprise approximately 61.4% of total revenues and sale items that comprise approximately 38.6% of total revenues in both periods. Included in net revenues in the three and nine months ended September 30, 2009 are rental items that comprise approximately 63.0% and 63.7%, respectively, of total revenues and sale items that comprise approximately 37.0% and 36.3%, respectively, of total revenues.

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

Cost of Goods and Services: Cost of goods and services includes the cost of medical equipment (excluding depreciation of $24.6 million and $78.3 million for the three and nine-month periods in 2010 and $25.0 million and $79.8 million for the three and nine-month periods in 2009, respectively), drugs and supplies sold to patients and certain operating costs related to the Company’s respiratory drug product line. These costs include an allocation of customer service, distribution and administrative costs relating to the respiratory drug product line of approximately $13.4 million and $39.9 million for the three and nine-month periods ended September 30, 2010, respectively. For the three and nine-month periods of 2009, such costs amounted to $12.8 million and $38.1 million, respectively. Included in cost of goods and services in the three and nine-month periods ended September 30, 2010 are salary and related expenses of pharmacists and pharmacy technicians of approximately $3.3 million and $9.7 million, respectively. Such salary and related expenses for the three and nine-month periods ended September 30, 2009, were $2.9 million and $8.6 million, respectively.

Operating Expenses: The Company manages 1,086 operating centers from which customers are provided equipment, supplies and services. An operating center averages approximately seven to eight employees and is typically comprised of a center manager, two customer service representatives (referred to as “CSR’s” – telephone intake, scheduling, documentation), two or three service representatives (referred to as “Service Reps” – delivery, maintenance and retrieval of equipment and delivery of disposables), a respiratory therapist (non-reimbursable clinical follow-up with the customer and communication to the prescribing physician) and a sales representative (marketing calls to local physicians and other referral sources).

8

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company includes in operating expenses the costs incurred at the Company’s operating centers for certain service personnel (center manager, CSR's and Service Reps), facilities (rent, utilities, communications, property taxes, etc.), vehicles (vehicle leases, gasoline, repair and maintenance), and general business supplies and miscellaneous expenses. Operating expenses for the interim periods of 2010 and 2009 within these major categories were as follows:

Operating Expenses (in thousands)	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2010		2009		2010		2009
Salary and related	$	64,645	$	65,503	$	192,711	$	194,000
Facilities		15,917		14,432		46,781		43,797
Vehicles		11,938		10,854		35,446		31,419
General supplies/miscellaneous		7,964		7,651		23,726		23,066
Total	$	100,464	$	98,440	$	298,664	$	292,282

Included in operating expenses during the three and nine-month periods ended September 30, 2010 are salary and related expenses for Service Reps in the amount of $27.3 million and $81.2 million, respectively. Such salary and related expenses for the three and nine-month periods ended September 30, 2009 were $26.1 million and $78.3 million, respectively.

Selling, General and Administrative Expenses: Selling, general and administrative expenses (“SG&A”) include costs related to sales and marketing activities, corporate overhead and other business support functions. Included in SG&A during the three and nine-month periods ended September 30, 2010 are salary and related expenses of $63.4 million and $191.6 million, respectively. These salary and related expenses include the cost of the Company’s respiratory therapists for the three and nine-month periods ended September 30, 2010 of $17.1 million and $50.7 million, respectively. Included in SG&A during the three and nine-month periods ended September 30, 2009 are salary and related expenses of $63.1 million and $192.9 million, respectively. These salary and related expenses include the cost of the Company’s respiratory therapists for the three and nine-month periods ended September 30, 2009 of $16.5 million and $48.9 million, respectively. The Company’s respiratory therapists generally provide non-reimbursable clinical follow-up with the customer and communication, as appropriate, to the prescribing physician with respect to the customer’s prescribed plan of care. The Company includes the salaries and related expenses of its respiratory therapist personnel (licensed respiratory therapists or, in some cases, registered nurses) in SG&A because it believes that these personnel enhance the Company’s business relative to its competitors who do not employ respiratory therapists.

Comprehensive Income: The objective for the reporting and display of comprehensive income and its components in the Company’s condensed consolidated financial statements is to report a measure (comprehensive income (loss)) of all changes in equity of an enterprise that result from transactions and other economic events in a period other than transactions with owners.

The Company’s comprehensive income is the same as reported net income for all periods presented.

Note 2. Fair Value of Assets and Liabilities

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

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

9

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

• Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

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

Fair value is a market-based measure considered from the perspective of a market participant who holds the asset or owes the liability rather than an entity-specific measure. Therefore, even when market assumptions are not readily available, the Company’s own assumptions are set to reflect those that market participants would use in pricing the asset or liability at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including periods of market dislocation, such as the recent illiquidity in the auction rate securities market. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition has caused, and in the future may cause, the Company’s financial instruments to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. During the three and nine-month periods ended September 30, 2010, the Company did not have any reclassifications in levels.

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

Contingent consideration of $4.2 million was recognized during the first quarter of 2010 in connection with a business acquisition in February 2010. Contingent consideration of $6.1 million was outstanding at December 31, 2009 related to a business acquisition in May 2009. Each period the Company evaluates the fair value of the contingent consideration obligations and records any increases in the fair value as contingent consideration expense and decreases in the fair value as a reduction of contingent consideration expense. Increases or decreases in the fair value of the contingent consideration obligations can result from factors including changes in discount periods and rates and changes in the timing and amount of financial estimates. The fair value of contingent consideration obligations decreased from $10.3 million as of March 31, 2010 to $8.7 million as of June 30, 2010, primarily due to changes in the assumed timing and amount of revenue and expense estimates related to the business acquired in May 2009. The fair value of contingent consideration obligations decreased from $8.7 million as of June 30, 2010 to $4.2 million as of September 30, 2010, pursuant to a mutual release agreement executed in September 2010 by the Company and the former owners of the business acquired in May 2009 that fully discharged the respective contingent consideration obligation. Accordingly, the Company recorded a gain of $4.5 million in the third quarter of 2010 which is reported in selling, general and administrative expenses in its consolidated statement of operations. At September 30, 2010, the amount recognized for the remaining contingent consideration arrangement, the range of outcomes and the assumptions used to develop the estimates, had not materially changed for the business acquired in February 2010.

10

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table presents the valuation of the Company’s financial assets and liabilities as of September 30, 2010 and December 31, 2009, measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

	Significant Unobservable Inputs (Level 3)
	(In thousands)
	September 30, 2010			December 31, 2009
Assets
Short-term investments – trading securities	$	0		$	54,215
Short-term investments – UBS Put Option		0			4,435
Total	$	0		$	58,650
Liabilities
Acquisition-related contingent consideration – short-term	$	4,195	(1)	$	276	(1)
Acquisition-related contingent consideration – long-term		0	(2)		5,794	(2)
Total	$	4,195		$	6,070

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

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

The following table presents the changes in the estimated fair values of the Company’s financial assets and liabilities that are measured using significant unobservable inputs (Level 3) for the nine months ended September 30, 2010:

	Significant Unobservable Inputs (Level 3)
	(In thousands)
	Assets			Liabilities
Balance on December 31, 2009	$	58,650		$	6,070
Unrealized gain – trading securities included in earnings		4,435			0
Unrealized loss – UBS Put Option included in earnings		(4,435	)		0
Redemptions at par		(58,650	)		0
Acquisition-related contingent consideration recorded in 2010		0			4,195
Change in fair value of contingent consideration – included in SG&A		0			(6,070	)
Balance on September 30, 2010	$	0		$	4,195

11

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis are as follows:

(in thousands)	September 30, 2010				December 31, 2009
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	$	177,098	$	177,098	$	20,428	$	20,428
Short-term investments – held to maturity		20,000		20,000		0		0
Restricted cash		5,345		5,345		0		0
Liabilities:
2.75% Series A Debentures		253,281		293,920		246,186		291,170
2.75% Series B Debentures		231,748		289,108		225,093		289,438
Deferred acquisition obligations		1,810		1,810		2,478		2,478

Fair values were determined as follows:

• The carrying amounts of cash and cash equivalents, short-term investments, restricted cash and deferred acquisition obligations approximate fair value because of the short-term maturity of these instruments. The short-term investments are classified as held-to-maturity and are carried at amortized cost.

• The fair value of the Series A and Series B Debentures are estimated based on several standard market variables, including the Company’s stock price, yield to put/call through conversion and yield to maturity.

Note 3. Investments

All of the auction rate securities held as of December 31, 2009, were secured by pools of student loans guaranteed by state-designated guaranty agencies or monoline insurers or reinsured by the United States government. The auction rate securities held by the Company were senior obligations under the applicable indentures authorizing the issuance of such securities. The Company received redemptions of these securities, at par, in the amount of $3.1 million in January 2010, $18.2 million in May 2010, $3.7 million in June 2010 and $33.7 million in July 2010.

The auction rate securities owned by the Company were purchased from UBS Financial Services, Inc., a subsidiary of UBS AG (“UBS”). In November 2008, the Company accepted an offer (the “UBS Put Option”) from UBS to sell to it at par value all of the Company’s remaining auction rate securities during a two-year time period beginning June 30, 2010. The Company elected to measure the UBS Put Option under the fair value option using a discounted cash flow approach that takes into account certain estimates for interest rates and the timing and amount of expected future cash flows, adjusted for any bearer risk associated with UBS’s financial ability to repurchase the auction rate securities. The fair value option enables some companies to reduce the volatility in reported earnings caused by measuring related assets and liabilities differently without applying complex hedge accounting to achieve similar results. On June 30, 2010, the Company exercised the put option to sell the remaining ARS securities at par value and received $33.7 million in cash proceeds on July 1, 2010.

During the nine months ended September 30, 2010, the Company recognized a $4.4 million unrealized gain on the auction rate securities recorded to other income, and recorded a corresponding increase to short-term investments. This

12

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

was offset by recognizing a $4.4 million unrealized loss on the UBS Put Option recorded to other expense and recording a corresponding decrease to short-term investments. No unrealized gains or losses were recognized in the three months ended September 30, 2010.

During the three months ended September 30, 2009, the Company recognized a $0.1 million unrealized loss on the auction rate securities recorded to other expense, and recorded a corresponding decrease to short-term investments. This was offset by recognizing a $0.1 million unrealized gain on the UBS Put Option recorded to other income, and recording a corresponding increase to short-term investments.

During the nine months ended September 30, 2009, the Company recognized a $6.7 million unrealized gain on the auction rate securities recorded to other income, and recorded a corresponding increase to short-term investments. This was offset by recognizing a $6.7 million unrealized loss on the UBS Put Option recorded to other expense, and recording a corresponding decrease to short-term investments. Accordingly, the change in valuations for the auction rate securities and UBS Put Option had no effect on the Consolidated Statement of Operations for the three and nine-month periods ending September 30, 2010 and September 30, 2009.

On August 10, 2010, the Company invested $20.0 million in a 157-day time deposit issued by Credit Agricole Corporate and Investment Bank maturing on January 14, 2011. The investment is classified as held-to-maturity and carried at amortized cost of $20.0 million in the accompanying balance sheet at September 30, 2010.

Note 4. Business Combinations

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

During the nine-month period ended September 30, 2010, the Company acquired certain assets of five companies. During the nine-month period ended September 30, 2009, the Company acquired certain assets of two companies.

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

	(In thousands)
Cash	$	11,375
Contingent consideration		4,195
Deferred acquisition obligations		353
	$	15,923

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

	(In thousands)
Current assets	$	612
Property and equipment		4,817
Intangible assets		80
Goodwill		11,666
Assumption of liabilities		(265	)
Deferred revenue		(987	)
	$	15,923

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

13

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 5. Accounts Receivable, Net

Accounts receivable, net at September 30, 2010 and December 31, 2009 consist of:

	September 30, 2010			December 31, 2009
	(In thousands)
Trade accounts receivable	$	243,396		$	201,102
Less allowance for sales adjustments and uncollectible accounts		(50,730	)		(41,560	)
Accounts receivable, net	$	192,666		$	159,542

Note 6. Property and Equipment, Net

Property and equipment, net at September 30, 2010 and December 31, 2009 consist of:

	September 30, 2010			December 31, 2009
	(In thousands)
Property and equipment at cost	$	1,147,131		$	1,080,406
Less accumulated depreciation		(807,908	)		(741,156	)
Property and equipment, net	$	339,223		$	339,250

Note 7. Other Current Liabilities

Other current liabilities at September 30, 2010 and December 31, 2009 consist of:

	September 30, 2010		December 31, 2009
	(In thousands)
Deferred revenue	$	40,381	$	37,022
Other current liabilities		17,189		12,242
Other current liabilities	$	57,570	$	49,264

14

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Note 8. Long-Term Obligations

Long-term obligations at September 30, 2010 and December 31, 2009 consist of:

	September 30, 2010			December 31, 2009
	(In thousands)
Convertible debt to mature in 2037, bearing fixed interest of 2.75%, with a put/call option in 2012	$	275,000		$	275,000
Unamortized discount		(21,719	)		(28,814	)
Convertible debt to mature in 2037, bearing fixed interest of 2.75%, with a put/call option in 2014		275,000			275,000
Unamortized discount		(43,252	)		(49,907	)
Other long-term liabilities		4,977			5,031
Capital lease obligations due through 2010		0			13
Unsecured acquisition obligations and contingent consideration, net of imputed interest, payable in various installments through 2011		6,005			8,548
Total long-term obligations		496,011			484,871
Less: current installments		6,005			2,767
Long-term obligations, excluding current installments	$	490,006		$	482,104

The Company’s revolving credit agreement with several lenders and Bank of America N.A., as agent, dated December 1, 2006, permits the Company to borrow amounts up to $390.0 million under a five-year revolving credit facility. The revolving credit facility contains a $60.0 million letter of credit sub-facility, which reduces the principal amount available under the facility by the amount of outstanding letters of credit on the sub-facility. As of September 30, 2010 and December 31, 2009, no borrowings were outstanding under the credit facility and $33.6 million in standby letters of credit were issued as of those dates. The revolving credit agreement has a maturity date of December 1, 2011. The Company pays an annual administration agency fee along with a quarterly facility fee. The facility fee is based on the Company’s consolidated leverage ratio and ranges between 0.10% and 0.175% annually. The leverage ratio is calculated each quarter to determine the applicable interest rate on revolving loans, the letter of credit fee and the facility fee for the following quarter. The revolving credit agreement contains several financial and other negative and affirmative covenants customary in such agreements and is secured by a pledge of the stock of the wholly-owned subsidiaries of Lincare Holdings Inc. The financial covenants in the Company’s credit agreement include interest coverage and leverage ratios, as defined in the agreement. The Company’s credit agreement requires compliance with all covenants set forth in the agreement and the Company was in compliance with all covenants as of September 30, 2010 and December 31, 2009. The credit agreement defines the occurrence of certain specified events as events of default which, if not waived by or cured to the satisfaction of the requisite lenders, allow the lenders to take actions against the Company, including termination of commitments under the agreement, acceleration of any unpaid principal and accrued interest in respect of outstanding borrowings, payment of additional cash collateral to be held in escrow for the benefit of the lenders and enforcement of any and all rights and interests created and existing under the credit agreement. Under certain conditions, an event of default may result in an increase in the interest rate (the “Default Rate”) payable by the Company on loans outstanding under the credit facility. The Default Rate is equal to the interest rate (including any applicable percentage as set forth in the agreement) otherwise applicable to such loans plus 2% per annum. In the case of a bankruptcy event (as defined in the credit agreement), all commitments automatically terminate and all amounts outstanding under the credit facility become immediately due and payable.

15

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

On October 31, 2007, the Company completed the sale of $275.0 million principal amount of convertible senior debentures due 2037 – Series A (the “Series A Debentures”) and $275.0 million principal amount of convertible senior debentures due 2037 – Series B (the “Series B Debentures” and together with the Series A Debentures, the “Series Debentures”) in a private placement. The Series Debentures pay interest semi-annually at a rate of 2.75% per annum. The Series Debentures are unsecured and unsubordinated obligations and will be convertible under specified circumstances based upon a base conversion rate, which, under certain circumstances, will be increased pursuant to a formula that is subject to a maximum conversion rate. Upon conversion, holders of the Series Debentures will receive cash up to the principal amount, and any excess conversion value will be delivered in shares of the Company’s common stock or in a combination of cash and shares of common stock, at the Company’s option. The base conversion rate for the Debentures as of September 30, 2010 is 29.4580 shares of common stock per $1,000 principal amount of Series Debentures, equivalent to a base conversion price of approximately $33.95 per share. In addition, if at the time of conversion the applicable price of the Company’s common stock exceeds the base conversion price, holders of the Series A Debentures and Series B Debentures will receive an additional number of shares of common stock per $1,000 principal amount of the Debentures, as determined pursuant to a specified formula. The Company will have the right to redeem the Series A Debentures and the Series B Debentures at any time after November 1, 2012 and November 1, 2014, respectively. Holders of the Series Debentures will have the right to require the Company to repurchase for cash all or some of their Series Debentures upon the occurrence of certain fundamental change transactions or on November 1, 2012, 2017, 2022, 2027 and 2032 in the case of the Series A Debentures and November 1, 2014, 2017, 2022, 2027 and 2032 in the case of the Series B Debentures.

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

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

	September 30, 2010						December 31, 2009
	Series A			Series B			Series A			Series B
Principal amount of convertible debentures	$	275,000		$	275,000		$	275,000		$	275,000
Unamortized discount		(21,719	)		(43,252	)		(28,814	)		(49,907	)
Net carrying amount		253,281			231,748			246,186			225,093
Additional paid-in capital		29,065			41,238			29,065			41,238

At September 30, 2010, the remaining period over which the discount on the liability components will be amortized is 25 months and 49 months for the Series A and Series B convertible debentures, respectively.

16

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The amount of interest expense recognized for the three months ended September 30, 2010 and 2009 was as follows (in thousands):

	September 30, 2010				September 30, 2009
	Series A		Series B		Series A		Series B
Contractual coupon interest	$	1,891	$	1,891	$	1,891	$	1,891
Amortization of discount on convertible debentures		2,405		2,259		2,247		2,101
Interest expense	$	4,296	$	4,150	$	4,138	$	3,992

The amount of interest expense recognized for the nine months ended September 30, 2010 and 2009 was as follows (in thousands):

	September 30, 2010				September 30, 2009
	Series A		Series B		Series A		Series B
Contractual coupon interest	$	5,672	$	5,672	$	5,672	$	5,672
Amortization of discount on convertible debentures		7,095		6,655		6,628		6,193
Interest expense	$	12,767	$	12,327	$	12,300	$	11,865

Note 9. Income Taxes

The Company conducts business nationally and, as a result, files a U.S. federal income tax return and returns in various state and local jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the United States. With few exceptions, the Company is no longer subject to U.S. federal, and state and local income tax examinations for years before 2006 and 2005, respectively.

The Company does not expect that the total amount of unrecognized tax positions will significantly increase or decrease in the next twelve months. The Company continues to recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense.

The Internal Revenue Service has completed its examination of the Company’s U.S. income tax returns through 2008. The U.S. federal statute of limitations remains open for the years 2007 and forward. There are no material disputes for the open tax years. The years 2009 and 2010 are currently under examination.

Note 10. Earnings Per Common Share

Basic earnings per common share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per common share reflects the potential dilution of securities that could share in the Company’s earnings, including exercise of outstanding stock options and non-vested restricted stock. As discussed in Note 8, the conditions for conversion related to the Company’s Convertible Debentures have never been met. Accordingly, there was no impact on diluted earnings per share attributable to assumed conversion. When the exercise of stock options or the inclusion of awards would be anti-dilutive, they are excluded from the earnings per common share calculation. For the three and nine months ended September 30, 2010, the number of excluded shares underlying anti-dilutive stock options and awards was 3,948,714 and 2,748,934, respectively. For the three and nine months ended September 30, 2009, the number of excluded shares underlying anti-dilutive stock options and awards was 8,698,125 and 10,752,062, respectively.

17

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

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

	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands, except per share data)
Numerator:
Income available to common stockholders and holders of dilutive securities	$	45,452	$	36,028	$	135,503	$	95,485
Denominator:
Weighted average shares		95,214		100,481		95,666		103,353
Effect of dilutive securities:
Incremental shares under stock compensation plans		1,491		896		1,823		617
Adjusted weighted average shares		96,705		101,377		97,489		103,970
Per share amount:
Basic	$	0.48	$	0.36	$	1.42	$	0.92
Diluted	$	0.47	$	0.36	$	1.39	$	0.92

Note 11. Stock-Based Compensation

For the three months ended September 30, 2010 and 2009, the Company recognized total stock-based compensation expenses of $6.5 million and $4.5 million, respectively, as well as related tax benefits of $1.7 million and $33.0 thousand, respectively. For the nine months ended September 30, 2010 and 2009, the Company recognized total stock-based compensation expenses of $19.8 million and $19.4 million, respectively, as well as related tax benefits of $5.3 million and $4.4 million, respectively. All stock-based compensation expenses are recognized using a graded method approach and are either classified within operating expenses or selling, general and administrative expenses on the accompanying condensed consolidated statements of operations, with substantially all of the expense being in selling, general and administrative expenses.

Stock Options

Stock option activity for the nine months ended September 30, 2010 is summarized below:

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2009		7,986,876		$	24.43
Options granted in 2010		0			—
Exercised in 2010		(1,055,537	)	$	23.93
Cancelled in 2010		(4,875	)	$	27.16
Outstanding at September 30, 2010		6,926,464		$	24.50		3.66	$	13,220,423
Exercisable at September 30, 2010		5,582,464		$	25.49		2.81	$	6,903,623
Vested or expected to vest in the future as of September 30, 2010		6,923,507		$	24.50		3.66	$	13,206,526

18

LINCARE HOLDINGS INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Of the stock options outstanding at September 30, 2010, options for 5,582,464 shares were exercisable and options for 1,344,000 shares were unvested. Of the total stock options outstanding at September 30, 2010, 6,923,507 were vested or expected to vest in the future, net of expected cancellations and forfeitures of 2,957. The intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 amounted to $6.3 million and $0.4 million, respectively.

As of September 30, 2010, the total remaining unrecognized compensation cost related to unvested stock options amounted to $4.3 million, which will be amortized over the weighted-average remaining requisite service period of 1.1 years.

Restricted Stock

The following table summarizes information about restricted stock activity for the nine months ended September 30, 2010:

	Shares			Weighted- Average Grant Date Fair Value Per Share
Unvested at December 31, 2009		2,506,575		$	21.53
Granted		542,400		$	23.58
Vested		(165,375	)	$	26.02
Forfeited		(14,000	)	$	24.97
Unvested at September 30, 2010		2,869,600		$	21.64

As of September 30, 2010, the total remaining unrecognized compensation cost related to restricted stock amounted to $34.1 million, which will be amortized over the weighted-average remaining requisite service period of 2.1 years.

Note 12. Subsequent Event

On October 1, 2010, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.20 per share which was paid on October 29, 2010 to stockholders of record as of October 15, 2010. The total dividend paid was $19.6 million.

19

LINCARE HOLDINGS INC. AND SUBSIDIARIES

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

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

Medicare Reimbursement

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

Recent legislation, including the Patient Protection and Affordable Care Act (“PPACA”), the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), the Medicare, Medicaid and SCHIP Extension Act of 2007 (“SCHIP Extension Act”), the Deficit Reduction Act of 2005 (“DRA”) and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), contain provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. PPACA, as amended, is a comprehensive health care reform law that contains a large number of health-related provisions to take effect over the next several years, including various cost containment and program integrity changes that will apply to the home medical equipment industry. MIPPA delayed the implementation of a Medicare competitive bidding program for oxygen equipment and certain other DME items that was scheduled to begin on July 1, 2008 and instituted a 9.5% price reduction nationwide for these items as of January 1, 2009. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. DRA provisions negatively impacted reimbursement for oxygen equipment beginning in 2009 and negatively impacted reimbursement for DME items subject to capped rental payments beginning in 2007. MMA changed the pricing formulas used to establish payment rates for inhalation drug therapies resulting in significantly reduced reimbursement beginning in 2005, established a competitive acquisition program for DME, established a Recovery Audit Contractors (“RAC”) program, a demonstration project designed to test a new method for recovery of Medicare overpayments by utilizing private companies operating on a contingent fee basis to identify and recoup Medicare overpayments, and implemented quality standards and accreditation requirements for DME suppliers. These legislative provisions, as currently in effect and when fully implemented, have had and will have a material adverse effect on our business, financial condition, operating results and cash flows.

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

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

(2) Makes adjustments to the Medicare DME Competitive Acquisition Program (“competitive bidding”). PPACA expands the second round of DME competitive bidding from 70 markets under prior law to 91 markets. The additional competitive bidding areas will include the next 21 largest metropolitan statistical areas beyond the 79 markets previously identified under the program, for a total of 100 markets. PPACA also adds a requirement to competitively bid all areas or use competitive bid information to set prices in all areas by 2016, effectively expanding the program to all geographic markets.

20

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

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

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

The SCHIP Extension Act, which became law on December 29, 2007, required CMS to adjust the methodology used to determine Medicare payment amounts for inhalation drugs by using volume-weighted average selling prices (“ASP”) based on actual sales volumes rather than average sales prices. The SCHIP Extension Act also specifically lowered reimbursement for the inhalation drug albuterol. CMS publishes payment rates for inhalation drugs each calendar quarter, representing the unit reimbursement rates in effect for inhalation drugs dispensed within that quarter. These payment rates may be subject to volatility as a result of the underlying ASP data used to determine the rates in effect each quarter. The ASP data published by CMS for inhalation drugs for the third quarter of 2010 included reductions in the Medicare payment rates for inhalation drugs that negatively impacts the Company’s net revenues by approximately $7.0 million per quarter. The ASP rates published by CMS for the fourth quarter of 2010 will result in additional reductions in our net revenues of approximately $3.0 million per quarter. We can not determine whether quarterly updates in ASP pricing data will continue to result in ongoing reductions in payment rates for inhalation drugs, or what impact such payment reductions could have on our business in the future.

Additionally, for calendar year 2011, CMS proposes to use 103% of Average Manufacturer Price (“AMP”) rather than 106 % of ASP for a drug when ASP exceeds AMP by 5% for either two straight quarters or three of the past four quarters. The proposed policy would also limit substitution of the price formula in a given quarter to only those drugs where ASP and AMP can be compared using the same set of national drug codes. The Office of Inspector General’s most recent published report on AMP and ASP comparisons as of the fourth quarter of 2009 did not include any inhalation drugs on the list of medications that met the 5% threshold. We can not determine at this time which, if any, inhalation drugs might meet the criteria established for substitution in a particular future quarter, nor the impact on payment rates for such drugs in the event that the AMP formula is utilized.

On February 1, 2006, Congress passed the DRA legislation which changed the reimbursement methodology for oxygen equipment from continuous monthly payment for as long as the equipment is in use by a Medicare beneficiary, which includes payment for oxygen contents, related disposable supplies and accessories and maintenance of equipment, to a capped rental arrangement whereby payment for oxygen equipment may not extend over a period of continuous use of longer than 36 months. Separate payments for oxygen contents continue to be made for the period of medical need beyond the 36^th month. Additionally, payment for routine maintenance and service of the oxygen equipment is made following each six-month period after the 36-month rental period ends. The oxygen provisions contained in DRA became effective on January 1, 2006. In the case of beneficiaries receiving oxygen equipment prior to the effective date, the 36-month period of continuous use began on January 1, 2006. Accordingly, the first month in which the new payment methodology impacted our net revenues was January 2009. We anticipate that the new oxygen payment rules will continue to negatively affect our net revenues on an ongoing basis, as each month additional customers reach the 36-month capped service period, resulting in up to two or more years without rental income on these customers. During the first nine months of 2010, we estimate that our net revenues were reduced by an additional $15.8 million attributable to customers reaching the payment cap.

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

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

(1) Significantly reduced reimbursement for inhalation drug therapies. Prior to MMA, Medicare reimbursement for covered drugs, including the inhalation drugs that we provide, was limited to 95% of the published average wholesale price (“AWP”) for the drug. Beginning in 2005, inhalation drugs furnished to Medicare beneficiaries are reimbursed at 106% of the volume-weighted average selling price (“ASP”) of the drug, as determined from data provided each quarter by drug manufacturers under a specific formula described in MMA.

(2) Established a competitive acquisition program for DME that was expected to commence in 2008, but was subsequently delayed by further legislation. MMA instructs CMS to establish and implement programs under which competitive acquisition areas will be established throughout the United States for purposes of awarding contracts for the furnishing of competitively priced items of DME, including oxygen equipment. The program was initially intended to be implemented in phases such that competition under the program would occur in nine of the largest metropolitan statistical areas (“MSAs”) in the first year and an additional 70 of the largest MSAs in a second, subsequent round of bidding.

For each competitive acquisition area, CMS is required to conduct a competition under which providers submit bids to supply certain covered items of DME. Successful bidders are 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 (there are, however, regulations in place that allow non-contracted providers to continue to provide equipment and services to their existing customers at the new prices determined through the bidding process). The contracts are expected to be re-bid at least every three years. CMS is required to award contracts to multiple entities submitting bids in each area for an item or service, but has the authority to limit the number of contractors in a competitive acquisition area to the number it determines to be necessary to meet projected demand.

CMS concluded the bidding process for the first round of MSAs in September 2007. On March 20, 2008, CMS completed the bid evaluation process and announced the payment amounts that would have taken effect in those markets beginning July 1, 2008. Contracts to provide products within the competitive bid areas were awarded to selected suppliers, including the Company, and took effect on July 1, 2008. On July 15, 2008, Congress enacted the MIPPA legislation which retroactively delayed the implementation of competitive bidding and reduced Medicare prices nationwide by 9.5% beginning in 2009 for the product categories, including oxygen, that were initially included in competitive bidding. As a result of the delay, CMS cancelled all contract awards retroactively to June 30, 2008.

On April 18, 2009, the interim final rule (“IFR”) for competitive bidding became effective. The IFR outlined the process for re-bidding the first round of competitive bidding in nine metropolitan markets in 2009, including tentative timelines and bidding requirements. Bidder registration began August 17, 2009 and contract bidding occurred from October 21, 2009 through December 21, 2009. The reimbursement rates resulting from the bidding process will go into effect in each competitive acquisition area on January 1, 2011.

Reimbursement rates from the re-bidding process were publicly released by CMS on June 30, 2010. CMS announced average savings of approximately 32% off the current payment rates in effect for the product categories included in competitive bidding. These payment rates will be in effect in the nine markets only, as of January 1, 2011. Lincare has been offered contracts to provide oxygen equipment in just two of the nine markets, Charlotte and Miami, and we have accepted and signed those contracts. The Company estimates that its annual Medicare revenues from the product categories in the nine markets affected by competitive bidding are approximately $48.0 million.

CMS will undertake a second round of competitive bidding in up to 91 additional markets, with contracts expected to be effective as of January 1, 2013. It is not certain at this time whether CMS intends to implement competitive bidding in all 91 markets simultaneously, or whether the program will be phased in over several years. The Company estimates that its annual Medicare revenues from the product categories in the 91 additional markets to be

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included in the second round of competitive bidding are approximately $247.0 million. This estimate may be revised by the Company once CMS publishes the list of zip codes included in the 91 additional markets. The PPACA legislation requires CMS to expand competitive bidding further to all geographic markets (certain markets may be excluded at the discretion of CMS) or to use competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.

We will continue to monitor developments regarding the implementation of the competitive bidding program. We can not predict the outcome of the competitive bidding program on our business when fully implemented nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding.

(3) Established a Recovery Audit Contractors (“RAC”) program to identify and recoup Medicare overpayments from providers. Started in 2005 as a demonstration project by CMS, the RAC program was designed to test a new method for recovery of Medicare overpayments by utilizing private companies operating on a contingent fee basis to identify and recoup Medicare overpayments from providers. Section 302 of the Tax Relief and Health Care Act of 2006 made the program permanent and requires the Department of Health and Human Services to expand the program to all states. The RAC contractors are empowered to withhold future payments, including in cases where the reimbursement rules are unclear or subject to differing interpretations. This activity, as well as the activity of intermediaries and others involved in government reimbursement, may include changes in long-standing interpretations of reimbursement rules.

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

Government Regulation

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

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

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

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

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Operating Results

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

	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2010		2009		2010		2009
	(In thousands)				(In thousands)
Oxygen and other respiratory therapy	$	371,023	$	353,938	$	1,110,783	$	1,033,463
Home medical equipment and other		47,650		38,706		136,296		111,214
Total	$	418,673	$	392,644	$	1,247,079	$	1,144,677

Net revenues for the three months ended September 30, 2010, increased by $26.0 million (or 6.6%), compared with the three months ended September 30, 2009 and for the nine months ended September 30, 2010, increased by $102.4 million (or 8.9%) compared with the nine months ended September 30, 2009. The Company estimates that the 6.6% increase in net revenues in the three-month period of 2010 was comprised of approximately 10.0% internal and acquisition growth offset by approximately 3.4% negative impact from $13.1 million of Medicare payment changes (see “Medicare Reimbursement” above). The Company estimates that the 8.9% increase in net revenues in the nine-month period of 2010 was comprised of approximately 10.6% internal and acquisition growth offset by approximately 1.7% negative impact from $18.9 million of Medicare payment changes in 2010. The internal growth in net revenues is attributable to underlying demographic growth in the markets for our products and gains in customer counts resulting primarily from our sales and marketing efforts that emphasize high-quality equipment and customer service. Growth in net revenues from acquisitions is attributable to the effects of acquisitions of local and regional companies and is based on the estimated contribution to net revenues for the four quarters following such acquisitions.

The contribution of oxygen and other respiratory therapy products to our net revenues was 88.6% and 89.1%, respectively, during the three and nine months ended September 30, 2010. Our strategy is to focus on the provision of oxygen and other respiratory therapy services to patients in the home and to provide home medical equipment and other services where we believe such services will enhance our core respiratory business.

Cost of goods and services, as a percentage of net revenues, was 27.5% and 27.2%, respectively, for the three and nine months ended September 30, 2010, compared with 28.0% and 27.8%, respectively, for the comparable prior year periods. Cost of goods and services for the three months ended September 30, 2010, increased $5.4 million, or 4.9%, when compared with the prior year period. Cost of goods and services for the nine months ended September 30, 2010, increased $21.9 million, or 6.9%, when compared with the prior year period. The increase in cost of goods and services in 2010 is attributable to an increase in the number of oxygen customers served and higher volumes in our inhalation drug, sleep therapy, enteral nutrition and infusion therapy product lines.

Cost of goods and services for the three and nine-month periods includes the cost of medical equipment (excluding depreciation of $24.6 million and $78.3 million in 2010 and $25.0 million and $79.8 million in 2009, respectively), drugs and supplies sold to patients and certain costs related to the Company’s respiratory drug product line. These costs include an allocation of customer service, distribution and administrative costs relating to the respiratory drug product line of approximately $13.4 million and $39.9 million for the three and nine-month periods of 2010, respectively, and approximately $12.8 million and $38.1 million for the three and nine-month periods of 2009, respectively. Included in cost of goods and services in the three and nine months ended September 30, 2010 are salary and related expenses of pharmacists and pharmacy technicians of $3.3 million and $9.7 million, respectively. Such salary and related expenses for the three and nine months ended September 30, 2009, were $2.9 million and $8.6 million, respectively.

Operating expenses, as a percentage of net revenues, were 24.0% and 23.9%, respectively, for the three and nine months ended September 30, 2010, compared with 25.1% and 25.5%, respectively, for the comparable prior year periods. Operating expenses for the three and nine months ended September 30, 2010, increased by $2.0 million, or 2.1%, and $6.4 million or 2.2%, respectively, over the prior year periods. The Company has been successful in achieving productivity gains that have contributed to containment of the growth in wage expenses and in managing the growth of its employee health benefit costs. These positive developments were partially offset by increases in vehicle related expenses during the first nine months of 2010, most significantly fuel costs, and higher facility expenses including rent and utilities.

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The Company manages 1,086 operating centers from which customers are provided equipment, supplies and services. An operating center averages approximately seven to eight employees and is typically comprised of a center manager, two customer service representatives (referred to as “CSR’s” – telephone intake, scheduling, documentation), two or three service representatives (referred to as “Service Reps” – delivery, maintenance and retrieval of equipment and delivery of disposables), a respiratory therapist (non-reimbursable clinical follow-up with the customer and communication to the prescribing physician) and a sales representative (marketing calls to local physicians and other referral sources).

The Company includes in operating expenses the costs incurred at the Company’s operating centers for certain service personnel (center manager, CSR’s and Service Reps), facilities (rent, utilities, communications, property taxes, etc.), vehicles (vehicle leases, gasoline, repair and maintenance), and general business supplies and miscellaneous expenses. Operating expenses for the interim periods of 2010 and 2009 within these major categories were as follows:

Operating Expenses (in thousands)	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2010		2009		2010		2009
Salary and related	$	64,645	$	65,503	$	192,711	$	194,000
Facilities		15,917		14,432		46,781		43,797
Vehicles		11,938		10,854		35,446		31,419
General supplies/miscellaneous		7,964		7,651		23,726		23,066
Total	$	100,464	$	98,440	$	298,664	$	292,282

Included in operating expenses during the three and nine months ended September 30, 2010 are salary and related expenses for Service Reps in the amount of $27.3 million and $81.2 million, respectively. Such salary and related expenses for the three and nine months ended September 30, 2009 were $26.1 million and $78.3 million, respectively.

Selling, general and administrative (“SG&A”) expenses, as a percentage of net revenues, were 19.0% and 19.9%, respectively, for the three and nine months ended September 30, 2010, compared with 20.9% and 21.6%, respectively, for the comparable prior year periods. SG&A expenses for the three and nine months ended September 30, 2010 decreased by $2.7 million, or 3.3%, and increased $0.4 million, or 0.2%, compared to the prior year periods. Contributing to the change in SG&A expenses during 2010 were higher casualty insurance costs and advertising expenses partially offset by lower share-based compensation costs and administrative payroll and related expenses and a reduction in the fair value of a contingent consideration obligation related to a prior period business acquisition.

SG&A expenses include costs related to sales and marketing activities, corporate overhead and other business support functions. Included in SG&A during the three and nine months ended September 30, 2010 are salary and related expenses of $63.4 million and $191.6 million, respectively. These salary and related expenses include the cost of the Company’s respiratory therapists for the three and nine months ended September 30, 2010 of $17.1 million and $50.7 million, respectively. Included in SG&A during the three and nine months ended September 30, 2009 are salary and related expenses of $63.1 million and $192.9 million, respectively. These salary and related expenses include the cost of the Company’s respiratory therapists in the amount of $16.5 million and $48.9 million during the respective periods. The Company’s respiratory therapists generally provide non-reimbursable clinical follow-up with the customer and communication, as appropriate, to the prescribing physician with respect to the customer’s prescribed plan of care. The Company includes the salaries and related expenses of its respiratory therapist personnel (licensed respiratory therapists or, in some cases, registered nurses) in SG&A because it believes that these personnel enhance the Company’s business relative to its competitors who do not employ respiratory therapists.

Bad debt expense as a percentage of net revenues was 2.6% and 1.9%, respectively, for the three and nine months ended September 30, 2010, compared with 1.5% for the three and nine months ended September 30, 2009. Bad debt expense for the three and nine months ended September 30, 2010 increased by $5.1 million and $6.2 million, respectively, over the comparable prior year periods. In the third quarter of 2010, we increased our allowance for uncollectible accounts by $4.7 million over the prior period estimate of 1.5% of net revenues to reflect the increase in the aging of our accounts receivable, particularly with respect to amounts due from customers for insurance copayments and deductibles.

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Included in depreciation and amortization expense in the three and nine months ended September 30, 2010 is depreciation of medical equipment of $24.6 million and $78.3 million, respectively, and depreciation of other property and equipment of $4.2 million and $9.3 million, respectively. Included in depreciation and amortization expense in the three and nine months ended September 30, 2009 is depreciation of medical equipment of $25.0 million and $79.8 million, respectively, and depreciation of other property and equipment of $5.1 million and $9.3 million, respectively.

Operating income for the three and nine months ended September 30, 2010, was $83.7 million (20.0% of net revenues) and $249.7 million (20.0% of net revenues), respectively, compared with $66.1 million (16.8% of net revenues) and $180.6 million (15.8% of net revenues), respectively, for the comparable prior year periods. The increase in operating income in 2010 is attributed to the increase in net revenues from the Company’s core product lines and the management of the growth in costs and expenses during the first nine months of 2010 as compared with the prior year period.

Liquidity and Capital Resources

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

Net cash provided by operating activities increased by 1.8% to $259.2 million for the nine months ended September 30, 2010, compared with $254.5 million for the nine months ended September 30, 2009. Net cash used in investing and financing activities was $102.5 million for the nine months ended September 30, 2010. Investing and financing activities during the nine-month period ended September 30, 2010 included our net investment in property and equipment of $80.3 million, $20.0 million of short-term investments, $19.6 million of dividends paid, $11.4 million of business acquisition expenditures (excluding $5.3 million of cash restricted for future contingent payments), $50.0 million of repurchases of our common stock, proceeds of $58.7 million from the sale of investments, and proceeds of $26.1 million from the exercise of stock options.

As of September 30, 2010, our principal sources of liquidity consisted of approximately $177.1 million of cash and cash equivalents, $20.0 million of short-term investments and $356.4 million available under our revolving credit agreement. The revolving credit agreement, dated December 1, 2006, makes available to us up to $390.0 million over a five-year period, subject to certain terms and conditions set forth in the agreement. As of September 30, 2010, there were $33.6 million of standby letters of credit issued under the credit facility.

On July 1, 2010, the Company received $33.7 million in cash proceeds from the sale of auction rate securities at par value. No gain or loss was recognized on the sale of the securities. On August 10, 2010, the Company invested $20.0 million in a 157-day time deposit issued by Credit Agricole Corporate and Investment Bank maturing on January 14, 2011. The investment is classified as held-to-maturity and carried at amortized cost of $20.0 million in the accompanying balance sheet at September 30, 2010.

On May 14, 2010, our Board of Directors declared a three-for-two stock split effected in the form of a 50% stock dividend on the Company’s common stock. The additional shares were distributed to stockholders on June 15, 2010.

On June 21, 2010, the Company announced that its Board of Directors had approved the initiation of a quarterly cash dividend payable at an annual rate of $0.80 per share of common stock outstanding. The first quarterly dividend of $0.20 per share was paid on July 29, 2010 to stockholders of record as of July 15, 2010.

On October 1, 2010, the Company announced that its Board of Directors had declared a quarterly cash dividend of $0.20 per share which was paid on October 29, 2010, to stockholders of record as of October 15, 2010. The payment of future dividends is dependent on our future earnings and cash flow and is subject to the discretion of our Board of Directors.

Our Board of Directors has authorized a share repurchase plan whereby the Company may repurchase from time to time, on the open market or in privately negotiated transactions, shares of the Company’s common stock in amounts determined pursuant to a formula (the “share repurchase formula”) that takes into account both the ratio of the Company’s net debt to cash flow and its available cash resources and borrowing availability. During the nine months ended September 30, 2010, the Company repurchased and retired 1,558,800 shares for $50.0 million pursuant to the repurchase plan. As of September 30, 2010, $453.5 million of the Company’s common stock was eligible for repurchase in accordance with the plan’s formula.

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On October 31, 2007, we completed the sale of $275.0 million principal amount of convertible senior debentures, due 2037 – Series A (the “Series A Debentures”) and $275.0 million principal amount of convertible senior debentures due 2037 – Series B (the “Series B Debentures” and together with the Series A Debentures, the “Series Debentures”) in a private placement. The Series Debentures pay interest semi-annually at a rate of 2.75% per annum. The Series Debentures are unsecured and unsubordinated obligations and are convertible under specified circumstances based upon a base conversion rate, which, under certain circumstances, will be increased pursuant to a formula that is subject to a maximum conversion rate. Upon conversion, holders of the Series Debentures will receive cash up to the principal amount, and any excess conversion value will be delivered in shares of our common stock or in a combination of cash and shares of common stock, at our option. The base conversion rate for the Debentures as of September 30, 2010 is 29.4580 shares of common stock per $1,000 principal amount of Series Debentures, equivalent to a base conversion price of approximately $33.95 per share. In addition, if at the time of conversion the applicable price of our common stock exceeds the base conversion price, holders of the Series Debentures will receive an additional number of shares of common stock per $1,000 principal amount as determined pursuant to a specified formula. We have the right to redeem the Series A Debentures and the Series B Debentures at any time after November 1, 2012 and November 1, 2014, respectively. Holders of the Series Debentures will have the right to require us to repurchase for cash all or some of their Series Debentures upon the occurrence of certain fundamental change transactions or on November 1, 2012, 2017, 2022, 2027 and 2032 in the case of the Series A Debentures and November 1, 2014, 2017, 2022, 2027 and 2032 in the case of the Series B Debentures.

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

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

The Company’s payor mix is highly concentrated among Medicare, Medicaid and other government third-party payors and contracted private insurance or commercial payors. Government payment rates are determined according to published fee schedules established pursuant to statute, law or other regulatory processes and commercial payment rates are based on contractual line item pricing as reflected in the respective contracts. Fee schedule updates have historically occurred on a prospective basis and have been made available to the Company in advance of the effective date of a change in reimbursement rates. The Company’s proprietary billing system has features that allow the Company to timely update payor price tables within the system as changes occur in order to accurately record revenues and accounts receivable at their expected realizable values. Additional systems and manual controls and processes are used by management to evaluate the accuracy of these recorded amounts. Based on the Company’s experience, it is unlikely that a change in estimate of unsettled amounts from third party payors would have a material adverse impact on its financial position or results of operations.

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Accounts receivable balance concentrations by major payor category as of September 30, 2010 and December 31, 2009 were as follows:

Percentage of Accounts Receivable Outstanding:
	September 30, 2010			December 31, 2009
Medicare		33.7	%		34.0	%
Medicaid/Other Government		14.5	%		15.6	%
Private Insurance		37.6	%		38.8	%
Customer Pay		14.2	%		11.6	%
Total		100.0	%		100.0	%

Aged accounts receivable balances by major payor category as of September 30, 2010 and December 31, 2009 were as follows:

Percentage of Accounts Aged in Days:	September 30, 2010
	0-60			61-120			Over 120
Medicare		78.5	%		10.3	%		11.2	%
Medicaid/Other Government		60.3	%		15.9	%		23.8	%
Private Insurance		60.0	%		13.8	%		26.2	%
Customer Pay		34.5	%		18.4	%		47.1	%
All Payors		62.7	%		13.6	%		23.7	%

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

We operate 34 regional billing and collection offices (“RBCOs”) that are responsible for the billing and collection of accounts receivable. The RBCOs are aligned geographically to support the accounts receivable activity of the operating centers within their assigned territories. As of September 30, 2010, there were 1,385 full-time employees in the RBCOs. Accounts receivable collections are performed by designated collectors within each of the RBCOs. The collectors use various reporting tools available within our proprietary billing system to identify claims that have been denied or partially paid by the responsible party and claims that have not been processed by the third-party payor in a timely manner. Collections of accounts receivable are typically pursued using direct phone contact to determine the reason for non-payment and, if necessary, corrected claims are prepared for resubmission and further follow-up with the responsible party. In some cases, third-party payors have developed electronic inquiry methods that we can access to determine the status of individual claims. We have benefited from the increasing availability of electronic funds transfers from payors, which now account for approximately 70.7% of all payments received. Our accounts receivable days sales outstanding (“DSO”) increased to 41 days at September 30, 2010 compared with 39 days at September 30, 2009 and our bad debt expense, as a percentage of net revenues, increased to 1.9% during the first nine months of 2010 compared with 1.5% during the prior year period. Contributing to the increase in accounts receivable and bad debt expense are copayments and deductibles due from customers who are finding it difficult to pay their out-of-pocket charges due to loss of insurance coverage or reductions in their investment or employment income.

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

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

Future Minimum Obligations

In the normal course of business, we enter into obligations and commitments that require future contractual payments. The commitments primarily result from repayment obligations for borrowings under our revolving credit facility and Series Debentures as well as contractual lease payments for facility, vehicle, and equipment leases, deferred taxes and acquisition obligations.

Forward Looking Statements

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

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

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

Certain Risk Factors Relating to the Company’s Business

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

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

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As a provider of home oxygen and other respiratory therapy services for the home health care market, we have historically depended heavily on Medicare reimbursement as a result of the high proportion of elderly persons suffering from respiratory disease. Medicare Part B, the Supplementary Medical Insurance Program, provides coverage to eligible beneficiaries for DME, such as oxygen equipment, respiratory assistance devices, continuous positive airway pressure devices, nebulizers and associated inhalation medications, hospital beds and wheelchairs for the home setting. Approximately 64% of our customers have primary coverage under Medicare Part B. There are increasing pressures on Medicare to control health care costs and to reduce or limit reimbursement rates for home medical equipment and services. Medicare reimbursement is subject to statutory and regulatory changes, retroactive rate adjustments, administrative and executive orders and governmental funding restrictions, all of which could materially decrease payments to us for the services and equipment we provide.

Recent legislation, including the Patient Protection and Affordable Care Act (“PPACA”), the Medicare Improvements for Patients and Providers Act of 2008 (“MIPPA”), the Medicare, Medicaid and SCHIP Extension Act of 2007 (“SCHIP Extension Act”), the Deficit Reduction Act of 2005 (“DRA”) and the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”), contain provisions that directly impact reimbursement for the primary respiratory and other DME products provided by Lincare. PPACA, as amended, is a comprehensive health care reform law that contains a large number of health-related provisions to take effect over the next several years, including various cost containment and program integrity changes that will apply to the home medical equipment industry. MIPPA delayed the implementation of a Medicare competitive bidding program for oxygen equipment and certain other DME items that was scheduled to begin on July 1, 2008 and instituted a 9.5% price reduction nationwide for these items as of January 1, 2009. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. DRA provisions negatively impacted reimbursement for oxygen equipment beginning in 2009 and negatively impacted reimbursement for DME items subject to capped rental payments beginning in 2007. MMA changed the pricing formulas used to establish payment rates for inhalation drug therapies resulting in significantly reduced reimbursement beginning in 2005, established a competitive acquisition program for DME, established a Recovery Audit Contractors (“RAC”) program, a demonstration project designed to test a new method for recovery of Medicare overpayments by utilizing private companies operating on a contingent fee basis to identify and recoup Medicare overpayments, and implemented quality standards and accreditation requirements for DME suppliers. These legislative provisions, as currently in effect and when fully implemented, have had and will have a material adverse effect on our business, financial condition, operating results and cash flows. See “MEDICARE REIMBURSEMENT” for a full discussion of the PPACA, MIPPA, SCHIP Extension Act, DRA and MMA provisions.

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

DRA changed the reimbursement methodology for oxygen equipment from continuous monthly payment for as long as the equipment is in use by a Medicare beneficiary, which includes payment for oxygen contents, related disposable supplies and accessories and maintenance of equipment, to a capped rental arrangement whereby payment for oxygen equipment may not extend over a period of continuous use of longer than 36 months. Separate payments for oxygen contents continue to be made for the period of medical need beyond the 36^th month. Additionally, payment for routine maintenance and service of the oxygen equipment is made following each six-month period after the 36-month rental period ends. The oxygen provisions contained in DRA became effective on January 1, 2006. In the case of beneficiaries receiving oxygen equipment prior to the effective date, the 36-month period of continuous use began on January 1, 2006. Accordingly, the first month in which the new payment methodology impacted our net revenues was January 2009. We anticipate that the new oxygen payment rules will continue to negatively affect our net revenues on an ongoing basis, as each month additional customers reach the 36-month capped service period, resulting in up to two or more years without rental income from these customers. During the first nine months of 2010, we estimate that our net revenues were reduced by an additional $15.8 million attributable to customers reaching the payment cap.

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

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On July 15, 2008, Congress enacted the MIPPA legislation which reduced Medicare payment rates nationwide for certain DME items, including oxygen equipment, by 9.5% beginning in 2009. In addition to the 9.5% reduction, CMS subjected the monthly payment amount for stationary oxygen equipment to additional cuts of 2.3% in 2009, thereby reducing the monthly payment rate from $199.28 in 2008 to $175.79 in 2009. On November 13, 2009, CMS announced the revised national monthly payment amount for stationary oxygen equipment furnished to Medicare beneficiaries in 2010 of $173.17, a reduction of 1.5%. We estimate that this reduction will negatively impact our revenues in 2010 by approximately $9.0 million.

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

Recently enacted legislation negatively affected Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008 (See “MEDICARE REIMBURSEMENT”). The SCHIP Extension Act required CMS to adjust the average sales price (“ASP”) calculation methodology used to determine Medicare payment amounts for inhalation drugs by using volume-weighted ASPs based on actual sales volume rather than average sales price. The SCHIP Extension Act also specifically lowered reimbursement for the inhalation drug albuterol. CMS publishes payment rates for inhalation drugs each calendar quarter, representing the unit reimbursement rates in effect for inhalation drugs dispensed within that quarter. These payment rates may be subject to volatility as a result of the underlying ASP data used to determine the rates in effect each quarter. The ASP data published by CMS for inhalation drugs for the third quarter of 2010 included reductions in the Medicare payment rates for inhalation drugs that negatively impacts the Company’s net revenues by approximately $7.0 million per quarter. The ASP rates published by CMS for the fourth quarter of 2010 will result in additional reductions in our net revenues of approximately $3.0 million per quarter. We can not determine whether quarterly updates in ASP pricing data will continue to result in ongoing reductions in payment rates for inhalation drugs, or what impact such payment reductions could have on our business in the future.

Additionally, for calendar year 2011, CMS proposes to use 103% of Average Manufacturer Price (AMP) rather than 106% of ASP for a drug when ASP exceeds AMP by 5% for either two straight quarters or three of the past four quarters. The proposed policy would also limit substitution of the price formula in a given quarter to only those drugs where ASP and AMP can be compared using the same set of national drug codes. The Office of Inspector General’s most recent published report on AMP and ASP comparisons as of the fourth quarter of 2009, did not include any inhalation drugs on the list of medications that met the 5% threshold. We can not determine at this time which, if any, inhalation drugs might meet the criteria established for substitution in a particular future quarter, nor the impact on payment rates for such drugs in the event that the AMP formula is utilized.

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

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

The effectiveness of the IR rule itself did not trigger payment adjustments for any items or services. Nevertheless, the IR rule puts in place a process that could eventually have a significant impact on Medicare payments for our equipment and services. We can not predict whether or when CMS will exercise its IR authority with respect to payment for our equipment and services, or the effect that such payment adjustments would have on our financial position or operating results.

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

CMS is required by law to establish and implement programs under which competitive acquisition areas will be established throughout the United States for purposes of awarding contracts for the furnishing of competitively priced items of DME, including oxygen equipment (See “MEDICARE REIMBURSEMENT”). The program was initially intended to be implemented in phases such that competition under the program would occur in nine of the largest MSAs in the first year, and an additional 70 of the largest MSAs in a second, subsequent round of bidding. The PPACA legislation

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expands the second round of DME competitive bidding from 70 markets under prior law to 91 markets. The additional competitive bidding areas will include the next 21 largest metropolitan statistical areas beyond the 79 markets previously identified under the program, for a total of 100 markets. PPACA also adds a requirement to competitively bid all areas or use competitive bid information to set prices in all areas by 2016, effectively expanding the program to all geographic markets.

For each competitive acquisition area, CMS is required to conduct a competition under which providers submit bids to supply certain covered items of DME. Successful bidders are 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 (there are, however, regulations in place that allow non-contracted providers to continue to provide equipment and services to their existing customers at the new prices determined through the bidding process). The contracts are expected to be re-bid at least every three years. CMS is required to award contracts to multiple entities submitting bids in each area for an item or service, but has the authority to limit the number of contractors in a competitive acquisition area to the number it determines to be necessary to meet projected demand.

CMS concluded the bidding process for the first round of MSAs in September 2007. On March 20, 2008, CMS completed the bid evaluation process and announced the payment amounts that would have taken effect in those markets beginning July 1, 2008. Contracts to provide products within the competitive bid areas were awarded to selected suppliers, including the Company, and took effect on July 1, 2008. On July 15, 2008, Congress enacted the MIPPA legislation which retroactively delayed the implementation of competitive bidding and reduced Medicare prices nationwide by 9.5% beginning in 2009 for the product categories, including oxygen, that were initially included in competitive bidding. As a result of the delay, CMS cancelled all contract awards retroactively to June 30, 2008.

On April 18, 2009, the interim final rule (“IFR”) for competitive bidding became effective. The IFR outlined the process for re-bidding the first round of competitive bidding in nine metropolitan markets in 2009, including tentative timelines and bidding requirements. Bidder registration began August 17, 2009 and contract bidding occurred from October 21, 2009 through December 21, 2009. The reimbursement rates resulting from the bidding process will go into effect in each competitive acquisition area on January 1, 2011.

Reimbursement rates from the re-bidding process were publicly released by CMS on June 30, 2010. CMS announced average savings of approximately 32% off the current payment rates in effect for the product categories included in competitive bidding. These payment rates will be in effect in the nine markets only, as of January 1, 2011. Lincare has been offered contracts to provide oxygen equipment in just two of the nine markets, Charlotte and Miami, and we have accepted and signed those contracts. The Company estimates that its annual Medicare revenues from the product categories in the nine markets affected by competitive bidding are approximately $48.0 million. CMS will undertake a second round of competitive bidding in up to 91 additional markets, with contracts expected to be effective as of January 1, 2013. It is not certain at this time whether CMS intends to implement competitive bidding in all 91 markets simultaneously, or whether the program will be phased in over several years. The Company estimates that its annual Medicare revenues from the product categories in the 91 additional markets to be included in the second round of competitive bidding are approximately $247.0 million. This estimate may be revised by the Company once CMS publishes the list of zip codes included in the 91 additional markets. The PPACA legislation requires CMS to expand competitive bidding further to all geographic markets (certain markets may be excluded at the discretion of CMS) or to use competitive bid pricing information to adjust the payment amounts otherwise in effect for areas that are not competitive acquisition areas by January 1, 2016.

We will continue to monitor developments regarding the implementation of the competitive bidding program. We can not predict the outcome of the competitive bidding program on our business when fully implemented nor the Medicare payment rates that will be in effect in future years for the items subjected to competitive bidding.

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

Due to budgetary shortfalls, many states are considering, or have enacted, cuts to their Medicaid programs, including funding for our equipment and services. These cuts have included, or may include, elimination or reduction of coverage for some or all of our equipment and services, amounts eligible for payment under co-insurance arrangements, or payment rates for covered items. Approximately 7% of our customers are eligible for primary Medicaid benefits, and State Medicaid programs fund approximately 12% of our payments from primary and secondary insurance benefits. Continued state budgetary pressures could lead to further reductions in funding for the reimbursement for our equipment and services which, in turn, could have a material adverse effect on our financial position and operating results.

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

Payors such as private insurance companies and employers are under pressure to increase profitability and reduce costs. In response, certain payors are limiting coverage or reducing reimbursement rates for the equipment and services we provide. Approximately 28% of our customers and approximately 33% of our primary and secondary payments are derived from private payors. Continued financial pressures on these entities could lead to further reimbursement reductions for our equipment and services that could have a material adverse effect on our financial condition and operating results.

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

We derive a significant majority of our revenues from reimbursement by third-party payors. We accept assignment of insurance benefits from customers and, in most instances, invoice and collect payments directly from Medicare, Medicaid and private insurance carriers, as well as from customers under co-insurance provisions. Approximately 48% of our revenues are derived from Medicare, 33% from private insurance carriers, 12% 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 are also subject to extensive pre-payment and post-payment audits by governmental and private payors that could result in material refunds of monies received or denials of claims submitted for payment under such third-party payor programs and contracts. We can not ensure that we will be able to continue to effectively manage the reimbursement process and collect payments for our equipment and services promptly.

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

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

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

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

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

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

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

Numerous federal and state laws and regulations, including HIPAA and the HITECH Act, govern the collection, dissemination, security, use and confidentiality of patient-identifiable health information. HIPAA and the HITECH Act require us to comply with standards for the use and disclosure of health information within our company and with third parties. HIPAA and the HITECH Act also include standards for common health care electronic transactions and code sets, such as claims information, plan eligibility, payment information and the use of electronic signatures, and privacy and electronic security of individually identifiable health information. HIPAA requires health care providers, including us, in addition to health plans and clearinghouses, to develop and maintain policies and procedures with respect to protected health information that is used or disclosed. The HITECH Act expands the notification requirement for breaches of patient-identifiable health information, restricts certain disclosures and sales of patient-identifiable health information and provides a tiered system for civil monetary penalties for HIPAA violations.

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

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

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

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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Our revolving credit facility is subject to changing LIBOR-based interest rates. At September 30, 2010, we had no outstanding borrowings under the credit facility.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

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

(b) Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Exchange Act Rule 13a-15(f)) during the fiscal quarter ended September 30, 2010, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Our operating centers are also subject to federal and/or state laws regulating, among other things, interstate motor-carrier transportation, repackaging of oxygen, distribution of medical equipment, certain types of home health activities, pharmacy operations, nursing services and respiratory services and apply to those locations involved in such activities. Certain of our employees are subject to state laws and regulations governing the ethics and professional practice of respiratory therapy, pharmacy and nursing. From time to time, the Company receives inquiries and complaints from various government agencies related to its operations or personnel.

It has been the Company’s policy to cooperate with all inquiries and requests for information from government agencies and to vigorously defend any administrative complaints. The Company can provide no assurances as to the duration or outcome of these inquiries and/or complaints.

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

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

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

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

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

During the three months ended September 30, 2010, the Company did not repurchase any shares of its common stock.

Our Board of Directors has authorized a share repurchase plan whereby the Company may repurchase shares of the Company’s common stock in amounts determined pursuant to a formula that takes into account both the ratio of the Company’s net debt to cash flow and its available cash resources and borrowing availability. As of September 30, 2010, $453.5 million of common stock was eligible for repurchase in accordance with the plan’s formula.

Item 3. Defaults Upon Senior Securities - Not Applicable

Item 4. Removed and Reserved

Item 5. Other Information - Not Applicable

Item 6. Exhibits

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

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SIGNATURE

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

LINCARE HOLDINGS INC.

Registrant

/S/ PAUL G. GABOS

Paul G. Gabos

Secretary, Chief Financial Officer

and Principal Accounting Officer

November 1, 2010

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INDEX OF EXHIBITS

Exhibit Number	Exhibit
3.10 (A)	Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.
3.11 (A)	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Lincare Holdings Inc.
3.20 (B)	Amended and Restated By-Laws of Lincare Holdings Inc.
4.10 (C)	Lincare Holdings Inc. Indenture dated as of June 11, 2003
4.20 (C)	Lincare Holdings Inc. Registration Rights Agreement dated as of June 11, 2003
4.30 (D)	Lincare Holdings Inc. Series A Indenture dated as of October 31, 2007
4.40 (D)	Lincare Holdings Inc. Series B Indenture dated as of October 31, 2007
4.50 (D)	Lincare Holdings Inc. Registration Rights Agreement dated as of October 31, 2007
4.60 (D)	First Amendment to Credit Agreement with Bank of America, N.A. as Agent and Calyon, New York Branch as Syndication Agent dated as of October 31, 2007
31.1	Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by John P. Byrnes, Chief Executive Officer
31.2	Certification Pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Paul G. Gabos, Chief Financial Officer
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by John P. Byrnes, Chief Executive Officer
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by Paul G. Gabos, Chief Financial Officer
101.INS *	XBRL Instance Document
101.SCH *	XBRL Taxonomy Extension Schema Document
101.CAL *	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB *	XBRL Taxonomy Extension Label Linkbase Document
101.PRE *	XBRL Taxonomy Extension Presentation Linkbase Document
A	Incorporated by reference to the Registrant’s Form 10-Q dated August 12, 1998.
B	Incorporated by reference to the Registrant’s Form 8-K dated November 26, 2007.
C	Incorporated by reference to the Registrant’s Form 8-K dated June 12, 2003.
D	Incorporated by reference to the Registrant’s Form 8-K dated November 6, 2007.
*	Furnished herewith

S-1

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, John P. Byrnes, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lincare Holdings Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent financial quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 1, 2010	By:	/S/ JOHN P. BYRNES
		John P. Byrnes Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Paul G. Gabos, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Lincare Holdings Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent financial quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 1, 2010	By:	/S/ PAUL G. GABOS
		Paul G. Gabos Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Lincare Holdings Inc. (the “Company”) for the quarter ended September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John P. Byrnes, Chief Executive Officer of the Company, certify to the best of my knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/S/ JOHN P. BYRNES
	John P. Byrnes Chief Executive Officer

November 1, 2010

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Lincare Holdings Inc. (the “Company”) for the quarter ended September 30, 2010 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Paul G. Gabos, Chief Financial Officer of the Company, certify to the best of my knowledge and belief, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) Information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:	/S/ PAUL G. GABOS
	Paul G. Gabos Chief Financial Officer

November 1, 2010