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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2005.
 o
    
    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: 000-50348
 NATIONSHEALTH, INC.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    06-1688360
(I.R.S. Employer Identification No.)13630 NW
8thStreet, Suite 210, Sunrise, FL
(Address of principal executive offices)
    
    33325
(Zip Code)
 (954) 903-5000
 None
 Common Stock, $0.0001 par value
 
 o þ
 o þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ
   Documents Incorporated By Reference




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NATIONSHEALTH, INC.
 FORM 10-K
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
 INDEX
 PagePART IItem 1
    
    Business
    
    1Item 1A
    
    Risk Factors
    
    7Item 1B
    
    Unresolved Staff Comments
    
    14Item 2
    
    Properties
    
    14Item 3
    
    Legal Proceedings
    
    14Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    14PART IIItem 5
    
    Market for
Registrants Common Equity and Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    15Item 6
    
    Selected Financial Data
    
    17Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 7A
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    32Item 8
    
    Financial Statements and Supplementary Data
    
    33Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    67Item 9A
    
    Controls and Procedures
    
    67PART IIIItem 10
    
    Directors and Executive Officers of the Registrant
    
    68Item 11
    
    Executive Compensation
    
    68Item 12
    
    Security Ownership of Certain Beneficial Owners and Management
    
    68Item 13
    
    Certain Relationships and Related Transactions
    
    69Item 14
    
    Principal Accountant Fees and Services
    
    69Item 15
    
    Exhibits and Financial Statement Schedules
    
    69SIGNATURES
    
    
    
    70Amendment to Employment AgreementDescription to Non-Employee Director CompensationSubsidiariesConsent of Ernst & Young LLPConsent of Rachlin Cohen & Holtz LLPSection 302 Chief Executive Officer CertificationSection 302 Chief Financial Officer CertificationSection 906 CEO & CFO Certification




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PART I
 
 Item 1. Business
 Business
   Medicare Part D Segment
    Medical Products Segment
 Home Delivery of Medical Products
  1




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Retail Program
  Sale of Respiratory Division
  Prescription Discount Drug Card Services
   2




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NationsHealth Discount Prescription Drug Card
  Medicare-Approved Prescription Drug Card
   Specialty and Oncology Pharmacy Business
    3




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Information Technology and Patient Management
  
    
    Direct-to-consumer marketing
    
    Enrollment and service of individual patients
    
    Fulfillment, reorder and electronic medical records management
    
    Inventory management and distribution systems
    
    Contracting with manufacturers
    
    Regulatory and Medicare compliance, audit and claims settlement
    
    Medicare and private insurer billing and accounts receivable management
   Government Regulation
   4




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
    
    Standards for Privacy of Individually Identifiable Health Information, or the
Privacy Rule  compliance date: April 14, 2003
    
    Transactions and Code Sets Standards  compliance date: October 16, 2003
    
    Electronic Security of Individually Identifiable Health Information, or the
Security Standards  compliance date: April 20, 2005
    
    HIPAA Administrative Simplification: Enforcement- dated February 16, 2006
     5




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Background
   Merger Accounting Treatment
  Customers
  6




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As of December 31,2005
    
    
    2004
    
    
    2003Patients of Supplies Services: (1)Diabetes Supplies Patients
    
    
    116,000
    
    
    
    86,000
    
    
    
    26,000Respiratory Supplies Patients (2)
    
    
    
    
    
    
    26,000
    
    
    
    10,000Ostomy Supplies Patients
    
    
    700
    
    
    
    1,000
    
    
    
    Total Supplies Patients
    
    
    116,700
    
    
    
    113,000
    
    
    
    36,000Prescription Discount Cardholders:NationsHealth Program
    
    
    2,900,000
    
    
    
    2,000,000
    
    
    
    900,000PrecisionDiscounts Program
    
    
    250,000
    
    
    
    200,000
    
    
    
    Total Number of Cardholders
    
    
    3,150,000
    
    
    
    2,200,000
    
    
    
    900,000
 
 (1)
    
    Includes all patients who have requested and been shipped products and have not
canceled service.(2)
    
    The respiratory division was sold on September 2, 2005. Employees
  Website
 www.nationshealth.com
 
 Item 1A. Risk Factors
 Risks Related to Our Business
 We have a limited operating history and are subject to the risks of a new enterprise.
  
    
    No history of profitability
    
    Uncertain growth in the market for, and uncertain market acceptance of, our services
    
    The evolving nature of the healthcare marketplace and the Medicare regulatory environment
    
    The risks of competition, technological change or evolving patient preferences
 7




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We could experience significantly reduced revenues and earnings if Medicare changes, delays,
reduces or denies reimbursement.
  We have invested significant capital and dedicated substantial resources to launch our Medicare
Part D services to CIGNA, which may not be successful.
  If we do not have sufficient capital to fund additional advertising, our ability to grow our
business will be substantially diminished
  If we do not manage our growth successfully, our growth and chances for achieving profitability may
slow or stop.
  8




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The profitability of our medical supplies business will decrease if we do not receive recurring
orders from patients.
  We could experience significantly reduced revenues and net income from sales of diabetes products
if improved technologies developed for glucose monitoring eliminate the need for consumable testing
supplies.
  Due to our size and limited operating history, we depend substantially on certain key personnel.
  Certain executive officers have rights under employment agreements that could require us to make
substantial payments to them.
  9




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We have agreed to purchase a large amount of medical supplies and we may not have the cash to
satisfy these purchase obligations.
  If any of our information technology platforms malfunction, our business and profitability may be
seriously harmed.
  We may have difficulties in achieving volume-based discounts or finding replacement supplies if we
lose any agreement with our suppliers of medical products.
  10




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Risks Related to Our Industry
 If we do not comply with applicable government regulations, we may be prohibited from selling our
products and could experience significantly reduced revenues and net income.
      The cost of efforts to comply with HIPAA regulations and the possible consequence of non-compliance
could adversely affect our operations and net income significantly.
  11




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Our accounts receivable are subject to significant collection risk due to third-party payors.
  We could be liable for harm caused by products that we sell.
  Newly adopted accounting regulations require us to expense stock options, which could cause our
stock price to decline.
  Risks Related to Owning Our Equity Securities
 Future sales of our common stock may depress our stock price.
  12




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Voting control by our executive officers, directors and other affiliates may limit your ability to
influence the outcome of director elections and other matters requiring stockholder approval.
  If we fail to maintain an effective system of internal controls in the future, we may not be able
to accurately report our financial results or prevent fraud. As a result, investors may lose
confidence in our financial reporting.
  Compliance with changing regulation relating to corporate governance and public disclosure may
result in additional expenses.
  Our common stock may continue to have a volatile public trading price and low trading volume.
  13




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##### Table of Contents




    
    Public announcements by us, our competitors or others
    
    Regulatory developments concerning the availability of reimbursement
pursuant to Medicare
    
    Public concern about the safety or efficacy of pharmaceuticals
    
    General market conditions and comments by securities analysts
    
    Quarterly fluctuations in our revenues and financial results
 Anti-takeover provisions in our governing documents and under Delaware law may make an acquisition
of us more difficult.
     
 Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders
  14




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market Information
  Common Stock
    
    Warrants
    
    UnitsHigh
    
    Low
    
    High
    
    Low
    
    High
    
    Low2003Third quarter
    
    $
    5.00
    
    
    $
    4.75
    
    
    $
    0.65
    
    
    $
    0.60
    
    
    $
    6.25
    
    
    $
    6.00Fourth quarter
    
    $
    5.00
    
    
    $
    4.84
    
    
    $
    0.71
    
    
    $
    0.60
    
    
    $
    6.60
    
    
    $
    6.012004First quarter
    
    $
    5.90
    
    
    $
    4.89
    
    
    $
    1.55
    
    
    $
    0.70
    
    
    $
    8.95
    
    
    $
    6.17Second quarter
    
    $
    8.20
    
    
    $
    5.50
    
    
    $
    3.19
    
    
    $
    1.34
    
    
    $
    14.80
    
    
    $
    8.00Third quarter
    
    $
    7.55
    
    
    $
    6.00
    
    
    $
    2.68
    
    
    $
    1.57
    
    
    $
    12.65
    
    
    $
    9.80Fourth quarter
    
    $
    7.36
    
    
    $
    5.89
    
    
    $
    2.39
    
    
    $
    1.45
    
    
    $
    11.80
    
    
    $
    9.172005First quarter
    
    $
    6.85
    
    
    $
    4.84
    
    
    $
    2.22
    
    
    $
    1.20
    
    
    $
    10.85
    
    
    $
    7.61Second quarter
    
    $
    7.05
    
    
    $
    5.35
    
    
    $
    1.95
    
    
    $
    1.12
    
    
    $
    10.49
    
    
    $
    7.85Third quarter
    
    $
    8.10
    
    
    $
    5.14
    
    
    $
    3.30
    
    
    $
    0.95
    
    
    $
    14.50
    
    
    $
    7.90Fourth quarter
    
    $
    8.33
    
    
    $
    6.70
    
    
    $
    3.25
    
    
    $
    2.07
    
    
    $
    14.70
    
    
    $
    11.84
  Holders of Record
  Dividends
  15




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Stock Option Plans
  Bonus Plan and Trust
   Issuer Purchases of Equity Securities
  Total
    
    
    Average
    
    
    Total Number of
    
    
    Maximum NumberNumber of
    
    
    Price
    
    
    Shares Purchased as
    
    
    of Shares that MayShares
    
    
    Paid per
    
    
    Part of Publicly
    
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    
    Share
    
    
    Announced Plans
    
    
    Under the PlansJuly 2005
    
    
    24,342
    
    
    $
    5.59
    
    
    
    
    
    
    
    December 2005
    
    
    31,555
    
    
    $
    8.00
    
    
    
    
    
    
    
    Total
    
    
    55,897
 Recent Sales of Unregistered Securities
    16




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Item 6. Selected Financial Data
  For the Years Ended December 31,2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001(In thousands, except per share data)Consolidated and Combined Statements of Operations Data:Net product sales
    
    $
    68,688
    
    
    $
    70,982
    
    
    $
    25,072
    
    
    $
    2,531
    
    
    $
    Prescription card revenue
    
    
    8,619
    
    
    
    3,240
    
    
    
    654
    
    
    
    10
    
    
    
    Service revenue
    
    
    10,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other revenue
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3787,556
    
    
    
    74,222
    
    
    
    25,726
    
    
    
    2,541
    
    
    
    37Cost of product sales
    
    
    29,689
    
    
    
    22,718
    
    
    
    9,899
    
    
    
    1,644
    
    
    
    Cost of services
    
    
    22,219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross profit
    
    
    35,648
    
    
    
    51,504
    
    
    
    15,827
    
    
    
    897
    
    
    
    37Operating Expenses:Patient acquisition and related costs
    
    
    18,077
    
    
    
    23,151
    
    
    
    6,779
    
    
    
    1,131
    
    
    
    217Patient service and fulfillment
    
    
    14,427
    
    
    
    13,672
    
    
    
    4,325
    
    
    
    246
    
    
    
    General and administrative
    
    
    26,323
    
    
    
    13,116
    
    
    
    4,435
    
    
    
    1,135
    
    
    
    69Cost of employee stock bonus plan
    
    
    
    
    
    
    14,315
    
    
    
    
    
    
    
    
    
    
    
    Provision for doubtful accounts
    
    
    7,575
    
    
    
    12,228
    
    
    
    3,794
    
    
    
    181
    
    
    
    Depreciation and amortization
    
    
    980
    
    
    
    506
    
    
    
    121
    
    
    
    14
    
    
    
    Amortization of equity issued to CIGNA
    
    
    646
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sale of respiratory division
    
    
    (15,508
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,520
    
    
    
    76,988
    
    
    
    19,454
    
    
    
    2,707
    
    
    
    286Loss from operations
    
    
    (16,872
    )
    
    
    (25,484
    )
    
    
    (3,627
    )
    
    
    (1,810
    )
    
    
    (249
    )Interest income
    
    
    150
    
    
    
    3
    
    
    
    2
    
    
    
    
    
    
    
    Interest expense
    
    
    (3,096
    )
    
    
    (943
    )
    
    
    (201
    )
    
    
    (45
    )
    
    
    (1
    )Other income (expense), net
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss
    
    $
    (19,819
    )
    
    $
    (26,424
    )
    
    $
    (3,826
    )
    
    $
    (1,855
    )
    
    $
    (250
    )Loss per share  basic and diluted
    
    $
    (0.75
    )
    
    $
    (1.01
    )
    
    $
    (0.15
    )
    
    $
    (0.07
    )
    
    $
    Weighted average shares outstanding used to compute basic and
diluted loss per share
    
    
    26,345
    
    
    
    26,154
    
    
    
    26,150
    
    
    
    26,150
    
    
    
    
 December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In thousands)Consolidated and Combined Balance Sheet
Data:Total Assets
    
    $
    49,859
    
    
    $
    19,376
    
    
    $
    6,629
    
    
    $
    977
    
    
    $
    11Long-term debt, net of current maturities.
    
    $
    5,176
    
    
    $
    
    
    
    $
    2,143
    
    
    $
    1,336
    
    
    $
    247Stockholders/ members equity
(deficiency)
    
    $
    14,017
    
    
    $
    (37
    )
    
    $
    (1,755
    )
    
    $
    (2,105
    )
    
    $
    (250
    )
 17




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   CIGNA Agreement and Medicare Part D
    18




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Medical Product Supplies
 Diabetes Supplies
  Retail Program
  Respiratory Supplies
   Ostomy Supplies
  19




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Prescription Discount Drug Card Services
   NationsHealth Discount Prescription Drug Card
  Medicare-Approved Prescription Drug Card
  Specialty and Oncology Pharmacy Business
  20




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Results of Operations
  2005
    
    
    2004
    
    
    2003$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Net product sales
    
    $
    68,688
    
    
    
    78.5
    %
    
    $
    70,982
    
    
    
    95.6
    %
    
    $
    25,072
    
    
    
    97.5
    %Prescription card revenue
    
    
    8,619
    
    
    
    9.8
    
    
    
    3,240
    
    
    
    4.4
    
    
    
    654
    
    
    
    2.5Service revenue
    
    
    10,249
    
    
    
    11.7
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Total revenue
    
    
    87,556
    
    
    
    100.0
    
    
    
    74,222
    
    
    
    100.0
    
    
    
    25,726
    
    
    
    100.0Cost of product sales
    
    
    29,689
    
    
    
    33.9
    
    
    
    22,718
    
    
    
    30.6
    
    
    
    9,899
    
    
    
    38.5Cost of services
    
    
    22,219
    
    
    
    25.4
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Gross Profit
    
    
    35,648
    
    
    
    40.7
    
    
    
    51,504
    
    
    
    69.4
    
    
    
    15,827
    
    
    
    61.5Operating Expenses:Patient acquisition and related costs
    
    
    18,077
    
    
    
    20.6
    
    
    
    23,151
    
    
    
    31.2
    
    
    
    6,779
    
    
    
    26.4Patient service and fulfillment
    
    
    14,427
    
    
    
    16.5
    
    
    
    13,672
    
    
    
    18.4
    
    
    
    4,325
    
    
    
    16.8General and administrative
    
    
    26,323
    
    
    
    30.1
    
    
    
    13,116
    
    
    
    17.7
    
    
    
    4,435
    
    
    
    17.2Cost of employee stock bonus plan
    
    
    
    
    
    
    0.0
    
    
    
    14,315
    
    
    
    19.3
    
    
    
    
    
    
    
    0.0Provision for doubtful accounts
    
    
    7,575
    
    
    
    8.7
    
    
    
    12,228
    
    
    
    16.5
    
    
    
    3,794
    
    
    
    14.7Depreciation and amortization
    
    
    980
    
    
    
    1.1
    
    
    
    506
    
    
    
    0.7
    
    
    
    121
    
    
    
    0.5Amortization of equity issued to
CIGNA
    
    
    646
    
    
    
    0.7
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Gain on sale of respiratory division
    
    
    (15,508
    )
    
    
    (17.7
    )
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.052,520
    
    
    
    60.0
    
    
    
    76,988
    
    
    
    103.7
    
    
    
    19,454
    
    
    
    75.6Loss from Operations
    
    
    (16,872
    )
    
    
    (19.3
    )
    
    
    (25,484
    )
    
    
    (34.3
    )
    
    
    (3,627
    )
    
    
    (14.1
    )Other expense, net
    
    
    (2,947
    )
    
    
    (3.4
    )
    
    
    (940
    )
    
    
    (1.3
    )
    
    
    (199
    )
    
    
    (0.8
    )Net loss
    
    $
    (19,819
    )
    
    
    (22.7
    %)
    
    $
    (26,424
    )
    
    
    (35.6
    %)
    
    $
    (3,826
    )
    
    
    (14.9
    %)
 2005 Compared to 2004
 Revenue.
 Cost of Product Sales .
 21




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Cost of Services.
  Patient Acquisition and Related Costs.
 Patient Service and Fulfillment .
 General and Administrative .
 Cost of Employee Stock Bonus Plan .
 Provision for Doubtful Accounts.
 22




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Depreciation and Amortization .
 Amortization of Equity Issued to CIGNA .
 Gain on Sale of Respiratory Division .
 Other Expense, Net.
 Net Loss.
 2004 Compared to 2003
 Revenue.
 Cost of Product Sales .
  23




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##### Table of Contents



Patient Acquisition and Related Costs.
 Patient Service and Fulfillment .
 General and Administrative .
 Cost of Employee Stock Bonus Plan .
 Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Other Expense.
 Net Loss.
 24




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Recent Developments
 Medicare Modernization Act
    Liquidity and Capital Resources
   25




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26




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Risk Factors
 Contractual Obligations
  Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanTotal
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 yearsLong-Term Debt
Obligations
(1)
    
    $
    17,500
    
    
    $
    
    
    
    $
    2,500
    
    
    $
    4,700
    
    
    $
    10,300Capital Lease
Obligations
    
    
    184
    
    
    
    150
    
    
    
    34
    
    
    
    
    
    
    
    Operating Lease
Obligations
    
    
    5,349
    
    
    
    1,638
    
    
    
    3,180
    
    
    
    531
    
    
    
    Purchase
Obligations (2)
    
    
    35,185
    
    
    
    35,077
    
    
    
    108
    
    
    
    
    
    
    
    Other Long-Term
liabilities
(3)
    
    
    308
    
    
    
    
    
    
    
    308
    
    
    
    
    
    
    
    Total$
    58,526
    
    
    $
    36,865
    
    
    $
    6,130
    
    
    $
    5,231
    
    
    $
    10,300
 
 (1)
    
    Includes 7.75% convertible notes with a par value of $15 million, which mature in February
2012. Pursuant to the terms of notes, we expect that we will be required to repay (redeem)
approximately $4.7 million of the principal amount of the notes in February 2010. Also
includes the outstanding balance under our line of credit, which is scheduled to terminate
April 30, 2009, but is included in current liabilities in our consolidated balance sheet as of
December, 31 2005. The line of credit agreement was amended and restated in March 2006 to,
among other things, extend the term to April 30, 2010.(2)
    
    Includes $4,412,000 of commitments for advertising in 2006.(3)
    
    Reflects the long-term portion of liability for executive severance at December 31, 2005. Off-Balance-Sheet Arrangements
  27




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Critical Accounting Policies
   Revenue Recognition
 Medical Product Sales
    28




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##### Table of Contents



CIGNA Agreement
  Allowances for Doubtful Accounts and Claim Denials
   Allowances for Costs Related to Billings in Process
  Patient Acquisition and Related Costs
 Reporting on Advertising Costs
 29




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##### Table of Contents



Recent Accounting Pronouncements
 Share-Based Payment
 1.
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS No.
123(R) for all awards granted to employees prior to the effective date of SFAS No. 123(R)
that remain unvested on the effective date.2.
    
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption.
  Accounting Changes and Error Corrections Reporting
Accounting Changes in Interim Financial Statements,
 30




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Important Factors That May Affect Future Operations and Results
   
    
    Expected future operations, revenue, gross margins and expenses
    
    Credit facilities and projected cash needs
    
    Sales opportunities, strategic relationships and marketing plans
    
    Estimates of potential markets for our products and services, including the
anticipated drivers for future growth
    
    Assessment of the impact of future accounting pronouncements, including SFAS 123(R)
   
    
    Our ability to successfully build a Medicare Part D segment
    
    Declining reimbursement levels for, or increases in the costs of, products dispensed
    
    Our history of operating losses and our expectation that we will incur significant
additional operating losses
    
    An inability to raise the capital that we will need to sustain our operations
    
    Our ability to attract new customers and retain existing customers
    
    Identification of, and competition for, growth and expansion opportunities
    
    Compliance with, or changes in, government regulation and legislation, or
interpretations thereof, including, but not limited to, pharmacy licensing requirements
and healthcare reform legislation, including HIPAA
    
    An inability to establish and maintain successful collaborative relationships could
adversely affect our ability to generate revenue
    
    Adverse developments in any investigation related to the pharmaceutical industry
    
    Competition and technological change that may make our products and technologies
less attractive or obsolete
    
    An inability to obtain and maintain intellectual property protection for our technologies
 31




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##### Table of Contents




    
    Adverse resolution of future lawsuits or investigations
    
    Significant fluctuations in our revenue and operating results, which have occurred
in the past and which we expect to continue to fluctuate in the future
    
    Any loss or inability to hire and retain qualified personnel
    
    Our exposure to product liability in excess of our insurance coverage
    
    Any failure to maintain an effective system of internal controls in the future could
adversely affect our ability to accurately report financial results or prevent fraud
    
    Compliance with changing regulation of corporate governance and public disclosure
may result in additional expenses
    
    Our common stock may continue to have a volatile public trading price and low
trading volume
    
    Anti-takeover provisions in our governing documents and under Delaware law may make
an acquisition of us more difficult
  
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk
   32




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Item 8. Financial Statements
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReports of Independent Registered Public Accounting Firms
    
    
    34Consolidated Balance Sheets as of December 31, 2005 and 2004
    
    
    36Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003
    
    
    37Consolidated Statements of Stockholders / Members Equity (Deficiency) for the years ended December 31, 2005, 2004 and 2003
    
    
    38Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003
    
    
    39Notes to Consolidated Financial Statements
    
    
    40
 33




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    /s/Ernst & Young LLPCertified Public Accountants
 
 34




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ RACHLIN COHEN & HOLTZ LLP
 
 35




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##### Table of Contents



NATIONSHEALTH, INC.
 
 CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 December 31,2005
    
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    13,971
    
    
    $
    2,904Short-term investments
    
    
    923
    
    
    
    100Accounts receivable, net of allowances of $17,525 and $10,985,
respectively
    
    
    7,908
    
    
    
    8,708Inventory
    
    
    1,285
    
    
    
    1,719Costs related to billings in process, net
    
    
    874
    
    
    
    1,437Other receivables
    
    
    1,877
    
    
    
    Investment held in trust
    
    
    
    
    
    
    2,000Prepaid expenses and other current assets
    
    
    750
    
    
    
    392Total current assets
    
    
    27,588
    
    
    
    17,260Property and equipment, net
    
    
    3,747
    
    
    
    1,770Investment in joint venture
    
    
    1,488
    
    
    
    Deferred equity compensation
    
    
    15,510
    
    
    
    Other assets, net
    
    
    1,526
    
    
    
    346Total assets
    
    $
    49,859
    
    
    $
    19,376LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIENCY)Current Liabilities:Accounts payable
    
    $
    7,367
    
    
    $
    4,595Accounts payable, related party
    
    
    6,020
    
    
    
    5,004Accrued expenses
    
    
    12,030
    
    
    
    7,195Deferred revenue, current portion
    
    
    235
    
    
    
    Line of credit
    
    
    2,500
    
    
    
    2,619Total current liabilities
    
    
    28,152
    
    
    
    19,413Long-Term Liabilities:Deferred revenue
    
    
    1,100
    
    
    
    Convertible notes, related party, net
    
    
    5,176
    
    
    
    Other long-term liabilities
    
    
    1,414
    
    
    
    Total long-term liabilities
    
    
    7,690
    
    
    
    Commitments and ContingenciesStockholders Equity (Deficiency):Preferred stock, $0.0001 par value; 50,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, $0.0001 par value; 250,000,000 shares authorized;
27,865,538 and 26,174,800 issued and 27,809,641 and 26,174,800
outstanding, respectively
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    68,949
    
    
    
    32,315Unearned compensation
    
    
    (2,761
    )
    
    
    Accumulated deficit
    
    
    (52,174
    )
    
    
    (32,355
    )Total stockholders equity (deficiency)
    
    
    14,017
    
    
    
    (37
    )Total liabilities and stockholders equity (deficiency)
    
    $
    49,859
    
    
    $
    19,376
 The accompanying notes are an integral part of these consolidated financial statements.
 36




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##### Table of Contents



NATIONSHEALTH, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Revenue:Net product sales
    
    $
    68,688
    
    
    $
    70,982
    
    
    $
    25,072Prescription card revenue
    
    
    8,619
    
    
    
    3,240
    
    
    
    654Service revenue
    
    
    10,249
    
    
    
    
    
    
    
    87,556
    
    
    
    74,222
    
    
    
    25,726Cost of product sales
    
    
    29,689
    
    
    
    22,718
    
    
    
    9,899Cost of services
    
    
    22,219
    
    
    
    
    
    
    
    Gross Profit
    
    
    35,648
    
    
    
    51,504
    
    
    
    15,827Operating Expenses:Patient acquisition and related costs
    
    
    18,077
    
    
    
    23,151
    
    
    
    6,779Patient service and fulfillment
    
    
    14,427
    
    
    
    13,672
    
    
    
    4,325General and administrative
    
    
    26,323
    
    
    
    13,116
    
    
    
    4,435Cost of employee stock bonus plan
    
    
    
    
    
    
    14,315
    
    
    
    Provision for doubtful accounts
    
    
    7,575
    
    
    
    12,228
    
    
    
    3,794Depreciation and amortization
    
    
    980
    
    
    
    506
    
    
    
    121Amortization of equity issued to CIGNA
    
    
    646
    
    
    
    
    
    
    
    Gain on sale of respiratory division
    
    
    (15,508
    )
    
    
    
    
    
    
    52,520
    
    
    
    76,988
    
    
    
    19,454Loss from Operations
    
    
    (16,872
    )
    
    
    (25,484
    )
    
    
    (3,627
    )Other Income (Expense):Interest income
    
    
    150
    
    
    
    3
    
    
    
    2Interest expense, related party
    
    
    (1,877
    )
    
    
    
    
    
    
    Interest expense
    
    
    (1,219
    )
    
    
    (943
    )
    
    
    (201
    )Other income (expense), net
    
    
    (1
    )
    
    
    
    
    
    
    (2,947
    )
    
    
    (940
    )
    
    
    (199
    )Net Loss
    
    $
    (19,819
    )
    
    $
    (26,424
    )
    
    $
    (3,826
    )Loss per
share  basic and diluted
    
    $
    (0.75
    )
    
    $
    (1.01
    )
    
    $
    (0.15
    )Weighted
average shares outstanding  basic and diluted
    
    
    26,345
    
    
    
    26,154
    
    
    
    26,150
 The accompanying notes are an integral part of these consolidated financial statements.
 37




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##### Table of Contents



NATIONSHEALTH, INC.
 
 CONSOLIDATED STATEMENTS OF
 STOCKHOLDERS / MEMBERS EQUITY (DEFICIENCY)
 (In thousands)
 Preferred
    
    
    PreferredAdditional
    
    
    Members
    
    
    MembersCommon Stock
    
    
    Paid-in
    
    
    Interests-
    
    
    Interests-
    
    
    Class B
    
    
    Unearned
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Capital
    
    
    Voting
    
    
    Nonvoting
    
    
    Interests
    
    
    Compensation
    
    
    Deficit
    
    
    TotalBalance, December 31, 2002
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2,105
    )
    
    $
    (2,105
    )Conversion of notes payable to
members
capital
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    435Sale of membership interest, net of
offering
costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,741
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,741Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,826
    )
    
    
    (3,826
    )Balance, December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    400
    
    
    
    3,741
    
    
    
    35
    
    
    
    
    
    
    
    (5,931
    )
    
    
    (1,755
    )Reverse merger
    
    
    26,150
    
    
    
    3
    
    
    
    18,483
    
    
    
    (400
    )
    
    
    (3,741
    )
    
    
    (35
    )
    
    
    
    
    
    
    
    
    
    
    14,310Employee stock bonus plan
    
    
    
    
    
    
    
    
    
    
    13,707
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,707Warrant exercises
    
    
    25
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26,424
    )
    
    
    (26,424
    )Balance, December 31, 2004
    
    
    26,175
    
    
    
    3
    
    
    
    32,315
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,355
    )
    
    
    (37
    )Discount on convertible notes,
related party
    
    
    
    
    
    
    
    
    
    
    10,611
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,611Issuances of common stock
    
    
    577
    
    
    
    
    
    
    
    3,888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,888Restricted stock awards granted
    
    
    377
    
    
    
    
    
    
    
    2,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,921
    )
    
    
    
    
    
    
    Warrants issued to CIGNA
    
    
    
    
    
    
    
    
    
    
    15,768
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,768Warrant exercises
    
    
    737
    
    
    
    
    
    
    
    3,686
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,686Purchases of treasury stock
    
    
    (56
    )
    
    
    
    
    
    
    (389
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (389
    )Accelerated vesting of stock options
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78Stock options issued to consultant
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Amortization of unearned compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160
    
    
    
    
    
    
    
    160Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,819
    )
    
    
    (19,819
    )Balance, December 31, 2005
    
    
    27,810
    
    
    $
    3
    
    
    $
    68,949
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (2,761
    )
    
    $
    (52,174
    )
    
    $
    14,017
 The accompanying notes are an integral part of these consolidated financial statements.
 38




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##### Table of Contents



NATIONSHEALTH, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Year Ended December 31,2005
    
    
    2004
    
    
    2003Cash Flows from Operating Activities:Net loss
    
    $
    (19,819
    )
    
    $
    (26,424
    )
    
    $
    (3,826
    )Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:Gain on sale of respiratory division
    
    
    (15,508
    )
    
    
    
    
    
    
    Provision for doubtful accounts
    
    
    7,575
    
    
    
    12,228
    
    
    
    3,794Provision for sales allowances and returns
    
    
    2,086
    
    
    
    2,220
    
    
    
    263Reserve for costs related to billings in process
    
    
    1,663
    
    
    
    2,272
    
    
    
    307Depreciation and amortization
    
    
    1,063
    
    
    
    506
    
    
    
    121Amortization of note discount
    
    
    787
    
    
    
    
    
    
    
    Amortization of deferred loan costs and other non-cash interest charges, net
    
    
    571
    
    
    
    
    
    
    
    Amortization of equity issued to CIGNA
    
    
    646
    
    
    
    
    
    
    
    Stock-based compensation
    
    
    309
    
    
    
    13,707
    
    
    
    Equity in loss of joint venture
    
    
    42
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,323
    )
    
    
    (18,175
    )
    
    
    (6,474
    )Inventory
    
    
    32
    
    
    
    (885
    )
    
    
    (517
    )Costs related to billings in process
    
    
    (1,100
    )
    
    
    (2,855
    )
    
    
    (1,072
    )Prepaid expenses and other assets
    
    
    (1,162
    )
    
    
    (654
    )
    
    
    (35
    )Accounts payable and accrued expenses
    
    
    6,541
    
    
    
    4,277
    
    
    
    3,541Accounts payable, related party
    
    
    1,016
    
    
    
    4,050
    
    
    
    954Deferred revenue
    
    
    1,335
    
    
    
    
    
    
    
    Net cash and cash equivalents used in operating activities
    
    
    (21,246
    )
    
    
    (9,733
    )
    
    
    (2,944
    )Cash Flows from Investing Activities:Proceeds from sale of respiratory division
    
    
    14,400
    
    
    
    
    
    
    
    Investment in joint venture
    
    
    (1,530
    )
    
    
    
    
    
    
    Purchases of available for sale investments, net
    
    
    (823
    )
    
    
    (100
    )
    
    
    Investment released from (placed in) trust
    
    
    2,000
    
    
    
    (2,000
    )
    
    
    Acquisition of property and equipment
    
    
    (2,393
    )
    
    
    (1,592
    )
    
    
    (719
    )Net cash and cash equivalents provided by (used in) investing activities
    
    
    11,654
    
    
    
    (3,692
    )
    
    
    (719
    )Cash Flows from Financing Activities:Proceeds from issuance of convertible notes, related party
    
    
    15,000
    
    
    
    
    
    
    
    Proceeds from issuances of common stock
    
    
    3,500
    
    
    
    
    
    
    
    Proceeds from exercise of warrants
    
    
    3,686
    
    
    
    125
    
    
    
    Net (repayments of) draws on lines of credit
    
    
    (119
    )
    
    
    1,819
    
    
    
    428Payment of note issuance costs
    
    
    (907
    )
    
    
    
    
    
    
    Purchases of treasury stock
    
    
    (389
    )
    
    
    
    
    
    
    Principle payments under capital lease obligations
    
    
    (112
    )
    
    
    
    
    
    
    Proceeds from reverse merger
    
    
    
    
    
    
    20,270
    
    
    
    Payments for conversion of membership interests
    
    
    
    
    
    
    (3,000
    )
    
    
    Payment of merger costs, net
    
    
    
    
    
    
    (2,954
    )
    
    
    Proceeds from sale of membership interest
    
    
    
    
    
    
    
    
    
    
    4,000Payment of offering costs
    
    
    
    
    
    
    
    
    
    
    (259
    )Proceeds from member notes payable
    
    
    
    
    
    
    
    
    
    
    1,648Principal payments on member notes payable
    
    
    
    
    
    
    (1,343
    )
    
    
    (833
    )Net cash and cash equivalents provided by financing activities
    
    
    20,659
    
    
    
    14,917
    
    
    
    4,984Net Increase in Cash and Cash Equivalents
    
    
    11,067
    
    
    
    1,492
    
    
    
    1,321Cash and Cash Equivalents, Beginning of Year
    
    
    2,904
    
    
    
    1,412
    
    
    
    91Cash and Cash Equivalents, End of Year
    
    $
    13,971
    
    
    $
    2,904
    
    
    $
    1,412Supplemental Disclosure of Cash Flow Information:Interest Paid
    
    $
    1,534
    
    
    $
    770
    
    
    $
    240Non-cash Investing and Financing Activities:Equipment acquired under capital leases
    
    $
    262
    
    
    $
    
    
    
    $
    Conversion of member notes payable to members capital
    
    $
    
    
    
    $
    
    
    
    $
    435
 The accompanying notes are an integral part of these consolidated financial statements.
 39




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##### Table of Contents



NATIONSHEALTH, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2005
 1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION
 Business
  CIGNA Agreement and Medicare Part D
  Medical Products
   Prescription Discount Drug Card Services
  Millstream
  40




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1.
BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION  (Continued)
 NationsHealth Holdings
    Merger and Accounting Treatment
   41




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION  (Continued)
 Principles of Consolidation
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Cash and Cash Equivalents
  Short-term Investments
  Accounts Receivable
   Inventory
  42




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Costs Related to Billings in Process
  Investment in Joint Venture
  Revenue Recognition
   43




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
   Patient Acquisition and Related Costs
   Shipping Costs
  44




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Stock-Based Compensation
 Accounting for Stock Issued to
Employees Accounting for Stock-Based Compensation Accounting for Stock-Based Compensation  Transition and Disclosure.
  2005
    
    
    2004Net loss, as reported
    
    $
    (19,819
    )
    
    $
    (26,424
    )Add: Stock-based employee compensation expense
included in net loss
    
    
    78
    
    
    
    Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards
    
    
    (1,132
    )
    
    
    (346
    )Pro forma
    
    $
    (20,873
    )
    
    $
    (26,770
    )Loss per share  basic and dilutedAs reported
    
    $
    (0.75
    )
    
    $
    (1.01
    )Pro forma
    
    $
    (0.79
    )
    
    $
    (1.02
    )
 45




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
  2005 Grants
    
    2004 GrantsExpected volatility
    
    
    49
    %
    
    
    50
    %Approximate risk free interest rate
    
    
    4.03
    %
    
    
    3.27
    %Expected lives
    
    5.0 years
    
    6.0 years
 Loss Per Share
  Use of Estimates
  Fair Value of Financial Instruments
    46




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Concentrations of Credit Risk
     Recent Accounting Pronouncements
 Share-Based Payment
 1.
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS No.
123(R) for all awards granted to employees prior to the effective date of SFAS No. 123(R)
that remain unvested on the effective date.2.
    
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption.
  47




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  (Continued)
 Accounting Changes and Error Corrections Reporting
Accounting Changes in Interim Financial Statements,
 3. LIQUIDITY AND PROFITABILITY CONSIDERATIONS
   CIGNA Funding Arrangement
  Revolving Line of Credit .
  Cost Reductions
  48




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 3. LIQUIDITY AND PROFITABILITY CONSIDERATIONS  (Continued)
 Potential Sale of Intangible Assets
  Summary
  4. CIGNA AGREEMENT
     49




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 5. US BIO JOINT VENTURE
     6. SALE OF RESPIRATORY DIVISION
  50




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 7. PROPERTY AND EQUIPMENT
  Estimated Useful
    
    December 31,Life (Years)
    
    2005
    
    
    2004(in thousands)Office and computer equipment
    
    3-5
    
    $
    1,685
    
    
    $
    682Furniture and fixtures
    
    5
    
    
    686
    
    
    
    351Leasehold improvements
    
    Up to 5
    
    
    652
    
    
    
    61Software
    
    3
    
    
    2,414
    
    
    
    1,3175,437
    
    
    
    2,411Less accumulated depreciation
and amortization
    
    
    
    
    1,690
    
    
    
    641$
    3,747
    
    
    $
    1,770
   8. ACCRUED EXPENSES
  December 31,2005
    
    
    2004Accrued compensation
    
    $
    3,202
    
    
    $
    1,542Accrued media
    
    
    1,950
    
    
    
    938Accrued call center services
    
    
    1,907
    
    
    
    726Other
    
    
    4,971
    
    
    
    3,989$
    12,030
    
    
    $
    7,195
 51




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 9. LINES OF CREDIT
 Balance Sheet Classifications of Borrowings
Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause
and a Lock-Box Arrangement.
   10. CONVERTIBLE NOTES
   52




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NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10. CONVERTIBLE NOTES  (Continued)
    53




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 10. CONVERTIBLE NOTES  (Continued)
     11. STOCKHOLDERS EQUITY (DEFICIENCY)
 The Offering
  54




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 11. STOCKHOLDERS EQUITY (DEFICIENCY)  (Continued)
  Warrants
   Preferred Stock
  Common Stock Reserved
  12. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS
 2004 Incentive Stock Plan and 2005 Long-Term Incentive Plan
  55




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 12. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS  (Continued)
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceBeginning of year
    
    
    1,208,125
    
    
    $
    6.87
    
    
    
    
    
    
    
    Granted
    
    
    1,018,048
    
    
    
    6.81
    
    
    
    1,208,125
    
    
    $
    6.87Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    (391,500
    )
    
    
    6.72
    
    
    
    
    
    
    
    Outstanding at end of year
    
    
    1,834,673
    
    
    $
    6.87
    
    
    
    1,208,125
    
    
    $
    6.87Options exercisable at end of year
    
    
    442,217
    
    
    $
    6.88
    
    
    
    47,625
    
    
    $
    6.87Weighted-average grant date fair value
    
    
    
    
    
    $
    3.24
    
    
    
    
    
    
    $
    3.52
  Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    Average
    
    
    
    
    
    AverageRange of
    
    Options
    
    Remaining
    
    Exercise
    
    Options
    
    ExerciseExercise Prices
    
    Outstanding
    
    Contractual Life
    
    Price
    
    Exercisable
    
    Price$5.44 to $6.80
    
    
    517,250
    
    
    
    5.49
    
    
    $
    6.35
    
    
    
    20,000
    
    
    $
    6.80$6.87 to $6.87
    
    
    1,075,375
    
    
    
    4.81
    
    
    $
    6.87
    
    
    
    414,717
    
    
    $
    6.87$6.97 to $8.06
    
    
    167,048
    
    
    
    5.84
    
    
    $
    7.89
    
    
    
    7,500
    
    
    $
    7.93$8.20 to $8.20
    
    
    75,000
    
    
    
    5.76
    
    
    $
    8.20
    
    
    
    
    
    
    1,834,673
    
    
    
    5.13
    
    
    $
    6.87
    
    
    
    442,217
    
    
    $
    6.88
  56




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 12. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS  (Continued)
 Employee Savings Plan
  Bonus Plan and Trust
  13. INCOME TAXES
 Accounting
for Income Taxes
  57




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13. INCOME TAXES
  December 31,2005
    
    
    2004Deferred tax assets:Net operating loss carry forwards
    
    $
    5,697
    
    
    $
    1,076Stock-based compensation
    
    
    4,639
    
    
    
    5,158Allowances for doubtful accounts, claims denials and returns
    
    
    6,943
    
    
    
    4,388Reserve for costs related to billings in process
    
    
    458
    
    
    
    605Accrued payroll
    
    
    586
    
    
    
    234Deferred revenue
    
    
    502
    
    
    
    Other
    
    
    169
    
    
    
    Total deferred tax assets
    
    
    18,994
    
    
    
    11,461Less valuation allowance
    
    
    (18,278
    )
    
    
    (10,993
    )716
    
    
    
    468Deferred tax liabilities:Property and equipment
    
    
    (141
    )
    
    
    (468
    )Software development costs
    
    
    (435
    )
    
    
    Other
    
    
    (140
    )
    
    
    Total deferred tax liabilities
    
    
    (716
    )
    
    
    (468
    )Net deferred taxes
    
    $
    
    
    
    $
    
    58




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 13. INCOME TAXES
  2005
    
    
    2004 *Tax at U.S. statutory rate
    
    
    34.0
    %
    
    
    34.0
    %State taxes, net of federal benefit
    
    
    3.5
    %
    
    
    3.6
    %Non-deductible items
    
    
    (0.9
    %)
    
    
    (0.2
    %)Change in valuation allowance
    
    
    (36.6
    %)
    
    
    (56.5
    %)Establishment of deferred tax asset at merger date
    
    
    
    %
    
    
    19.1
    %
    %
    
    
    
    %
 
 *
    
    Includes operations subsequent to the date of the Millstream merger on August 31, 2004 through
December 31, 2004. 14. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 Purchase Commitments
 Medical Benefit Distribution Agreement
   Advertising Commitments
  Leases
  59




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
   Capital
    
    
    OperatingYear Ending December 31,
    
    Leases
    
    
    Leases2006
    
    $
    150
    
    
    $
    1,6382007
    
    
    30
    
    
    
    1,4252008
    
    
    4
    
    
    
    9232009
    
    
    
    
    
    
    8322010
    
    
    
    
    
    
    531184
    
    
    $
    5,349Less: amounts representing interest
    
    
    34Net present value of capital lease obligations
    
    $
    150
  Equity Participation Fee
  Letter of Credit
  60




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 Employment Agreements
  
    
    An amount equal to the then current annual base salary for twenty-four months;
    
    In the event of the executives disability, medical insurance during the period the
executives spouse or the executive is eligible to receive benefits under COBRA;
    
    Immediate vesting of all stock options or restricted stock previously granted to the
executive;
    
    Require the Company to purchase from the executive up to $3,000,000 worth of shares of
the Companys common stock. In lieu of a cash payment, the Company may arrange for the sale
of the shares to a third party or register the resale of the shares, in which case the
executive shall receive at least $3,000,000. If the Company decides to purchase the shares
from the executive and one or both of the other executives exercises their rights to sell
at the same time, then the Company may pay the funds to the executives over two or three
years, as appropriate, in equal amounts pro-rata among the executives.
    61




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 14. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 Notes Payable to Members of NationsHealth Holdings
  15. SEGMENT INFORMATION
   62




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 15. SEGMENT INFORMATION
  Revenue:Medical Products (1)
    
    $
    77,307Medicare Part D (2)
    
    
    10,249Consolidated revenue
    
    $
    87,556Segment profit (loss):Medical Products
    
    $
    5,066Medicare Part D
    
    
    (13,440
    )Unallocated amounts:Amortization of equity issued to CIGNA
    
    
    (646
    )Gain on sale of respiratory division
    
    
    15,508Cost of employee stock bonus plan
    
    
    Other corporate expenses
    
    
    (23,360
    )Consolidated loss from operations
    
    $
    (16,872
    )
 
 (1)
    
    Revenue for the Medical Products segment includes net prescription card revenue.(2)
    
    Represents revenue from services provided to CIGNA.   Medical Products
    
    $
    11,745Medicare Part D
    
    
    1,346Unallocated assets
    
    
    36,768Consolidated assets
    
    $
    49,859
 63




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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 16. MAJOR SUPPLIERS
  Percentage
    
    
    Amountof
    
    
    ofPurchases
    
    
    PurchasesYear Ended December 31, 2005Supplier A (related party)
    
    
    32
    %
    
    $
    8,815Supplier D
    
    
    21
    %
    
    
    5,646Supplier E
    
    
    10
    %
    
    
    2,83063
    %
    
    $
    17,291Year Ended December 31, 2004Supplier A (related party)
    
    
    39
    %
    
    $
    9,642Supplier D
    
    
    15
    %
    
    
    3,79454
    %
    
    $
    13,436Year Ended December 31, 2003Supplier B
    
    
    18
    %
    
    $
    1,895Supplier C
    
    
    15
    %
    
    
    1,622Supplier D
    
    
    24
    %
    
    
    2,53157
    %
    
    $
    6,048


64



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##### Table of Contents



NATIONSHEALTH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 Quarter EndedMarch 31
    
    June 30
    
    September 30
    
    December 31(in thousands)2005Revenue
    
    $
    18,992
    
    
    $
    22,151
    
    
    $
    21,263
    
    
    $
    25,150Gross profit (loss)
    
    
    12,066
    
    
    
    13,666
    
    
    
    11,915
    
    
    
    (1,999
    )Net (loss) income
    
    
    (8,274
    )
    
    
    (5,400
    )
    
    
    11,792
    (2)
    
    
    (17,937
    )(1)(Loss) earnings per
share  basic
    
    $
    (0.32
    )
    
    $
    (0.21
    )
    
    $
    0.45
    
    
    $
    (0.67
    )(Loss) earnings per
share  diluted*
    
    $
    (0.32
    )
    
    $
    (0.21
    )
    
    $
    0.40
    
    
    $
    (0.67
    )2004Revenue
    
    $
    13,305
    
    
    $
    18,580
    
    
    $
    20,087
    
    
    $
    22,250Gross profit
    
    
    9,250
    
    
    
    12,627
    
    
    
    13,804
    
    
    
    15,823Net loss
    
    
    (3,071
    )
    
    
    (4,235
    )
    
    
    (888
    )
    
    
    (18,230
    )(3)Loss per share -
basic and diluted*
    
    $
    (0.12
    )
    
    $
    (0.16
    )
    
    $
    (0.03
    )
    
    $
    (0.70
    )
 
 (1)
    
    Results for the quarter ended December 31, 2005 reflect expenses of approximately $3,430,000
related to year-end bonuses and approximately $1,274,000 related to executive severance.(2)
    
    Results for the quarter ended September 30, 2005 reflect a gain of approximately $15,508,000
related to the sale of the Companys respiratory division (see Note 6).(3)
    
    Results for the quarter ended December 31, 2004 reflect a charge of approximately $14,315,000
related to an employee stock bonus plan (see Note 12).*
    
    See Note 2. 65




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##### Table of Contents



NATIONSHEALTH, INC.
 SCHEDULE II
 VALUATION AND QUALIFYING ACCOUNTS
 Balance
    
    Chargedat
    
    to Costs
    
    Charged
    
    
    
    
    
    BalanceBeginning
    
    and
    
    to Other
    
    
    
    
    
    at End ofYear ending December 31:
    
    of Period
    
    Expenses
    
    Accounts
    
    Deductions
    
    Period2005Deducted from asset accounts:Allowances for doubtful
accounts and claim denials
    
    $
    10,985
    
    
    $
    7,575
    
    
    $
    549
    (a)
    
    $
    (1,584
    )
    
    $
    17,525Allowances for costs
related to billings in
process
    
    
    1,606
    
    
    
    1,663
    
    
    
    
    
    
    
    (2,052
    )
    
    
    1,217Reserves:Reserve for sales
returns
    
    
    1,610
    
    
    
    
    
    
    
    1,537
    (b)
    
    
    (1,814
    )
    
    
    1,3332004Deducted from asset accounts:Allowances for doubtful
accounts and claim denials
    
    $
    3,409
    
    
    $
    12,228
    
    
    $
    
    
    
    $
    (4,652
    )
    
    $
    10,985Allowances for costs
related to billings in
process
    
    
    183
    
    
    
    2,272
    
    
    
    
    
    
    
    (849
    )
    
    
    1,606Reserves:Reserve for sales
returns
    
    
    118
    
    
    
    
    
    
    
    2,220
    (b)
    
    
    (728
    )
    
    
    1,6102003Deducted from asset accounts:Allowances for doubtful
accounts and claim denials
    
    $
    120
    
    
    $
    3,794
    
    
    $
    
    
    
    $
    (505
    )
    
    $
    3,409Allowances for costs
related to billings in
process
    
    
    17
    
    
    
    307
    
    
    
    
    
    
    
    (141
    )
    
    
    183Reserves:Reserve for sales
returns
    
    
    9
    
    
    
    
    
    
    
    263
    (b)
    
    
    (154
    )
    
    
    118
 
 (a)
    
    Allowances for claim denials netted against revenues.(b)
    
    Amount netted against revenues. 66




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##### Table of Contents



Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
 Item 9A. Controls and Procedures
  67




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##### Table of Contents



PART III
 
 Item 10. Directors and Executive Officers of the Registrant
  Code of Ethics
 www.nationshealth.com
 
 Item 11. Executive Compensation
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management
  Securities Authorized for Issuance Under Equity Compensation Plans
  Number of securities remainingWeighted-average
    
    
    available for future issuanceNumber of securities to
    
    
    exercise price of
    
    
    underbe issued upon exercise
    
    
    outstanding
    
    
    equity compensation plansof outstanding options,
    
    
    options, warrants
    
    
    (excluding securities reflected inwarrants and rights
    
    
    and rights
    
    
    column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    1,834,673
    
    
    $
    6.87
    
    
    
    1,788,721Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,834,673
    
    
    $
    6.87
    
    
    
    1,788,721
 68




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##### Table of Contents



Item 13. Certain Relationships and Related Transactions
  
 Item 14. Principal Accountant Fees and Services
  
 Item 15. Exhibits and Financial Statement Schedules
 (a)
    
    1. Consolidated Financial Statements.
        69




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##### Table of Contents



SIGNATURES
  NATIONSHEALTH, INC.By:
    
    /s/ Glenn M. Parker
  Name
    
    Title
    
    Date/s/ Glenn M. Parker

Glenn M. Parker
    
    Chief Executive Officer and
Director (Principal Executive
Officer)
    
    March 31, 2006/s/ Timothy Fairbanks

Timothy Fairbanks
    
    Chief Financial Officer and
Director (Principal Financial
Officer)
    
    March 31, 2006/s/ Arthur R. Spector

Arthur R. Spector
    
    Chairman of the Board of Directors
    
    March 31, 2006/s/ Lewis P. Stone

Lewis P. Stone
    
    Director, President and Chief
Information Officer
    
    March 31, 2006/s/ Elliot F. Hahn

Elliot F. Hahn, Ph.D.
    
    Director
    
    March 31, 2006/s/Gary D. Small

Gary D. Small
    
    Director
    
    March 31, 2006/s/ Raymond N. Steinman

Raymond N. Steinman
    
    Director
    
    March 31, 2006/s/ Michael D. Tabris

Michael D. Tabris
    
    Director
    
    March 31, 2006/s/ Mark H. Rachesky

Mark H. Rachesky, M.D.
    
    Director
    
    March 31, 2006/s/ Don K. Rice

Don K. Rice
    
    Director
    
    March 31, 2006/s/ Richard R. Howard

Richard R. Howard
    
    Director
    
    March 31, 2006/s/ George F. Raymond

George F. Raymond
    
    Director
    
    March 31, 2006
 70




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##### Table of Contents



NATIONSHEALTH, INC.
 
 EXHIBIT INDEX
 Exhibit No.
    
    Description2.1
    
    Amended and Restated Agreement and Plan of Merger dated as of August 10,
2004 among Millstream Acquisition Corporation, N Merger L.L.C. and
NationsHealth Holdings, L.L.C. Filed as Annex A to the Companys Definitive
Proxy Statement (File No. 000-50348) filed August 13, 2004 and incorporated
herein by reference.2.2
    
    Amended and Restated Asset Purchase Agreement, dated September 3, 2005, by
and between Lincare Inc., Med 4 Home Inc., United States Pharmaceutical
Group, LLC and the Company. Certain schedules referenced in the Amended and
Restated Asset Purchase Agreement have been omitted in accordance with Item
601(b)(2) of Regulation S-K. A copy of any omitted schedule will be
furnished supplementally to the Securities and Exchange Commission upon
request. Filed as Exhibit 2.1 to the Companys Form 10-Q (File No.
000-50348) filed November 14, 2005 and incorporated herein by reference.3.1
    
    Second Restated Certificate of Incorporation of Millstream Acquisition
Corporation. Filed as Exhibit 3.3 to the Companys Form 8-A12G/A (File No.
000-50348) filed September 8, 2004 and incorporated herein by reference.3.2
    
    By-Laws of NationsHealth, Inc., as amended and restated on August 31, 2004.
Filed as Exhibit 3.4 to the Companys Form 8-A12G/A (File No. 000-50348)
filed September 8, 2004 and incorporated herein by reference.4.1
    
    Specimen Common Stock Certificate.
Filed as Exhibit 4.1 to the Companys Registration Statement on
Form S-1 (File No. 333-105388), as amended, originally
filed on May 19, 2003 and incorporated herein by reference.4.2
    
    Specimen Warrant Certificate.
Filed as Exhibit 4.2 to the Companys Registration Statement on
Form S-1 (File No. 333-105388), as amended, originally
filed on May 19, 2003 and incorporated herein by reference.4.3
    
    Form of Unit Purchase Option granted to Representative.
Filed as Exhibit 4.3 to the Companys Registration Statement on
Form S-1 (File No. 333-105388), as amended, originally
filed on May 19, 2003 and incorporated herein by reference.4.4
    
    Form of Warrant Agreement between
Continental Stock Transfer & Trust Company and the Company.
Filed as Exhibit 4.4 to the Companys Registration Statement on
Form S-1 (File No. 333-105388), as amended, originally
filed on May 19, 2003 and incorporated herein by reference.4.5
    
    Specimen Unit Certificate.
Filed as Exhibit 4.5 to the Companys Registration Statement on
Form S-1 (File No. 333-105388), as amended, originally
filed on May 19, 2003 and incorporated herein by reference.4.6
    
    7 3/4% Secured Convertible
Note issued by the Company to MHR Capital Partners (100) LP dated
February 28, 2005. Filed as Exhibit 4.1 to the
Companys Current Report on Form 8-K (File
No. 000-50348) filed March 4, 2005 and incorporated herein by reference.4.7
    
    7 3/4% Secured Convertible
Note issued by the Company to MHR Capital Partners LP dated
February 28, 2005. Filed as Exhibit 4.2 to the
Companys Current Report on Form 8-K (File
No. 000-50348) filed March 4, 2005 and incorporated herein by reference.4.8
    
    7 3/4% Secured Convertible
Note issued by the Company to OTQ LLC dated February 28, 2005.
Filed as Exhibit 4.3 to the Companys Current Report on
Form 8-K (File No. 000-50348) filed March 4, 2005 and incorporated herein by reference.4.9
    
    Warrant Agreement, dated as of May 4, 2005, by and between NationsHealth,
Inc. and Connecticut General Life Insurance Company. Filed as Exhibit 4.1
to the Companys Form 8-K (File No. 000-50348) filed May 11, 2005 and
incorporated herein by reference.




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##### Table of Contents



Exhibit No.
    
    Description10.1*
    
    Employment Agreement made as of March 9, 2004, by and between Millstream
Acquisition Corporation and Glenn M. Parker, M.D. Filed as Exhibit 5.02(d)
to the Companys Form 8-K (File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.10.2*
    
    Employment Agreement made as of March 9, 2004, by and between Millstream
Acquisition Corporation and Robert Gregg. Filed as Exhibit 5.02(e) to the
Companys Form 8-K (File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.10.3*
    
    Employment Agreement made as of March 9, 2004, by and between Millstream
Acquisition Corporation and Lewis Stone. Filed as Exhibit 5.02(f) to the
Companys Form 8-K (File No. 000-50348) filed September 7, 2004 and
incorporated herein by reference.10.4*
    
    Employment Agreement made as of April 15, 2005,by and between NationsHealth,
Inc. and Gregory J. Cuoto. Filed as Exhibit 99.1 to the Companys Form 8-K
(File No. 000-50348) filed April 21, 2005 and incorporated herein by
reference.10.5*
    
    Employment Agreement made as of April 15, 2005,by and between NationsHealth,
Inc. and Tracy M. Schmidt, Esq. Filed as Exhibit 99.2 to the Companys Form
8-K (File No. 000-50348) filed April 21, 2005 and incorporated herein by
reference.10.6*
    
    Employment Agreement made as of April 15, 2005,by and between NationsHealth,
Inc. and Tim Fairbanks. Filed as Exhibit 99.3 to the Companys Form 8-K
(File No. 000-50348) filed April 21, 2005 and incorporated herein by
reference.10.7*
    
    Employment Agreement made as of February 3, 2006, by and between
NationsHealth, Inc. and Robert E. Tremain. Filed as Exhibit 10.1 to the
Companys Form 8-K (File No. 000-50348) filed February 9, 2006 and
incorporated herein by reference.10.8
    
    Indemnification and Escrow Agreement, dated as of August 30, 2004 among
Millstream Acquisition Corporation, Continental Stock Transfer & Trust
Company, as Escrow, RGGPLS Holding, Inc., and Arthur Spector. Filed as
Exhibit 5.02(g) to the Companys Form 8-K (File No. 000-50348) filed
September 7, 2004 and incorporated herein by reference.10.9
    
    Lease Agreement with Liberty Property Limited Partnership dated March 1,
2003, for the property located at 13650 N.W. 8th Street, Sunrise,
Florida. Filed as exhibit 10.5 to the Companys Form 10-KSB (File No.
000-50348) filed March 25, 2005 and incorporated herein by reference.10.10
    
    Assignment of Lease Agreement with Liberty Property Limited Partnership for
the property located at 13650 N.W. 8th Street, Sunrise, Florida,
dated February 19, 2004. Filed as exhibit 10.6 to the Companys Form 10-KSB
(File No. 000-50348) filed March 25, 2005 and incorporated herein by
reference.




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##### Table of Contents



Exhibit No.
    
    Description10.11
    
    Lease Agreement with Liberty Property Limited Partnership dated May 1, 2004,
for the property located at 13630 N.W. 8th Street, Sunrise,
Florida. Filed as exhibit 10.7 to the Companys Form 10-KSB (File No.
000-50348) filed March 25, 2005 and incorporated herein by reference.10.12
    
    Assignment of Lease Agreement with Liberty Property Limited Partnership for
the property located at 13630 N.W. 8th Street, Sunrise, Florida,
dated February 19, 2004. Filed as exhibit 10.8 to the Companys Form 10-KSB
(File No. 000-50348) filed March 25, 2005 and incorporated herein by
reference.10.13
    
    Sublease Agreement with D & K Healthcare Resources Inc. dated May 19, 2004,
for the premises located at 2955 West Corporate Lakes Boulevard, Weston,
Florida. Filed as exhibit 10.9 to the Companys Form 10-KSB (File No.
000-50348) filed March 25, 2005 and incorporated herein by reference.10.14*
    
    NationsHealth, Inc. 2005 Long-Term Incentive Plan effective as of April 25,
2005. Filed as exhibit 10.1 to the Companys Form 8-K (File No. 000-50348)
filed June 17, 2005 and incorporated herein by reference.10.15*
    
    RGGPLS Holding, Inc. Stock Bonus Plan & Trust effective December 30, 2004.
Filed as exhibit 10.1 to the Companys Form S-8 (File No. 333-126197) filed
June 28, 2005 and incorporated herein by reference.10.16*
    
    Amendment No. 1 to RGGPLS Holding, Inc. Stock Bonus Plan & Trust effective
February 28, 2005. Filed as exhibit 10.2 to the Companys Form S-8 (File
No. 333-126197) filed June 28, 2005 and incorporated herein by reference.10.17*
    
    NationsHealth, Inc. 2004 Incentive Stock Plan, dated August 30, 2004. Filed
as Annex I to the Companys Definitive Proxy Statement (File No. 000-50348)
filed August 13, 2004 and incorporated herein by reference.10.18
    
    Amended and Restated Revolving Credit and Security agreement among United
States Pharmaceutical Group, L.L.C. and NationsHealth Holdings, L.L.C. and
CapitalSource Finance LLC dated as of June 29, 2004. Filed as exhibit 10.4
to the Companys Form 10-Q (File No. 000-50348) filed August 15, 2005 and
incorporated herein by reference.10.19
    
    First Amendment to Amended and Restated Revolving Credit and Security
Agreement by and between CapitalSource Finance LLC, United States
Pharmaceutical Group, L.L.C. d/b/a NationsHealth, and NationsHealth
Holdings, L.L.C., dated as of August 10, 2004. Filed as exhibit 10.5 to the
Companys Form 10-Q (File No. 000-50348) filed August 15, 2005 and
incorporated herein by reference and incorporated herein by reference.10.20
    
    Joinder and Second Amendment to Amended and Restated Revolving Credit and
Security Agreement by and between CapitalSource Finance LLC, United States
Pharmaceutical Group, L.L.C. d/b/a NationsHealth, NationsHealth Holdings,
L.L.C., and NationsHealth, Inc., dated as of September 14, 2004. Filed as
exhibit 10.6 to the Companys Form 10-Q (File No. 000-50348) filed August
15, 2005 and incorporated herein by reference.10.21***
    
    Strategic Agreement by and among Connecticut General Life Insurance Company,
United States Pharmaceutical Group, L.L.C. and NationsHealth, Inc., dated as
of May 4, 2005. Filed as exhibit 10.9 to the Companys Form 10-Q (File No.
000-50348) filed August 15, 2005 and incorporated herein by reference.10.22**
    
    Limited Liability Company Agreement of NationsHealth Specialty Rx, LLC,
dated August 3, 2005, by and between US Bioservices Corporation and the
Company. Filed as Exhibit 10.1 to the Companys Form 10-Q (File No.
000-50348) filed November 14, 2005 and incorporated herein by reference.10.23
    
    Sublease Agreement with Asset
Management Outsourcing, Inc. dated August 3,
2005 for the property located at 7067C West Broward Boulevard Plantation,
Florida 33317. Filed as Exhibit 10.8 to the Companys Form 10-Q (File No.
000-50348) filed November 14, 2005 and incorporated herein by reference.




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##### Table of Contents



Exhibit No.
    
    Description10.24*
    
    Separation Agreement and General Release, dated December 16, 2005, between
Robert Gregg and NationsHealth, Inc. Filed as Exhibit 10.1 to the Companys
Form 8-K (File No. 000-50348) filed December 22, 2005 and incorporated
herein by reference.10.25*
    
    Amendment to the Employment Agreement Between NationsHealth, Inc. and Robert
E. Tremain as of February 3, 2006.+10.26
    
    Second Amended and Restated Revolving Credit and Security Agreement among
NationsHealth, Inc., United States Pharmaceutical Group, L.L.C. and
NationsHealth Holdings, L.L.C. and CapitalSource Finance LLC dated as of
March 21, 2006. Filed as exhibit 10.1 to the Companys Form 8-K (File No.
000-50348) filed March 27, 2006 and incorporated herein by reference.10.27*
    
    Information on bonuses granted for 2005 to the Chairman of the Board and
Executive Officers of NationsHealth, Inc. Included in the Form 8-K (File
No. 000-50348) filed January 17, 2006 and incorporated herein by
reference.10.28*
    
    Description of NationsHealth, Inc. Non-Employee Director Compensation.+10.29
    
    Stockholders Agreement, dated as of March 9, 2004, as amendment on June 2,
2004 among Millstream Acquisition Corporation, RGGPLS Holding, Inc. and GRS
Holdings, L.L.C. Filed as Annex E to the Companys Definitive Proxy
Statement (File No. 000-50348) filed August 13, 2004 and incorporated herein
by reference.10.30
    
    Registration Rights Agreement, dated as of March 9, 2004, as amended on June
2, 2004, by and among Millstream Acquisition Corporation, RGGPLS Holding,
Inc., GRH Holdings, L.L.C., and Becton, Dickinson and Company. Filed as
Annex F to the Companys Definitive Proxy Statement (File No. 000-50348)
filed August 13, 2004 and incorporated herein by reference.10.31
    
    Amended and Restated Governance Agreement, dated as of August 10, 2004,
among Millstream Acquisition Corporation, RGGPLS Holding, Inc., and Arthur
Spector. Filed as Exhibit 5.02(a) to the Companys Form 8-K (File No.
000-50348) filed September 7, 2004 and incorporated herein by reference.10.32*
    
    Form of Stock Option Agreement under the NationsHealth, Inc. 2004 Stock
Option Plan. Filed as Exhibit 10.12 to the Companys Form 10-QSB (File No.
000-50348) filed November 10, 2004 and incorporated herein by reference.10.33
    
    Securities Purchase Agreement, dated as of May 4, 2005, by and between
NationsHealth, Inc. and Connecticut General Life Insurance Company. Filed
as Exhibit 4.2 to the Companys Form 8-K (File No. 000-50348) filed May 11,
2005 and incorporated herein by reference.10.34
    
    Stock Purchase Agreement, dated August 18, 2005, by and between
NationsHealth, Inc. and US Bioservices Corporation. Filed as Exhibit 10.1
to the Companys Form 8-K (File No. 000-50348) filed August 24, 2005 and
incorporated herein by reference.10.35
    
    Registration Rights Agreement, dated August 18, 2005, by and between
NationsHealth, Inc. and US Bioservices Corporation. Filed as Exhibit 10.2
to the Companys Form 8-K (File No. 000-50348) filed August 24, 2005 and
incorporated herein by reference.10.36
    
    Registration Rights Agreement, dated as of November 4, 2005, by and among
NationsHealth, Inc. and the Holders of Registrable Securities. Filed as
Exhibit 10.2 to the Companys Form 8-K (File No. 000-50348) filed November
10, 2005 and incorporated herein by reference.10.37*
    
    Form of Stock Option Agreement under the NationsHealth, Inc. 2005 Long-Term
Incentive Plan. Filed as Exhibit 10.4 to the Companys Form 10-Q (File No.
000-50348) filed November 14, 2005 and incorporated herein by reference.10.38*
    
    Form of Restricted Stock Unit Agreement under the NationsHealth, Inc. 2005
Long-Term Incentive Plan. Filed as Exhibit 10.5 to the Companys Form 10-Q
(File No. 000-50348) filed November 14, 2005 and incorporated herein by
reference.10.39*
    
    Form of Restricted Stock Agreement under the NationsHealth, Inc. 2005
Long-Term Incentive Plan. Filed as Exhibit 10.6 to the Companys Form 10-Q
(File No. 000-50348) filed November 14, 2005 and incorporated herein by
reference.10.40*
    
    Form of Stock Appreciation Right Agreement under the NationsHealth, Inc.
2005 Long-Term Incentive Plan. Filed as Exhibit 10.7 to the Companys Form
10-Q (File No. 000-50348) filed November 14, 2005 and incorporated herein by
reference.10.41
    
    Investment Unit Purchase Agreement, dated February 28, 2005, by and among the
Company, NationsHealth Holdings, L.L.C., United States Pharmaceutical Group, L.L.C., MHR Capital
Partners LP, OTQ LLC and MHR Capital Partners (100) LP. Filed as Exhibit 10.1 to the Companys
Form 8-K (File No. 000-50348) filed March 4, 2005 and incorporated herein by reference.10.42
    
    Senior Subordination Agreement, dated as of February 28, 2005, by MHR Capital Partners
LP, MHR Capital Partners (100) LP and OTQ LLC, MHR Capital Partners LP in its capacity as
collateral agent, in favor of CapitalSource Finance LLC, and for certain purposes RGGPLS Holding,
Inc. Filed as Exhibit 10.2 to the Companys Form 8-K (File No. 000-50348) filed March 4, 2005 and
incorporated herein by reference.10.43
    
    Fifth Amendment to Amended and Restated Revolving Credit and Security Agreement, dated
February 28, 2005, by and between CapitalSource Finance LLC, United States Pharmaceutical Group,
L.L.C., NationsHealth Holdings, L.L.C. and the Company. Filed as Exhibit 10.3 to the Companys Form
8-K (File No. 000-50348) filed March 4, 2005 and incorporated herein by reference.10.44
    
    Registration Rights Agreement, dated February 28, 2005, between the Company and the
parties specified on the signature pages thereof. Filed as Exhibit 10.4 to the Companys Form 8-K
(File No. 000-50348) filed March 4, 2005 and incorporated herein by reference.10.45
    
    Stockholders Agreement, dated February 28, 2005, by and among the Company, RGGPLS
Holding, Inc., GRH Holdings, L.L.C, MHR Capital Partners LP, OTQ LLC and MHR Capital Partners (100)
LP. Filed as Exhibit 10.5 to the Companys Form 8-K (File No. 000-50348) filed March 4, 2005 and
incorporated herein by reference.10.46
    
    Consent and Waiver, dated as of February 28, 2005, among the Company and the
stockholders of the Company named on the signature pages thereto. Filed as Exhibit 10.6 to the
Companys Form 8-K (File No. 000-50348) filed March 4, 2005 and incorporated herein by reference.21
    
    Subsidiaries of Registrant.+23.1
    
    Consent of Ernst & Young LLP.+23.2
    
    Consent of Rachlin Cohen & Holtz LLP.+31.1
    
    Certification of Chief Executive Officer Pursuant to §240.13a-14 or
§240.15d-14 of the Securities Exchange Act of 1934, as amended.+31.2
    
    Certification of Chief Financial Officer Pursuant to §240.13a-14 or
§240.15d-14 of the Securities Exchange Act of 1934, as amended.+32.1
    
    Certification pursuant to 18 U.S.C.
Section 1350. 
 
 *
    
    Management contract or compensatory plan or arrangement.**
    
    Portions of this Exhibit have been omitted and filed separately with the Securities and
Exchange Commission pursuant to a request for confidential treatment pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934.***
    
    Confidential treatment has been granted for portions of this
exhibit pursuant to Rule 24b-2 of the Securities Exchange Act of 1934.+
    
    Filed herewith.
    
    Furnished herewith.