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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 1934For the fiscal year ended December 31, 2006.o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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 8th Street, Suite 210, Sunrise, FL
(Address of principal executive offices)
    
    33325
(Zip Code)
 (954) 903-5000
  (Title of each class)
    
    (Name of each exchange on which registered)Common Stock, $0.0001 par value per share
    
    The NASDAQ Stock MarketWarrants
    
    The NASDAQ Stock MarketUnits
    
    The NASDAQ Stock Market
  
 o þ
 o þ
 þ o
 o
 o o þ
 o þ
   Documents Incorporated By Reference




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##### 



NATIONSHEALTH, INC.
 FORM 10-K
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
 INDEX
 PagePART IItem 1
    
    Business
    
    
    1Item 1A
    
    Risk Factors
    
    
    7Item 2
    
    Properties
    
    
    15Item 3
    
    Legal Proceedings
    
    
    15Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    
    15PART IIItem 5
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    16Item 6
    
    Selected Financial Data
    
    
    18Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8
    
    Financial Statements and Supplementary Data
    
    
    36Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    69Item 9A
    
    Controls and Procedures
    
    
    69Item 9B
    
    Other Information
    
    
    69PART IIIItem 10
    
    Directors, Executive Officers and Corporate Governance
    
    
    70Item 11
    
    Executive Compensation
    
    
    70Item 12
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    70Item 13
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    71Item 14
    
    Principal Accountant Fees and Services
    
    
    71PART IVItem 15
    
    Exhibits and Financial Statement Schedules
    
    
    72SIGNATURES
    
    
    
    
    73Exhibit 4.10Exhibit 4.11Exhibit 21Exhibit 23.1Exhibit 23.2Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I
 
 Item 1. Business.
 Business
   Medical Products Segment
 Home Delivery of Medical Products
   Retail Program
   1




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Sale of Respiratory Division
  Discount Prescription Drug Cards
   Specialty Pharmacy
    2




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Insurance Services Segment
   Information Technology and Patient Management
  
    
    Direct-to-consumer marketing
    
    Eligibility management, enrollment and service of individual members and patients, including grievance resolution
    
    Fulfillment, reorder and electronic medical records management
    
    Integration of data and telecommunications systems
    
    State Pharmaceutical Assistance Program support
    
    Electronic imaging management
    
    Security of data and communications with CMS and Pharmacy Benefit Management providers
    
    Contracting with manufacturers
    
    Regulatory compliance, including Healthcare Insurance Portability and Accountability Act of 1996 and CMS, audit and claims settlement
  3




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
    
    Medicare and private insurer billing and collections
    
    Automated payment processing, including wire (CMS and Social Security Administration), electronic bill payment, ACH, check and credit card
    
    Service level reporting
 Patient Service Organization
   Competition
   
    
    other durable medical equipment providers;
    
    retail pharmacies;
    
    healthcare product distributors;
    
    pharmacy benefit management companies and prescription drug plans with in-house pharmacies; and
    
    other companies that provide customer enrollment and services to prescription drug plans.
 Government Regulation
 General
   4




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Medicare
   HIPAA
   Pharmacy
   5




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Background
   Merger Accounting Treatment
  Patient Base
   6




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Seasonality
  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;
    
    The evolving nature of the healthcare marketplace and the Medicare regulatory environment;
    
    The risks of competition, technological change or evolving patient preferences; and
    
    The sufficiency and availability of capital.
 We could experience significantly reduced revenues and earnings if Medicare changes, delays,
reduces or denies reimbursement.
   7




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Competitive bidding for DME and supplies may reduce our revenues and earnings.
     We have invested significant capital and dedicated substantial resources to launch our insurance
services to Medicare prescription drug and managed care providers, which may not be successful.
   8




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If we do not have sufficient capital to fund additional advertising and patient acquisitions, our
ability to grow our business will be substantially diminished
  If we are unable to grow our business and manage growth successfully, we may not achieve
profitability.
  The profitability of our Medical Products business will decrease if we do not receive recurring
orders from patients.
  We could experience significantly reduced revenues and profit from sales of diabetes products if
improved technologies developed for glucose monitoring eliminate the need for consumable testing
supplies.
   9




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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.
   If any of our information technology platforms malfunction, our business and profitability may be
seriously harmed.
   10




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We may have difficulties in achieving volume-based discounts or finding replacement supplies if we
lose any agreement with our suppliers of medical products.
  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 profit.
    11




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The cost of efforts to comply with HIPAA regulations and the possible consequence of non-compliance
could adversely affect our operations and profit significantly.
  Our accounts receivable are subject to significant collection risk due to third-party payors.
  Our business could suffer from rising insurance costs, the unavailability of insurance or other
events.
    12




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Risks Related to Owning Our Equity Securities
 Future sales of our common stock may depress our stock price.
  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.
   13




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If we fail to maintain an effective system of internal control 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 regulations 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.
   
    
    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
    
    Low trading volume associated with the number of shares that are publicly traded
  14




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Anti-takeover provisions in our governing documents and under Delaware law may make an acquisition
of us more difficult.
     
 Item 2. Properties.
  
 Item 3. Legal Proceedings.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
   15




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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
    
    
    LowYear Ended December 31, 2005First 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
    
    
    $
    11.84Year Ended December 31, 2006First quarter
    
    $
    7.96
    
    
    $
    3.71
    
    
    $
    2.95
    
    
    $
    0.63
    
    
    $
    11.00
    
    
    $
    5.50Second quarter
    
    $
    4.45
    
    
    $
    1.94
    
    
    $
    0.68
    
    
    $
    0.20
    
    
    $
    5.85
    
    
    $
    2.30Third quarter
    
    $
    3.24
    
    
    $
    1.56
    
    
    $
    0.43
    
    
    $
    0.11
    
    
    $
    4.81
    
    
    $
    1.66Fourth quarter
    
    $
    2.75
    
    
    $
    1.05
    
    
    $
    0.25
    
    
    $
    0.06
    
    
    $
    3.00
    
    
    $
    1.11
  Holders of Record
  Dividends
   16




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Issuer Purchases of Equity Securities
  Total
    
    
    Average
    
    
    Total Number of
    
    
    Maximum NumberNumber of
    
    
    Price
    
    
    Shares Purchased as
    
    
    of Shares that MayShares
    
    
    Paid
    
    
    Part of Publicly
    
    
    Yet Be PurchasedPeriod
    
    Purchased
    
    
    per Share
    
    
    Announced Plans
    
    
    Under the PlansOctober 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    November 2006
    
    
    19,176
    
    
    $
    2.35
    
    
    
    
    
    
    
    December 2006
    
    
    16,962
    
    
    $
    1.80
    
    
    
    
    
    
    
    Total
    
    
    36,138
    
    
    $
    2.09
    
    
    
    
    
    
    
    
 Stock Performance Graph
  
 Nasdaq NationalNationsHealth, Inc.
    
    
    Russel 200 Index
    
    
    Market Index8/28/2003
    
    
    100.00
    
    
    
    100.00
    
    
    
    100.0012/31/2003
    
    
    97.80
    
    
    
    111.96
    
    
    
    110.6312/31/2004
    
    
    138.00
    
    
    
    131.55
    
    
    
    119.9312/31/2005
    
    
    156.20
    
    
    
    135.92
    
    
    
    122.5712/31/2006
    
    
    33.80
    
    
    
    159.12
    
    
    
    135.15
  17




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##### Table of Contents



Item 6. Selected Financial Data.
  For the Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands, except per share data)Consolidated and Combined Statements of Operations Data:Net product sales
    
    $
    44,788
    
    
    $
    68,688
    
    
    $
    70,982
    
    
    $
    25,072
    
    
    $
    2,531Prescription drug card revenue
    
    
    3,983
    
    
    
    8,619
    
    
    
    3,240
    
    
    
    654
    
    
    
    10Service revenue
    
    
    38,445
    
    
    
    10,249
    
    
    
    
    
    
    
    
    
    
    
    87,216
    
    
    
    87,556
    
    
    
    74,222
    
    
    
    25,726
    
    
    
    2,541Cost of product sales
    
    
    18,854
    
    
    
    29,689
    
    
    
    22,718
    
    
    
    9,899
    
    
    
    1,644Cost of services
    
    
    31,907
    
    
    
    22,219
    
    
    
    
    
    
    
    
    
    
    
    Gross profit
    
    
    36,455
    
    
    
    35,648
    
    
    
    51,504
    
    
    
    15,827
    
    
    
    897Operating Expenses:Patient acquisition and related costs
    
    
    3,382
    
    
    
    18,077
    
    
    
    23,151
    
    
    
    6,779
    
    
    
    1,131Patient service and fulfillment
    
    
    8,286
    
    
    
    14,427
    
    
    
    13,672
    
    
    
    4,325
    
    
    
    246General and administrative
    
    
    27,940
    
    
    
    26,323
    
    
    
    13,116
    
    
    
    4,435
    
    
    
    1,135Cost of employee stock bonus plan
    
    
    
    
    
    
    
    
    
    
    14,315
    
    
    
    
    
    
    
    Provision for doubtful accounts
    
    
    3,625
    
    
    
    7,575
    
    
    
    12,228
    
    
    
    3,794
    
    
    
    181Depreciation and amortization
    
    
    1,353
    
    
    
    980
    
    
    
    506
    
    
    
    121
    
    
    
    14Amortization of customer contract intangible
    
    
    3,878
    
    
    
    646
    
    
    
    
    
    
    
    
    
    
    
    Impairment of investment in joint venture
    
    
    1,292
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gain on sales of business lines
    
    
    (5,000
    )
    
    
    (15,508
    )
    
    
    
    
    
    
    
    
    
    
    44,756
    
    
    
    52,520
    
    
    
    76,988
    
    
    
    19,454
    
    
    
    2,707Loss from operations
    
    
    (8,301
    )
    
    
    (16,872
    )
    
    
    (25,484
    )
    
    
    (3,627
    )
    
    
    (1,810
    )Interest income
    
    
    257
    
    
    
    150
    
    
    
    3
    
    
    
    2
    
    
    
    Interest expense
    
    
    (3,234
    )
    
    
    (3,097
    )
    
    
    (943
    )
    
    
    (201
    )
    
    
    (45
    )Net loss
    
    $
    (11,278
    )
    
    $
    (19,819
    )
    
    $
    (26,424
    )
    
    $
    (3,826
    )
    
    $
    (1,855
    )Loss per share  basic and diluted
    
    $
    (0.40
    )
    
    $
    (0.75
    )
    
    $
    (1.01
    )
    
    $
    (0.15
    )
    
    $
    (0.07
    )Weighted average shares outstanding  basic and diluted
    
    
    27,895
    
    
    
    26,345
    
    
    
    26,154
    
    
    
    26,150
    
    
    
    26,150
 As of December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(In thousands)Consolidated and Combined Balance Sheet Data:Total assets
    
    $
    30,388
    
    
    $
    49,859
    
    
    $
    19,376
    
    
    $
    6,629
    
    
    $
    977Long-term debt, net of current maturities
    
    $
    7,644
    
    
    $
    5,176
    
    
    $
    
    
    
    $
    2,143
    
    
    $
    1,336Stockholders/ members equity (deficiency)
    
    $
    7,367
    
    
    $
    14,017
    
    
    $
    (37
    )
    
    $
    (1,755
    )
    
    $
    (2,105
    )
  18




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Overview
   Medical
Products Segment
 Diabetes Supplies
  Retail Program
   19




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Other Medical Products
   Discount Prescription Drug Card Services
  Insurance Services Segment
    20




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Results of Operations
  2006
    
    
    2005
    
    
    2004$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Net product sales
    
    $
    44,788
    
    
    
    51.4
    %
    
    $
    68,688
    
    
    
    78.5
    %
    
    $
    70,982
    
    
    
    95.6
    %Prescription drug card revenue
    
    
    3,983
    
    
    
    4.6
    
    
    
    8,619
    
    
    
    9.8
    
    
    
    3,240
    
    
    
    4.4Service revenue
    
    
    38,445
    
    
    
    44.1
    
    
    
    10,249
    
    
    
    11.7
    
    
    
    
    
    
    
    0.0Total revenue
    
    
    87,216
    
    
    
    100.0
    
    
    
    87,556
    
    
    
    100.0
    
    
    
    74,222
    
    
    
    100.0Cost of product sales
    
    
    18,854
    
    
    
    21.6
    
    
    
    29,689
    
    
    
    33.9
    
    
    
    22,718
    
    
    
    30.6Cost of services
    
    
    31,907
    
    
    
    36.6
    
    
    
    22,219
    
    
    
    25.4
    
    
    
    
    
    
    
    0.0Gross Profit
    
    
    36,455
    
    
    
    41.8
    
    
    
    35,648
    
    
    
    40.7
    
    
    
    51,504
    
    
    
    69.4Operating Expenses:Patient acquisition and related costs
    
    
    3,382
    
    
    
    3.9
    
    
    
    18,077
    
    
    
    20.6
    
    
    
    23,151
    
    
    
    31.2Patient service and fulfillment
    
    
    8,286
    
    
    
    9.5
    
    
    
    14,427
    
    
    
    16.5
    
    
    
    13,672
    
    
    
    18.4General and administrative
    
    
    27,940
    
    
    
    32.0
    
    
    
    26,323
    
    
    
    30.1
    
    
    
    13,116
    
    
    
    17.7Cost of employee stock bonus plan
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0
    
    
    
    14,315
    
    
    
    19.3Provision for doubtful accounts
    
    
    3,625
    
    
    
    4.2
    
    
    
    7,575
    
    
    
    8.7
    
    
    
    12,228
    
    
    
    16.5Depreciation and amortization
    
    
    1,353
    
    
    
    1.6
    
    
    
    980
    
    
    
    1.1
    
    
    
    506
    
    
    
    0.7Amortization of customer contract intangible
    
    
    3,878
    
    
    
    4.4
    
    
    
    646
    
    
    
    0.7
    
    
    
    
    
    
    
    0.0Impairment of investment in joint venture
    
    
    1,292
    
    
    
    1.5
    
    
    
    
    
    
    
    0.0
    
    
    
    
    
    
    
    0.0Gain on sales of business lines
    
    
    (5,000
    )
    
    
    (5.7
    )
    
    
    (15,508
    )
    
    
    (17.7
    )
    
    
    
    
    
    
    0.044,756
    
    
    
    51.3
    
    
    
    52,520
    
    
    
    60.0
    
    
    
    76,988
    
    
    
    103.7Loss from Operations
    
    
    (8,301
    )
    
    
    (9.5
    )
    
    
    (16,872
    )
    
    
    (19.3
    )
    
    
    (25,484
    )
    
    
    (34.3
    )Other expense, net
    
    
    (2,977
    )
    
    
    (3.4
    )
    
    
    (2,947
    )
    
    
    (3.4
    )
    
    
    (940
    )
    
    
    (1.3
    )Net loss
    
    $
    (11,278
    )
    
    
    (12.9
    %)
    
    $
    (19,819
    )
    
    
    (22.7
    %)
    
    $
    (26,424
    )
    
    
    (35.6
    %)
 2006 Compared to 2005
 Revenue.
  21




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Cost of Product Sales .
 Cost of Services.
 Gross Profit Margin.
 Patient Acquisition and Related Costs.
   22




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Patient Service and Fulfillment .
  General and Administrative .
 Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Impairment of Investment in Joint Venture.
 Amortization
of Customer Contract Intangible .
  23




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Gain on Sales of Business Lines .
  Other Expense, Net.
 Net Loss.
 2005 Compared to 2004
 Revenue.
 Cost of Product Sales .
 Cost of Services.
   24




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Patient Acquisition and Related Costs.
 Patient Service and Fulfillment .
  General and Administrative .
 Cost of Employee Stock Bonus Plan .
  25




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Provision for Doubtful Accounts.
 Depreciation and Amortization .
 Amortization of Customer Contract Intangible .
 Gain on Sales of Business Lines .
 Other Expense, Net.
 Net Loss.
 Liquidity and Capital Resources
     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, including scheduled interest payments (1)
    
    $
    24,279
    
    
    $
    1,163
    
    
    $
    3,826
    
    
    $
    8,857
    
    
    $
    10,433Capital lease obligations
    
    
    23
    
    
    
    19
    
    
    
    4
    
    
    
    
    
    
    
    Operating lease payments
    
    
    5,035
    
    
    
    1,387
    
    
    
    2,583
    
    
    
    1,065
    
    
    
    Total
    
    $
    29,337
    
    
    $
    2,569
    
    
    $
    6,413
    
    
    $
    9,922
    
    
    $
    10,433
 (1)
    
    Includes principal and interest payments on our 7.75% convertible notes with a
principal amount of $15 million, which mature in February 2012. The notes are convertible
by the holders and redeemable by us at any time; therefore future payments for interest are
subject to the notes remaining outstanding. Pursuant to the terms of the 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 principal balance
under our line of credit, which is scheduled to terminate April 30, 2010. Future interest
payments under the line of credit are not determinable and vary based upon fluctuations in
interest rates and the balance outstanding under the line of credit at any given point in
time. Also includes principal payment on a non-interest bearing promissory note with a
principal amount of $1.5 million, which matures in February 2008.
 Off-Balance-Sheet Arrangements
   28




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##### Table of Contents



Critical Accounting Policies
   Revenue Recognition and Accounts Receivable
 Medical Product Sales
    29




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##### Table of Contents



CIGNA Agreement
  Allowances for Doubtful Accounts
     30




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##### Table of Contents



Aging of Accounts Receivable as of December 31, 2006< 91
    
    
    91  180
    
    
    181  360
    
    
    > 360Payor
    
    Days
    
    
    Days
    
    
    Days
    
    
    Days
    
    
    TotalMedicare
    
    $
    2,410
    
    
    $
    181
    
    
    $
    489
    
    
    $
    1,276
    
    
    $
    4,356Commercial parties and Medicaid
    
    
    1,176
    
    
    
    744
    
    
    
    1,502
    
    
    
    2,065
    
    
    
    5,487Patients
    
    
    685
    
    
    
    579
    
    
    
    1,313
    
    
    
    3,947
    
    
    
    6,524Other (1)
    
    
    2,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,159Total gross accounts receivable
    
    $
    6,430
    
    
    $
    1,504
    
    
    $
    3,304
    
    
    $
    7,288
    
    
    
    18,526Less: Allowances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,451
    )Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,075
 Aging of Accounts Receivable as of December 31, 2005< 91
    
    
    91  180
    
    
    181  360
    
    
    > 360Payor
    
    Days
    
    
    Days
    
    
    Days
    
    
    Days
    
    
    TotalMedicare
    
    $
    3,001
    
    
    $
    505
    
    
    $
    672
    
    
    $
    1,024
    
    
    $
    5,202Commercial parties and Medicaid
    
    
    943
    
    
    
    1,151
    
    
    
    2,023
    
    
    
    3,090
    
    
    
    7,207Patients
    
    
    954
    
    
    
    1,474
    
    
    
    2,698
    
    
    
    4,961
    
    
    
    10,087Other (2)
    
    
    2,937
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,937Total gross accounts receivable
    
    $
    7,835
    
    
    $
    3,130
    
    
    $
    5,393
    
    
    $
    9,075
    
    
    
    25,433Less: Allowances
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,525
    )Accounts receivable, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    7,908
 (1)
    
    Primarily represents amounts due from CIGNA and other clients of our Insurance
Services segment.(2)
    
    Primarily represents amounts due from the third-party claims adjudicator for our
discount prescription drug card business.
 Allowances for Costs Related to Billings in Process
   31




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##### Table of Contents



Patient Acquisition and Related Costs
 Reporting on Advertising Costs
  Recent Accounting Pronouncements
 Share-Based Payment
 Accounting Changes and Error Corrections Accounting Changes Reporting
Accounting Changes in Interim Financial Statements,
 Accounting for Uncertainty in
Income Taxes
  32




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##### Table of Contents



Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities
 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
   33




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##### Table of Contents




    
    Our ability to successfully maintain our Insurance Services segment
    
    Competitive bidding for DME and supplies
    
    Increases in the costs of medical products dispensed
    
    Our history of operating losses and the possibility that we will incur significant additional operating losses
    
    An ability to raise the capital that we will need to sustain our operations
    
    Our ability to attract new patients and retain existing patients
    
    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
    
    Our ability to obtain and maintain intellectual property protection for our technologies
    
    Adverse resolution of current or future lawsuits or investigations
    
    Significant fluctuations in our revenue and operating results, which have occurred in the past and which could 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
   34




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##### Table of Contents



Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
    35




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data.
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReports of Independent Registered Public Accounting Firms
    
    
    37Consolidated Balance Sheets as of December 31, 2006 and 2005
    
    
    39Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004
    
    
    40Consolidated Statements of Stockholders / Members Equity (Deficiency) for the years ended December 31, 2006, 2005 and 2004
    
    
    41Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    42Notes to Consolidated Financial Statements
    
    
    43
  36




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
    Share-Based
Payment
 /s/Ernst & Young LLPCertified Public Accountants
 
  37




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     /s/ RACHLIN COHEN & HOLTZ LLP
 
  38




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##### Table of Contents



NATIONSHEALTH, INC.
 
 CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    4,224
    
    
    $
    13,971Short-term investments
    
    
    
    
    
    
    923Accounts receivable, net of allowances of $12,451 and $17,525,
respectively
    
    
    6,075
    
    
    
    7,908Inventory
    
    
    1,636
    
    
    
    1,285Costs related to billings in process, net
    
    
    565
    
    
    
    874Other receivables
    
    
    219
    
    
    
    1,877Prepaid expenses and other current assets
    
    
    529
    
    
    
    750Total current assets
    
    
    13,248
    
    
    
    27,588Property and equipment, net
    
    
    3,557
    
    
    
    3,747Investment in joint venture
    
    
    
    
    
    
    1,488Customer contract intangible, net
    
    
    11,632
    
    
    
    15,510Other assets, net
    
    
    1,951
    
    
    
    1,526Total assets
    
    $
    30,388
    
    
    $
    49,859LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    3,026
    
    
    $
    13,387Accrued expenses
    
    
    9,069
    
    
    
    12,030Deferred revenue, current portion
    
    
    
    
    
    
    235Line of credit
    
    
    2,500
    
    
    
    2,500Total current liabilities
    
    
    14,595
    
    
    
    28,152Long-Term Liabilities:Deferred revenue
    
    
    
    
    
    
    1,100Convertible notes, related party, net
    
    
    6,316
    
    
    
    5,176Promissory note payable, net
    
    
    1,328
    
    
    
    Other long-term liabilities
    
    
    782
    
    
    
    1,414Total long-term liabilities
    
    
    8,426
    
    
    
    7,690Commitments and ContingenciesStockholders Equity:Preferred stock, $0.0001 par value; 50,000,000 shares authorized;
none issued
    
    
    
    
    
    
    Common stock, $0.0001 par value; 250,000,000 shares authorized;
28,906,708 and 27,865,538 issued and 28,837,760 and 27,809,641
outstanding, respectively
    
    
    3
    
    
    
    3Additional paid-in capital
    
    
    70,816
    
    
    
    68,949Unearned compensation
    
    
    
    
    
    
    (2,761
    )Accumulated deficit
    
    
    (63,452
    )
    
    
    (52,174
    )Total stockholders equity
    
    
    7,367
    
    
    
    14,017Total liabilities and stockholders equity
    
    $
    30,388
    
    
    $
    49,859
 The accompanying notes are an integral part of these consolidated financial statements.
  39




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##### Table of Contents



NATIONSHEALTH, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Revenue:Net product sales
    
    $
    44,788
    
    
    $
    68,688
    
    
    $
    70,982Prescription drug card revenue
    
    
    3,983
    
    
    
    8,619
    
    
    
    3,240Service revenue
    
    
    38,445
    
    
    
    10,249
    
    
    
    87,216
    
    
    
    87,556
    
    
    
    74,222Cost of product sales
    
    
    18,854
    
    
    
    29,689
    
    
    
    22,718Cost of services
    
    
    31,907
    
    
    
    22,219
    
    
    
    Gross Profit
    
    
    36,455
    
    
    
    35,648
    
    
    
    51,504Operating Expenses:Patient acquisition and related costs
    
    
    3,382
    
    
    
    18,077
    
    
    
    23,151Patient service and fulfillment
    
    
    8,286
    
    
    
    14,427
    
    
    
    13,672General and administrative
    
    
    27,940
    
    
    
    26,323
    
    
    
    13,116Cost of employee stock bonus plan
    
    
    
    
    
    
    
    
    
    
    14,315Provision for doubtful accounts
    
    
    3,625
    
    
    
    7,575
    
    
    
    12,228Depreciation and amortization
    
    
    1,353
    
    
    
    980
    
    
    
    506Amortization of customer contract intangible
    
    
    3,878
    
    
    
    646
    
    
    
    Impairment of investment in joint venture
    
    
    1,292
    
    
    
    
    
    
    
    Gain on sales of business lines
    
    
    (5,000
    )
    
    
    (15,508
    )
    
    
    44,756
    
    
    
    52,520
    
    
    
    76,988Loss from Operations
    
    
    (8,301
    )
    
    
    (16,872
    )
    
    
    (25,484
    )Other Income (Expense):Interest income
    
    
    257
    
    
    
    150
    
    
    
    3Interest expense, related party
    
    
    (2,448
    )
    
    
    (1,878
    )
    
    
    Interest expense
    
    
    (786
    )
    
    
    (1,219
    )
    
    
    (943
    )(2,977
    )
    
    
    (2,947
    )
    
    
    (940
    )Net Loss
    
    $
    (11,278
    )
    
    $
    (19,819
    )
    
    $
    (26,424
    )Loss per share  basic and diluted
    
    $
    (0.40
    )
    
    $
    (0.75
    )
    
    $
    (1.01
    )Weighted average shares outstanding  basic and diluted
    
    
    27,895
    
    
    
    26,345
    
    
    
    26,154
 The accompanying notes are an integral part of these consolidated financial statements.
  40




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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, 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,888Repurchases of common stock
    
    
    (56
    )
    
    
    
    
    
    
    (389
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (389
    )Restricted stock awards
    
    
    377
    
    
    
    
    
    
    
    2,921
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,761
    )
    
    
    
    
    
    
    160Warrants issued to CIGNA
    
    
    
    
    
    
    
    
    
    
    15,768
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,768Warrant exercises
    
    
    737
    
    
    
    
    
    
    
    3,686
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,686Accelerated vesting of stock options
    
    
    
    
    
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    78Stock options issued to consultant
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,819
    )
    
    
    (19,819
    )Balance, December 31, 2005
    
    
    27,810
    
    
    
    3
    
    
    
    68,949
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,761
    )
    
    
    (52,174
    )
    
    
    14,017Issuances of common stock
    
    
    52
    
    
    
    
    
    
    
    395
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    395Repurchases of common stock
    
    
    (36
    )
    
    
    
    
    
    
    (75
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75
    )Restricted stock awards, net of
forfeitures
    
    
    610
    
    
    
    
    
    
    
    1,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,328Warrant exercises
    
    
    400
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,000Reclassification of unearned
compensation
upon adoption of SFAS No. 123 (R)
    
    
    
    
    
    
    
    
    
    
    (2,761
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,761
    
    
    
    
    
    
    
    Employee stock options, net of
forfeitures
    
    
    
    
    
    
    
    
    
    
    963
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    963Employee stock option exercises
    
    
    2
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,278
    )
    
    
    (11,278
    )Balance, December 31, 2006
    
    
    28,838
    
    
    $
    3
    
    
    $
    70,816
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (63,452
    )
    
    $
    7,367
 The accompanying notes are an integral part of these consolidated financial statements.
  41




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NATIONSHEALTH, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Cash Flows from Operating Activities:Net loss
    
    $
    (11,278
    )
    
    $
    (19,819
    )
    
    $
    (26,424
    )Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities:Gain on sales of business lines
    
    
    (5,000
    )
    
    
    (15,508
    )
    
    
    Provision for doubtful accounts
    
    
    3,625
    
    
    
    7,575
    
    
    
    12,228Provision for sales allowances and returns
    
    
    2,210
    
    
    
    2,086
    
    
    
    2,220Reserve for (recovery of) costs related to billings in process
    
    
    (280
    )
    
    
    1,663
    
    
    
    2,272Depreciation and amortization
    
    
    1,869
    
    
    
    1,063
    
    
    
    506Amortization of note discount
    
    
    1,177
    
    
    
    787
    
    
    
    Amortization of deferred loan costs and other non-cash interest charges, net
    
    
    264
    
    
    
    571
    
    
    
    Amortization of customer contract intangible
    
    
    3,878
    
    
    
    646
    
    
    
    Stock-based compensation
    
    
    2,291
    
    
    
    309
    
    
    
    13,707Impairment of investment in joint venture
    
    
    1,292
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (3,115
    )
    
    
    (7,323
    )
    
    
    (18,175
    )Inventory
    
    
    (351
    )
    
    
    32
    
    
    
    (885
    )Costs related to billings in process
    
    
    589
    
    
    
    (1,100
    )
    
    
    (2,855
    )Prepaid expenses and other assets
    
    
    148
    
    
    
    (1,120
    )
    
    
    (654
    )Accounts payable and accrued expenses
    
    
    (15,644
    )
    
    
    6,541
    
    
    
    4,277Accounts payable, related party
    
    
    
    
    
    
    1,016
    
    
    
    4,050Deferred revenue
    
    
    (1,335
    )
    
    
    1,335
    
    
    
    Net cash and cash equivalents used in operating activities
    
    
    (19,660
    )
    
    
    (21,246
    )
    
    
    (9,733
    )Cash Flows from Investing Activities:Proceeds from sales of business lines
    
    
    7,600
    
    
    
    14,400
    
    
    
    Dissolution of (investment in) joint venture
    
    
    1,530
    
    
    
    (1,530
    )
    
    
    Maturity (purchases) of available for sale investments, net
    
    
    923
    
    
    
    (823
    )
    
    
    (100
    )Investment released from (placed in) trust
    
    
    
    
    
    
    2,000
    
    
    
    (2,000
    )Acquisition of property and equipment
    
    
    (1,669
    )
    
    
    (2,393
    )
    
    
    (1,592
    )Acquisition of patient lists
    
    
    (280
    )
    
    
    
    
    
    
    Net cash and cash equivalents provided by (used in) investing activities
    
    
    8,104
    
    
    
    11,654
    
    
    
    (3,692
    )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
    
    
    2,000
    
    
    
    3,686
    
    
    
    125Net draws on (repayments of) lines of credit
    
    
    100
    
    
    
    (119
    )
    
    
    1,819Payment of debt issuance costs
    
    
    (100
    )
    
    
    (907
    )
    
    
    Repurchases of common stock
    
    
    (75
    )
    
    
    (389
    )
    
    
    Principal payments under capital lease obligations
    
    
    (133
    )
    
    
    (112
    )
    
    
    Proceeds from reverse merger
    
    
    
    
    
    
    
    
    
    
    20,270Payments for conversion of membership interests
    
    
    
    
    
    
    
    
    
    
    (3,000
    )Payment of merger costs, net
    
    
    
    
    
    
    
    
    
    
    (2,954
    )Proceeds from exercise of employee stock options
    
    
    17
    
    
    
    
    
    
    
    Principal payments on member notes payable
    
    
    
    
    
    
    
    
    
    
    (1,343
    )Net cash and cash equivalents provided by financing activities
    
    
    1,809
    
    
    
    20,659
    
    
    
    14,917Net (Decrease) Increase in Cash and Cash Equivalents
    
    
    (9,747
    )
    
    
    11,067
    
    
    
    1,492Cash and Cash Equivalents, Beginning of Year
    
    
    13,971
    
    
    
    2,904
    
    
    
    1,412Cash and Cash Equivalents, End of Year
    
    $
    4,224
    
    
    $
    13,971
    
    
    $
    2,904Supplemental Disclosure of Cash Flow Information:Interest Paid
    
    $
    1,578
    
    
    $
    1,534
    
    
    $
    770Non-cash Financing Activities:Payment of bonuses with stock
    
    $
    395
    
    
    $
    
    
    
    $
    Issuance of promissory note for joint venture termination fee
    
    $
    1,500
    
    
    $
    
    
    
    $
    Equipment acquired under capital leases
    
    $
    
    
    
    $
    262
    
    
    $
    
 The accompanying notes are an integral part of these consolidated financial statements.
  42




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##### Table of Contents



NATIONSHEALTH, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006
 1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION
 Business
  Merger and Accounting Treatment
      43




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Principles of Consolidation
  2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Cash and Cash Equivalents
  Short-term Investments
  Accounts Receivable
   44




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Inventory
  Costs Related to Billings in Process
  Customer
Contract Intangible
  Revenue Recognition
   45




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    Patient Acquisition and Related Costs
     46




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Patient Service and Fulfillment Expenses
  Loss Per Share
  Use of Estimates
  Fair Value of Financial Instruments
    Concentrations of Credit Risk
   47




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes
 Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities
 3. LIQUIDITY AND PROFITABILITY CONSIDERATIONS
   48




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Amended and Restated CIGNA Agreement
  Revolving Line of Credit .
  Cost Reductions
  Sales of Lines of Business
  Summary
   49




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 4. CIGNA AGREEMENT
      5. US BIO JOINT VENTURE
     50




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
    6. SALES OF LINES OF BUSINESS
   7. PROPERTY AND EQUIPMENT
  December 31,Estimated Useful
    
    2006
    
    
    2005Life (Years)
    
    (in thousands)Office and computer equipment
    
    3-5
    
    $
    2,138
    
    
    $
    1,685Furniture and fixtures
    
    5
    
    
    806
    
    
    
    686Leasehold improvements
    
    Up to 5
    
    
    705
    
    
    
    652Software
    
    3
    
    
    3,329
    
    
    
    2,4146,978
    
    
    
    5,437Less accumulated depreciation
and amortization
    
    
    
    
    3,421
    
    
    
    1,690$
    3,557
    
    
    $
    3,747
  51




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   8. ACCRUED EXPENSES
  December 31,2006
    
    
    2005Accrued compensation
    
    $
    2,310
    
    
    $
    3,201Accrued media
    
    
    53
    
    
    
    1,950Accrued refunds
    
    
    1,583
    
    
    
    1,333Accrued fulfillment costs
    
    
    1,356
    
    
    
    272Accrued call center services
    
    
    21
    
    
    
    1,907Accrued purchase price adjustment
    
    
    1,000
    
    
    
    Other
    
    
    2,746
    
    
    
    3,367$
    9,069
    
    
    $
    12,030
 9. LINE OF CREDIT
    52




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 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
     53




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NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
     54




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   11. STOCKHOLDERS EQUITY
 Preferred Stock
  Warrants
   55




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   Common Stock Reserved
  12. EMPLOYEE STOCK COMPENSATION AND BENEFIT PLANS
    Accounting for Stock Issued to Employees
  56




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 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 net loss
    
    $
    (20,873
    )
    
    $
    (26,770
    )Loss per share  basic and dilutedAs reported
    
    $
    (0.75
    )
    
    $
    (1.01
    )Pro forma
    
    $
    (0.79
    )
    
    $
    (1.02
    )
 Share-Based Payment
   57




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  2006 Grants
    
    
    2005 Grants
    
    
    2004 GrantsWeighted average expected volatility
    
    
    58
    %
    
    
    49
    %
    
    
    50
    %Range of expected volatility
    
    
    50% - 70
    %
    
    
    45% - 50
    %
    
    
    50
    %Range of risk free interest rate
    
    
    4.35% - 5.13
    %
    
    
    3.88% - 4.44
    %
    
    
    3.27
    %Expected term
    
    5.0 years
    
    5.0 years
    
    6.0 yearsExpected annual forfeiture rate
    
    
    20
    %
    
    
    0
    %
    
    
    0
    %Expected dividend rate
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
   WeightedWeighted
    
    
    AverageAverage
    
    
    RemainingExercise
    
    
    ContractualShares
    
    
    Price
    
    
    Term (years)Outstanding at beginning of year
    
    
    1,834,673
    
    
    $
    6.87Granted
    
    
    641,000
    
    
    
    4.08Exercised
    
    
    (2,500
    )
    
    
    6.87Forfeited
    
    
    (828,667
    )
    
    
    6.76Expired
    
    
    (273,999
    )
    
    
    6.68Outstanding at end of year
    
    
    1,370,507
    
    
    $
    5.67
    
    
    
    4.51Vested and exercisable at end of year
    
    
    560,315
    
    
    $
    6.92
    
    
    
    4.04
    58




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Weighted AverageGrant DateShares
    
    
    Fair ValueNonvested restricted stock grants at beginning of year
    
    
    376,606
    
    
    $7.76Granted
    
    
    795,000
    
    
    2.49Vested
    
    
    (192,244
    )
    
    6.91Forfeited
    
    
    (185,000
    )
    
    2.70Nonvested restricted stock grants at end of year
    
    
    794,362
    
    
    3.86
  Employee Savings Plan
  Bonus Plan and Trust
  13. INCOME TAXES
 Accounting for Income Taxes
  59




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
   December 31,2006
    
    
    2005Deferred tax assets:Net operating loss carry forwards
    
    $
    10,910
    
    
    $
    5,697Stock-based compensation
    
    
    5,018
    
    
    
    4,639Allowances for doubtful accounts, claims denials and returns
    
    
    5,098
    
    
    
    6,943Reserve for costs related to billings in process
    
    
    144
    
    
    
    458Accrued payroll
    
    
    539
    
    
    
    586Deferred revenue
    
    
    
    
    
    
    502Other
    
    
    1,193
    
    
    
    169Total deferred tax assets
    
    
    22,902
    
    
    
    18,994Less valuation allowance
    
    
    (22,296
    )
    
    
    (18,278
    )606
    
    
    
    716Deferred tax liabilities:Property and equipment
    
    
    
    
    
    
    (141
    )Software development costs
    
    
    (501
    )
    
    
    (435
    )Other
    
    
    (105
    )
    
    
    (140
    )Total deferred tax liabilities
    
    
    (606
    )
    
    
    (716
    )Net deferred taxes
    
    $
    
    
    
    $
    
    60




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  2006
    
    
    2005
    
    
    2004 *Tax at U.S. statutory rate
    
    
    34.0
    %
    
    
    34.0
    %
    
    
    34.0
    %State taxes, net of federal benefit
    
    
    3.5
    %
    
    
    3.5
    %
    
    
    3.6
    %Non-deductible items
    
    
    (1.1
    %)
    
    
    (0.9
    %)
    
    
    (0.2
    %)Change in valuation allowance
    
    
    (36.4
    %)
    
    
    (36.6
    %)
    
    
    (56.5
    %)Establishment of deferred tax asset at merger date
    
    
    
    %
    
    
    
    %
    
    
    19.1
    %Income tax expense
    
    
    
    %
    
    
    
    %
    
    
    
    %
  14. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
 Leases and Debt Maturities
      61




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  Capital
    
    
    Operating
    
    
    DebtYear Ending December 31,
    
    Leases
    
    
    Leases
    
    
    Maturities2007
    
    $
    19
    
    
    $
    1,387
    
    
    $
    2008
    
    
    4
    
    
    
    1,328
    
    
    
    1,5002009
    
    
    
    
    
    
    1,255
    
    
    
    2010
    
    
    
    
    
    
    853
    
    
    
    4,7002011
    
    
    
    
    
    
    212
    
    
    
    Thereafter
    
    
    
    
    
    
    
    
    
    
    10,30023
    
    
    $
    5,035
    
    
    $
    16,500Less: amounts representing interest
    
    
    6Net present value of capital lease obligations
    
    $
    17
 Medicare Audit
   Equity Participation Fee
   62




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Letter of Credit
  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.
    63




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 Notes Payable to Members of NationsHealth Holdings
  15. SEGMENT INFORMATION
    64




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
  2006
    
    
    2005Revenue:Medical Products (1)
    
    $
    48,771
    
    
    $
    77,307Insurance Services
    
    
    38,445
    
    
    
    10,249Consolidated revenue
    
    $
    87,216
    
    
    $
    87,556Segment profit (loss):Medical Products (2)
    
    $
    9,520
    
    
    $
    5,066Insurance Services
    
    
    2,574
    
    
    
    (13,440
    )Unallocated amounts:Amortization of customer contract intangible
    
    
    (3,878
    )
    
    
    (646
    )Gain on sales of business lines
    
    
    5,000
    
    
    
    15,508Other corporate expenses
    
    
    (21,517
    )
    
    
    (23,360
    )Consolidated loss from operations
    
    $
    (8,301
    )
    
    $
    (16,872
    )
 (1)
    
    Revenue for the Medical Products segment includes net revenue from the Prescription
Drug Card Business, which was sold on September 5, 2006 and product sales from the
respiratory division that was sold on September 2, 2005 (see Note 6).(2)
    
    Segment profit for Medical Products for the year ended December 31, 2006 includes a
gain of approximately $977,000 related to the settlement of a vendor obligation.
    2006
    
    
    2005Medical Products
    
    $
    7,427
    
    
    $
    11,745Insurance Services
    
    
    3,442
    
    
    
    1,346Unallocated
    
    
    19,519
    
    
    
    36,768Consolidated assets
    
    $
    30,388
    
    
    $
    49,859
  65




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 16. MAJOR SUPPLIERS
  Percentage
    
    
    Amountof
    
    
    ofPurchases
    
    
    PurchasesYear Ended December 31, 2006Supplier A
    
    
    25
    %
    
    $
    3,964Supplier D
    
    
    24
    %
    
    
    3,931Supplier F
    
    
    20
    %
    
    
    3,137Supplier B
    
    
    12
    %
    
    
    2,000Supplier C
    
    
    10
    %
    
    
    1,67991
    %
    
    $
    14,711Year Ended December 31, 2005Supplier A
    
    
    32
    %
    
    $
    8,815Supplier D
    
    
    21
    %
    
    
    5,646Supplier E
    
    
    10
    %
    
    
    2,83063
    %
    
    $
    17,291Year Ended December 31, 2004Supplier A
    
    
    39
    %
    
    $
    9,642Supplier D
    
    
    15
    %
    
    
    3,79454
    %
    
    $
    13,436
  66




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##### Table of Contents



NATIONSHEALTH, INC.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)
 17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 Quarter EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 31(in thousands)2006Revenue
    
    $
    25,015
    
    
    $
    19,616
    
    
    $
    19,796
    
    
    $
    22,789Gross profit
    
    
    649
    
    
    
    10,536
    
    
    
    13,133
    
    
    
    12,137Net (loss) income
    
    
    (13,530
    )
    
    
    (4,997
    )(1)
    
    
    6,020
    (2)
    
    
    1,229
    (3)(Loss) earnings per
share  basic and
diluted *
    
    $
    (0.49
    )
    
    $
    (0.18
    )
    
    $
    0.22
    
    
    $
    0.042005Revenue
    
    $
    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
    (4)
    
    
    (17,937
    )(5)(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
    )
  (1)
    
    Results for the quarter ended June 30, 2006 reflect an impairment charge of approximately
$733,000 to write down the investment in the Companys joint venture to its estimated net
realizable value as of June 30, 2006 (see Note 5) and a gain of approximately $1,688,000 from
a vendor settlement related to amounts that had been accrued in a prior quarter.(2)
    
    Results for the quarter ended September 30, 2006 reflect a gain of approximately $5,000,000
related to the sale of the Companys Discount Prescription Drug Card Business (see Note 6), a
gain of approximately $977,000 from the termination of a distribution agreement with a vendor
and an additional impairment charge of approximately $559,000 to write down the investment in
the Companys joint venture to its estimated net realizable value as of September 30, 2006
(see Note 5).(3)
    
    Results for the quarter ended December 31, 2006 reflect approximately $475,000 of expense
related to executive severance and the reversal of approximately $800,000 related to year-end
bonus amounts that had been accrued in prior quarters.(4)
    
    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).(5)
    
    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.
  67




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NATIONSHEALTH, INC.
 SCHEDULE II
 VALUATION AND QUALIFYING ACCOUNTS
 (In thousands)
 Charged(Credited)
    
    
    
    
    
    
    
    
    
    
    BalanceBalance at
    
    
    to Costs
    
    
    Charged
    
    
    
    
    
    
    at EndBeginning of
    
    
    and
    
    
    to Other
    
    
    
    
    
    
    ofYear ended December 31:
    
    Period
    
    
    Expenses
    
    
    Accounts
    
    
    Deductions
    
    
    Period2006Deducted from asset accounts:Allowances for doubtful accounts and claim
denials
    
    $
    17,525
    
    
    $
    3,625
    
    
    $
    1,323
    (a)
    
    $
    (10,022
    )
    
    $
    12,451Allowances for costs related to billings in
process
    
    
    1,217
    
    
    
    (280
    )
    
    
    
    
    
    
    (554
    )
    
    
    383Valuation allowance for deferred tax assets
    
    
    18,278
    
    
    
    
    
    
    
    4,018
    
    
    
    
    
    
    
    22,296Reserves:Reserve for sales returns
    
    
    1,333
    
    
    
    
    
    
    
    887
    (b)
    
    
    (637
    )
    
    
    1,5832005Deducted 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
    )
    
    
    1,217Valuation allowance for deferred tax assets
    
    
    10,993
    
    
    
    
    
    
    
    7,285
    
    
    
    
    
    
    
    18,278Reserves: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
    )
    
    
    1,606Valuation allowance for deferred tax assets
    
    
    2,192
    
    
    
    
    
    
    
    8,801
    
    
    
    
    
    
    
    10,993Reserves:Reserve for sales returns
    
    
    118
    
    
    
    
    
    
    
    2,220
    (b)
    
    
    (728
    )
    
    
    1,610
 (a)
    
    Allowances for claim denials and other sales allowances netted against revenue.(b)
    
    Allowances for sales returns netted against revenue.
  68




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
  
 Item 9A. Controls and Procedures.
  
 Item 9B. Other Information.
   69




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##### Table of Contents



PART III
 
 Item 10. Directors, Executive Officers and Corporate Governance.
  Code of Ethics
 www.nationshealth.com
 
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
   70




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##### Table of Contents



Securities Authorized for Issuance Under Equity Compensation Plans
  Weighted-average
    
    Number of securities remainingNumber of securities to
    
    exercise price of
    
    available for future issuance 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
    
    
    1,370,507
    
    
    $
    5.67
    
    
    
    1,588,550Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,370,507
    
    
    $
    5.67
    
    
    
    1,588,550
 
 Item 13. Certain Relationships and Related Transactions, and Director Independence.
  
 Item 14. Principal Accountant Fees and Services.
   71




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##### Table of Contents



PART IV
 
 Item 15. Exhibits and Financial Statement Schedules.
 (a)
    
    1. Consolidated Financial Statements.
         72




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SIGNATURES
  NATIONSHEALTH, INC.By:
    /s/ Glenn M. ParkerGlenn M. Parker, M.D.Chief Executive Officer March 30, 2007
  Name
    
    Title
    
    Date/s/ Glenn M. Parker
    
    Chief Executive Officer and
Director
    
    March 30, 2007Glenn M. Parker
    
    (Principal Executive Officer)/s/ Timothy Fairbanks
    
    Chief Financial Officer and
Director
    
    March 30, 2007Timothy Fairbanks
    
    (Principal Financial Officer)/s/ Bryan Happ
    
    Chief Accounting Officer
    
    March 30, 2007Bryan Happ
    
    (Principal Accounting Officer)/s/ Arthur R. Spector
    
    Chairman of the Board of Directors
    
    March 30, 2007Arthur R. Spector/s/ Lewis P. Stone
    
    Director, President and Chief
    
    March 30, 2007Lewis P. Stone
    
    Information Officer/s/ Elliot F. Hahn
    
    Director
    
    March 30, 2007Elliot F. Hahn, Ph.D./s/Gary D. Small
    
    Director
    
    March 30, 2007Gary D. Small/s/ Raymond N. Steinman
    
    Director
    
    March 30, 2007Raymond N. Steinman/s/ Michael D. Tabris
    
    Director
    
    March 30, 2007Michael D. Tabris/s/ Mark H. Rachesky
    
    Director
    
    March 30, 2007Mark H. Rachesky, M.D./s/ Don K. Rice
    
    Director
    
    March 30, 2007Don K. Rice/s/ Richard R. Howard
    
    Director
    
    March 30, 2007Richard R. Howard/s/ George F. Raymond
    
    Director
    
    March 30, 2007George F. Raymond
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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
NationsHealth, Inc. 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 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 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 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 NationsHealth,
Inc. to MHR Capital Partners (100) LP dated February 28,
2005. Filed as Exhibit 4.1 to the Companys 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 NationsHealth,
Inc. to MHR Capital Partners LP dated February 28, 2005.
Filed as Exhibit 4.2 to the Companys Form 8-K (File No.
000-50348) filed March 4, 2005 and incorporated herein by
reference.
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Exhibit No.
    
    Description4.8
    
    7 3/4% Secured Convertible Note issued by NationsHealth,
Inc. to OTQ LLC dated February 28, 2005. Filed as Exhibit
4.3 to the Companys 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.4.10
    
    Warrant Clarification Agreement, dated March 28, 2007, to the Warrant
Agreement, dated as of August 25, 2003, by and between NationsHealth, Inc. and Continental Stock Transfer & Trust Company. +4.11
    
    Unit Purchase Option Clarification
Agreement, dated March 28, 2007, to the Unit Purchase Option, dated
as of August 25, 2003 issued by NationsHealth, Inc. to
EarlybirdCapital, Inc. +10.1*
    
    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. Couto. 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 December 23, 2002, 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.10.11
    
    Lease Agreement with Liberty Property Limited Partnership
dated February 9, 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.
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Exhibit No.
    
    Description10.13
    
    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
    
    First Amendment of Sublease Agreement with D & K
Healthcare Resources Inc. for the premises located at 2955
West Corporate Lakes Boulevard, Weston, Florida, dated May
1, 2006. Filed as Exhibit 10.3 to the Companys Form 10-Q
(File No. 000-50348) filed August 14, 2006 and
incorporated herein by reference.10.15
    
    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.10.16
    
    Industrial Lease Agreement between Industrial Property
Fund III, L.P. as Landlord, and NationsHealth, Inc. and
United States Pharmaceutical Group, L.L.C. collectively,
as Tenant, commencing on September 4, 2006. Filed as
Exhibit 10.4 to the Companys Form 10-Q (File No.
000-50348) filed November 13, 2006 and incorporated herein
by reference.10.17
    
    Property Lease between Orange Blossom Investments, LLC,
and NationsHealth, Inc., dated October 13, 2006. Filed as
Exhibit 10.10 to the Companys Form 10-Q (File No.
000-50348) filed November 13, 2006 and incorporated herein
by reference.10.18
    
    Lease Agreement between NationsHealth, Inc., as Lessee,
and Farnam Street Financial, Inc., as Lessor, dated
February 5, 2007. Filed as Exhibit 99.1 to the Companys
Form 8-K (File No. 000-50348) filed February 9, 2007 and
incorporated herein by reference.10.19*
    
    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.10.20*
    
    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.10.21*
    
    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.10.22*
    
    NationsHealth, Inc. 2004 Incentive Stock Plan, dated
August 30, 2004. Filed as Annex I to the Companys
Schedule 14A (File No. 000-50348) filed August 13, 2004
and incorporated herein by reference.10.23
    
    Second Amended and Restated Revolving Credit and Security
Agreement among NationsHealth, Inc., United States
Pharmaceutical Group, L.L.C., 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.10.24
    
    First Amendment to Second Amended and Restated Revolving
Credit and Security Agreement dated August 11, 2006, by
and between CapitalSource Finance LLC, United States
Pharmaceutical Group, L.L.C., NationsHealth Holdings,
L.L.C. and NationsHealth, Inc. Filed as Exhibit 10.7 to
the Companys Form 10-Q (File No. 000-50348) filed
November 13, 2006 and incorporated herein by reference.
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Exhibit No.
    
    Description10.25
    
    Waiver, Consent and Second Amendment to Second Amended and
Restated Revolving Credit and Security Agreement dated
September 27, 2006, by and between CapitalSource Finance
LLC, United States Pharmaceutical Group, L.L.C.,
NationsHealth Holdings, L.L.C. and NationsHealth, Inc.
Filed as Exhibit 10.8 to the Companys Form 10-Q (File No.
000-50348) filed November 13, 2006 and incorporated herein
by reference.10.26
    
    Third Amendment to Second Amended and Restated Revolving
Credit and Security Agreement dated October 2, 2006, by
and between CapitalSource Finance LLC, United States
Pharmaceutical Group, L.L.C., NationsHealth Holdings,
L.L.C. and NationsHealth, Inc. Filed as Exhibit 10.9 to
the Companys Form 10-Q (File No. 000-50348) filed
November 13, 2006 and incorporated herein by reference.10.27**
    
    Amended and Restated Preferred Vendor Agreement by and
among Connecticut General Life Insurance Company, United
States Pharmaceutical Group, L.L.C. and NationsHealth,
Inc., dated as of May 26, 2006. Filed as Exhibit 10.2 to
the Companys Form 10-Q (File No. 000-50348) filed August
14, 2006 and incorporated herein by reference.10.28**
    
    Limited Liability Company Agreement of NationsHealth
Specialty Rx, LLC, dated August 3, 2005, by and between US
Bioservices Corporation and NationsHealth, Inc. 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.10.29
    
    Agreement to Dissolve Limited Liability Company and
Promissory Note, dated as of September 27, 2006, between
NationsHealth, Inc. and US Bioservices Corporation. Filed
as Exhibit 10.1 to the Companys Form 8-K (File No.
000-50348) filed October 3, 2006 and incorporated herein
by reference.10.30*
    
    Amendment to the Employment Agreement Between
NationsHealth, Inc. and Robert E. Tremain dated as of
March 8, 2006. Filed as Exhibit 10.25 to the Companys
Form 10-K (File No. 000-50348) filed March 31, 2006 and
incorporated herein by reference.10.31*
    
    Amendment to the Employment Agreement Between
NationsHealth, Inc. and Robert E. Tremain dated as of June
14, 2006. Filed as Exhibit 10.1 to the Companys Form 8-K
(File No. 000-50348) filed June 14, 2006 and incorporated
herein by reference.10.32*
    
    Amendment to the Employment Agreement Between
NationsHealth, Inc. and Robert E. Tremain dated as of
October 5, 2006. Filed as Exhibit 10.5 to the Companys
Form 10-Q (File No. 000-50348) filed November 13, 2006 and
incorporated herein by reference.10.33*
    
    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.10.34*
    
    Separation Agreement and Waiver and General Release of
Claims dated June 30, 2006, between NationsHealth, Inc.
and Tracy M. Schmidt, Esq. Filed as Exhibit 10.1 to the
Companys Form 10-Q (File No. 000-50348) filed August 14,
2006 and incorporated herein by reference.10.35*
    
    Separation Agreement and General Release dated October 5,
2006, between NationsHealth, Inc. and Gregory Couto.
Filed as Exhibit 10.1 to the Companys Form 8-K (File No.
000-50348) filed October 16, 2006 and incorporated herein
by reference.10.36*
    
    Separation Agreement and General Release dated November
20, 2006, between NationsHealth, Inc. and Robert E.
Tremain. Filed as Exhibit 99.1 to the Companys Form 8-K
(File No. 000-50348) filed November 28, 2006 and
incorporated herein by reference.10. 37
    
    Stockholders Agreement, dated as of March 9, 2004, as
amended 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 Schedule 14A (File No.
000-50348) filed August 13, 2004 and incorporated herein
by reference.
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Exhibit No.
    
    Description10.38
    
    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 Schedule 14A (File No.
000-50348) filed August 13, 2004 and incorporated herein
by reference.10.39
    
    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.10.40*
    
    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.10.41
    
    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.10.42
    
    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.10.43
    
    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.10.44
    
    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.10.45*
    
    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.10.46*
    
    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.10.47*
    
    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.10.48*
    
    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.10.49
    
    Investment Unit Purchase Agreement, dated February 28,
2005, by and among NationsHealth, Inc., 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.10.50
    
    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.10.51
    
    Registration Rights Agreement, dated February 28, 2005,
between NationsHealth, Inc. 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.
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Exhibit No.
    
    Description10.52
    
    Stockholders Agreement, dated February 28, 2005, by and
among NationsHealth, Inc., 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.10.53
    
    Consent and Waiver, dated as of February 28, 2005, among
NationsHealth, Inc. and the stockholders of NationsHealth,
Inc. 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.10.54
    
    Asset Purchase Agreement, dated as of September 5, 2006,
by and among NationsHealth, Inc., United States
Pharmaceutical Group, L.L.C. and HealthTran LLC. Filed as
Exhibit 99.1 to the Companys Form 8-K (File No.
000-50348) filed September 6, 2006 and incorporated herein
by reference.10.55
    
    Agreement of Termination, dated as of September 13, 2006,
by and among NationsHealth, Inc., United States
Pharmaceutical Group, L.L.C. and Becton, Dickinson and
Company. Filed as Exhibit 99.1 to the Companys Form 8-K
(File No. 000-50348) filed September 13, 2006 and
incorporated herein by reference.21
    
    Subsidiaries of the 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
Section 302 of the Sarbanes-Oxley Act of 2002.+31.2
    
    Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.+32.1
    
    Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.≠
      79