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 delayed until 2010 the implementation of a Medicare competitive bidding program for oxygen equipment and certain other DME items that was scheduled to begin on July 1, 2008 and instituted a 9.5% price reduction nationwide for these items as of January 1, 2009. The SCHIP Extension Act reduced Medicare reimbursement amounts for covered Part B drugs, including inhalation drugs that we provide, beginning April 1, 2008. DRA provisions negatively impacted reimbursement for oxygen equipment beginning in 2009 and negatively impacted reimbursement for DME items subject to capped rental payments beginning in 2007. MMA significantly reduced reimbursement for inhalation drug therapies beginning in 2005, reduced payment amounts for five categories of DME, including oxygen, beginning in 2005, froze payment amounts for other covered DME items through 2007, established a competitive bidding program for DME, and implemented quality standards and accreditation requirements for DME suppliers.

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. We estimate that these lower payment amounts for inhalation drugs reduced our net revenues and operating income by approximately $22.0 million in the three months ended March 31, 2009 compared with the first fiscal quarter of 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, or what impact such payment reductions could have on our business in the future.

On February 1, 2006, Congress passed the DRA legislation which contains provisions that impacted reimbursement for oxygen equipment and DME. 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 36th month. Additionally, payment for routine maintenance and service of the oxygen equipment, limited to 30 minutes of labor, 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.

The ultimate 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 customers receiving reimbursable oxygen contents beyond the 36-month rental period, (iii) the ultimate

duration of therapy for customers on service beyond 36 months, (iv) the incidence of customers with equipment deemed to be beyond its useful life that may be eligible for new equipment and therefore a new rental period, (v) payment amounts and coverage guidelines established by CMS to reimburse suppliers for maintenance of oxygen equipment, and (vi) the extent to which other government and private payors attempt to adopt new oxygen payment rules similar to those now in effect under Medicare. 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. The Company developed a preliminary estimate of the potential reduction in our revenues and operating income in 2009 resulting from the oxygen capped rental regulations of between $130 million and $145 million. Based on activity through the end of the first quarter of 2009, we do not believe that this estimate needs to be revised at this time. The assumptions used to develop this estimate are highly dependent upon the variables listed above, as well as other factors that we may be unable to anticipate. This estimate may be unreliable and subject to change as more information becomes available to the Company.

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.

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% 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% 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 has resulted in dramatic reductions in payment rates for inhalation drugs since 2005.

(2) Established a competitive acquisition program for DME that was expected to commence in 2008, but was subsequently delayed by further legislation. MMA instructs CMS to establish and implement programs under which competitive acquisition areas will be established throughout the United States for contract award purposes for the furnishing of competitively priced items of DME, including oxygen equipment. The program was initially intended to be implemented in phases such that competition under the program would occur in 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 is to conduct a competition under which providers will submit bids to supply certain covered items of DME. Successful bidders will be expected to meet certain program quality standards in order to be awarded a contract and only successful bidders can supply the covered items to Medicare beneficiaries in the acquisition area. The applicable contract award prices are expected to be less than would be paid under current Medicare fee schedules and contracts will be re-bid at least every three years. CMS will be required to award contracts to multiple entities submitting bids in each area for an item or service, but will have the authority to limit the number of contractors in a competitive acquisition area to the number needed to meet projected demand. CMS 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, 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 for

up to 18 months 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 outlines the process for rebidding the first round of competitive bidding in 2009. The bidding will apply to nine of the original ten MSAs in round one and will be expanded to additional MSAs thereafter. A competition for a national mail order competitive bidding program may occur after 2010. It is unclear at this time when contracts would be awarded under the program and the respective effective dates of the contracts. 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.

The 9.5% reduction in Medicare payment rates imposed by the MIPPA legislation for the product categories, including oxygen, that were initially included in competitive bidding took effect on January 1, 2009. In addition to the 9.5% reduction, CMS 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. We estimate that these price reductions, in aggregate, will reduce our net revenues and operating income by approximately $110 million in 2009.

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
                                                      Ended March 31,
                                                      2009         2008
                                                       (In thousands)
           Oxygen and other respiratory therapy   $    336,342   $ 382,720
           Home medical equipment and other             35,332      32,700

           Total                                  $    371,674   $ 415,420

Net revenues for the three months ended March 31, 2009, decreased by $43.7 million (or 10.5%), compared with the three months ended March 31, 2008. The Company estimates that the 10.5% decrease in net revenues in the first three months of 2009 was comprised of approximately 9.5% internal and acquisition growth offset by approximately 20.0% negative impact from Medicare price reductions taking effect in 2009 (see "Medicare Reimbursement"). 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 three months ended March 31, 2009 and 2008, the Company did not acquire the business or assets of any companies.

The contribution of oxygen and other respiratory therapy products to our net revenues was 90.5% and 92.1%, respectively, during the three months ended March 31, 2009 and 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, was 27.6% for the three months ended March 31, 2009, compared with 23.5% for the comparable prior year period. Cost of goods and services for the three months ended March 31, 2009, increased $5.0 million or 5.1%, when compared with the prior year period. The increase in cost of goods and services in 2009 is attributable to an increase in the number of oxygen customers served and higher volumes in our inhalation drug and sleep therapy product lines.

Cost of goods and services for the three-month periods includes the cost of equipment (excluding depreciation of $20.7 million in the first three months of 2009 and 2008), 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 $12.5 million and $12.8 million for the three months ended March 31, 2009 and 2008, respectively. Included in cost of goods and services in each quarter are salary and related expenses of pharmacists and pharmacy technicians of $2.7 million.

Operating expenses, as a percentage of net revenues, were 26.1% for the three months ended March 31, 2009, compared with 23.2% for the comparable prior year period. Operating expenses for the three months ended March 31, 2009, increased by $0.8 million, or 0.9%, over the prior year period. Contributing to the containment of growth in operating expenses during the first three months of 2009 were lower fuel and other vehicle related expenses, lower purchases of supply items and controls over salary and related expenses.

The Company manages 1,056 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 2009 and 2008 within these major categories were as follows:

                                                    Three Months Ended
              Operating Expenses (in thousands)         March 31,
                                                     2009         2008
              Salary and related                  $    64,102   $ 61,750
              Facilities                               15,060     14,553
              Vehicles                                  9,817     11,942
              General supplies/miscellaneous            8,118      8,033


              Total                               $    97,097   $ 96,278

Included in operating expenses during the three months ended March 31, 2009 are salary and related expenses for Service Reps in the amount of $26.1 million. Such salary and related expenses for the three months ended March 31, 2008 were $25.2 million.

Selling, general and administrative ("SG&A") expenses, as a percentage of net revenues, were 23.0% for the three months ended March 31, 2009, compared with 19.8% for the comparable prior year period. SG&A expenses for the three months ended March 31, 2009 increased by $3.4 million, or 4.1%, compared to the prior year period. Contributing to the increase in SG&A expenses in 2009 were $4.7 million of stock option compensation expense attributable to the surrender and cancellation of approximately 1.1 million unvested, out-of-the money stock options held by our executive officers, directors and certain other employees for no compensation in return. The $4.7 million charge represents acceleration of future non-cash compensation expense recognized during the current three-month period.

SG&A expenses include costs related to sales and marketing activities, corporate overhead and other business support functions. Included in SG&A during the three months ended March 31, 2009 and 2008 are salary and related expenses of $67.7 million and $59.1 million, respectively. These salary and related expenses include the cost of the Company's respiratory therapists for the three months ended March 31, 2009 and 2008 of $16.0 million and $15.3 million, respectively. The Company's respiratory therapists generally provide non-reimbursable and discretionary clinical follow-up with the customer and communication, as appropriate, to the prescribing physician with respect to the customer's plan of care. The Company includes the salaries and related expenses of its respiratory therapist personnel (licensed respiratory therapists or, in some cases, registered nurses) in SG&A because it believes that these personnel enhance the Company's business relative to its competitors who do not employ respiratory therapists.

Included in depreciation and amortization expense in the three months ended March 31, 2009 is depreciation of patient service equipment of $20.7 million and depreciation of other property and equipment of $8.3 million. Included in depreciation and amortization expense in the three months ended March 31, 2008 is depreciation of patient service equipment of $20.7 million and depreciation of other property and equipment of $8.8 million.

Operating income for the three months ended March 31, 2009, was $51.8 million
(13.9% of net revenues), compared with $103.6 million (24.9% of net revenues)
for the comparable prior year period. The decrease in operating income in 2009 is attributed to the dramatic reduction in Medicare reimbursement for the Company's primary product lines that took effect this year (see "Medicare Reimbursement").

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 decreased by 38.1% to $78.3 million for the three months ended March 31, 2009, compared with $126.4 million for the three months ended March 31, 2008. Net cash used in investing and financing activities was $136.8 million for the three months ended March 31, 2009. Investing and financing activities during the three-month period ended March 31, 2009 included our net investment in property and equipment of $36.8 million, payments of principal on debt of $0.3 million, repurchases of our common stock of $100.2 million, and proceeds from the sale of investments of $0.5 million.

As of March 31, 2009, our principal sources of liquidity consisted of approximately $14.1 million of cash and cash equivalents and $363.0 million available under our revolving credit agreement. The revolving credit agreement, dated December 1, 2006, makes available to us up to $390.0 million over a five-year period, subject to certain terms and conditions set forth in the agreement. As of March 31, 2009, there were $27.0 million of standby letters of credit issued under the credit facility.

At March 31, 2009, the Company held $57.0 million of auction rate securities. These securities are variable-rate debt instruments with contractual maturities between the years 2020 and 2041 with interest rates that reset every seven or 35 days pursuant to a bidding process as determined by the underlying security indentures. Under the provisions of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the investments are classified as trading securities and are carried at fair value, with any realized and unrealized gains and losses included in other income and expense.

During the first quarter of 2008, the Company reclassified all of its investments in auction rate securities from short-term to long-term investments. Of the auction rate securities held as of March 31, 2009, $57.0 million are secured by pools of student loans guaranteed by state-designated guaranty agencies or monoline insurers or reinsured by the United States government. All of the auction rate securities held by the Company are senior obligations under the applicable indentures authorizing the issuance of such securities. Recent turmoil in the credit markets has resulted in widespread failures to attract demand for such securities at the periodic auction dates occurring subsequent to December 31, 2007. As of March 31, 2009, all of the securities held by the Company continued to experience auction failures, resulting in our continuing to hold such securities. The Company received partial redemptions of these securities, at par, in the amount of $0.5 million in February 2009.

All of the auction rate securities owned by the Company were purchased from UBS Financial Services, Inc., a subsidiary of UBS AG ("UBS"), and are held by UBS . . .