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

Medicare Reimbursement

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

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

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

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

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

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

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

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

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

DRA also changed the reimbursement methodology for items of DME in the capped rental payment category, including but not limited to such items as continuous positive airway pressure ("CPAP") devices, certain respiratory assist devices, nebulizers, hospital beds and wheelchairs. For such items of DME, payment may not extend over a period of continuous use of longer than 13 months. On the first day that begins after the 13th 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 applied to items furnished for which the first rental month occurred on or after January 1, 2006. Accordingly, the first month in which the new payment methodology impacted our net revenues was February 2007.

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

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

(1) Significantly reduced reimbursement for inhalation drug therapies. Historically, prescription drug coverage under Medicare has been limited to drugs furnished incident to a physician's services and certain self-administered drugs, including inhalation drug therapies. Prior to MMA, Medicare reimbursement for covered drugs, including the inhalation drugs that we provide, was limited to 95 percent of the published average wholesale price ("AWP") for the drug. MMA established new payment limits and procedures for drugs reimbursed under Medicare Part B. Beginning in 2005, inhalation drugs furnished to Medicare beneficiaries are reimbursed at 106 percent of the volume-weighted average selling price ("ASP") of the drug, as determined from data provided each quarter by drug manufacturers under a specific formula described in MMA. Implementation of the ASP-based reimbursement formula resulted in a dramatic reduction in payment rates for inhalation drugs. We can not determine whether quarterly updates in ASP pricing data submitted by drug manufacturers and adopted by CMS will continue to result in ongoing reductions in payment rates for inhalation drugs, and what impact such payment reductions could have on our business in the future.

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

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

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

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

Government Regulation

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

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

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

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

Operating Results

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



                                         For The Three Months        For The Nine Months
                                         Ended September 30,         Ended September 30,
                                           2008         2007         2008          2007
                                            (In thousands)             (In thousands)
Oxygen and other respiratory therapy   $    370,713   $ 375,561   $ 1,147,310   $ 1,090,568
Home medical equipment and other             34,964      32,591       102,178        93,126

Total                                  $    405,677   $ 408,152   $ 1,249,488   $ 1,183,694

Net revenues for the three months ended September 30, 2008, decreased by $2.5 million (or 0.6%) compared with the three months ended September 30, 2007, and for the nine months ended September 30, 2008, increased $65.8 million (or 5.6%) compared with the nine months ended September 30, 2007. The Company estimates that the 0.6% decrease in net revenues in the three-month period was comprised of 4.8% internal growth and 0.6% acquisition growth offset by $24.5 million of Medicare price changes taking effect in 2008 (see "Medicare Reimbursement"). The Company estimates that the 5.6% increase in net revenues in the nine-month period was comprised of 9.9% internal growth and 0.4% acquisition growth partially offset by $55.4 million of Medicare price changes taking effect in 2008. The internal growth in net revenues is attributable to underlying demographic growth in the markets for our products and gains in customer counts resulting primarily from our sales and marketing efforts that emphasize high-quality equipment and customer service. Growth in net revenues from acquisitions is attributable to the effects of acquisitions of local and regional companies and is based on the estimated contribution to net revenues for the four quarters following such acquisitions. During the nine months ended September 30, 2008, the Company acquired certain assets of three companies with aggregate annual revenues of approximately $5.8 million. The aggregate cost of these acquisitions was $7.7 million. During the nine months ended September 30, 2007, we did not acquire the business or assets of any companies.

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

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

The contribution of oxygen and other respiratory therapy products to our net revenues was 91.4% and 91.8%, respectively, during the three and nine months ended September 30, 2008. Our strategy is to focus on the provision of oxygen and other respiratory therapy services to patients in the home and to provide home medical equipment and other services where we believe such services will enhance our core respiratory business.

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

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

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

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

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

                                           Three Months Ended       Nine Months Ended
                                             September 30,            September 30,
     Operating Expenses (in thousands)      2008         2007       2008        2007
     Salary and related                  $    63,156   $ 57,655   $ 186,559   $ 173,822
     Facilities                               14,404     14,191      43,056      41,553
     Vehicles                                 14,127     11,514      39,896      33,466
     General supplies/miscellaneous            8,821      8,098      24,931      24,098

     Total                               $   100,508   $ 91,458   $ 294,442   $ 272,939

Included in operating expenses during the three and nine months ended September 30, 2008 are salary and related expenses for Service Reps in the . . .