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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



|x |  | QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------



For the quarterly period ended June 30, 2003



OR



| ̈ |  | TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
|- |  | ----------------------------------------------------------------



For the transition period from  to



Commission File Number 1-15445



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DRUGMAX, INC.,

(Formerly DrugMax.com, Inc.)

(Exact name of registrant as specified in its
charter)



|Nevada                                                        |  | 34-1755390                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



25400 US Highway 19
North, Suite 137, Clearwater, FL 33763

(Address of principal executive offices)



(727) 533-0431

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12-b-2 of the Exchange Act.) ̈Yes  x  No.



As of August 1,
2003, there were 7,176,315 shares of common stock, par value $0.001 per share, outstanding.



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##### Table of Contents

DRUGMAX, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2003



TABLE OF CONTENTS



|                                                                                                      |  | Page #
|----------------------------------------------------------------------------------------------------- |  | ------
|PART I FINANCIAL INFORMATION                                                                          |  |       
|                                                                                                      | 
|Item 1. Financial Statements                                                                          |  |       
|Condensed Consolidated Balance Sheets June 30, 2003 (unaudited) and March 31, 2003                    |  | 3     
|Condensed Consolidated Statements of Operations Three Months Ended June 30, 2003 and 2002 (unaudited) |  | 4     
|Condensed Consolidated Statements of Cash Flows Three Months Ended June 30, 2003 and 2002 (unaudited) |  | 5     
|Notes to Condensed Consolidated Financial Statements (unaudited)                                      |  | 6     
|                                                                                                      | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations         |  | 13    
|Financial Condition, Liquidity and Capital Resources                                                  |  | 17    
|                                                                                                      | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                    |  | 17    
|Item 4. Controls and Procedures                                                                       |  | 18    
|                                                                                                      | 
|PART II OTHER INFORMATION                                                                             |  |       
|                                                                                                      | 
|Item 1. Legal Proceedings                                                                             |  | 18    
|Item 6. Exhibits and Reports on Form 8-K                                                              |  | 19    
|                                                                                                      | 
|Signature Page                                                                                        |  | 22    
|Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302                     |  |       
|Exhibit 31.2 Certification of Principal Financial Officer Pursuant to Section 302                     |  |       
|Exhibit 32.1 Certification Pursuant to Section 906                                                    |  |       
|Exhibit 32.2 Certification Pursuant to Section 906                                                    |  |       



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##### Table of Contents

PART IFINANCIAL INFORMATION



Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                      |  | June 30, 2003 |             |   | March 31, 2003 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | -------------- | -
|                                                                                                                                                                      |  | (Unaudited)   |             |   |                |  
|ASSETS                                                                                                                                                                |  |               |             |   |                |  
|Current assets:                                                                                                                                                       |  |               |             |   |                |  
|Cash and cash equivalents                                                                                                                                             |  | $             | 38,873      |   |                | $
|Restricted cash                                                                                                                                                       |  |               |            |   |                |  
|Accounts receivable, net of allowance for doubtful accounts of $1,253,829                                                                                             |  |               | 12,443,086  |   |                |  
|Inventory                                                                                                                                                             |  |               | 18,898,022  |   |                |  
|Due from affiliates                                                                                                                                                   |  |               |            |   |                |  
|Net deferred income tax assetcurrent                                                                                                                                 |  |               | 668,294     |   |                |  
|Prepaid expenses and other current assets                                                                                                                             |  |               | 1,179,717   |   |                |  
|                                                                                                                                                                      |  |               |             |   |                |  
|Total current assets                                                                                                                                                  |  |               | 33,227,992  |   |                |  
|                                                                                                                                                                      |  |              
|Property and equipment, net                                                                                                                                           |  |               | 1,088,106   |   |                |  
|Goodwill                                                                                                                                                              |  |               | 13,105,000  |   |                |  
|Patents and trademarks                                                                                                                                                |  |               | 325,436     |   |                |  
|Shareholder notes receivable                                                                                                                                          |  |               | 100,000     |   |                |  
|Notes receivable                                                                                                                                                      |  |               | 464,520     |   |                |  
|Net deferred income tax assetlong term                                                                                                                               |  |               | 749,336     |   |                |  
|Deferred financing costs, net                                                                                                                                         |  |               | 493,748     |   |                |  
|Other assets                                                                                                                                                          |  |               | 49,000      |   |                |  
|Deposits                                                                                                                                                              |  |               | 48,570      |   |                |  
|                                                                                                                                                                      |  |               |             |   |                |  
|Total assets                                                                                                                                                          |  | $             | 49,651,708  |   |                | $
|                                                                                                                                                                      |  |               |             |   |                |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                  |  |               |             |   |                |  
|                                                                                                                                                                      |  |              
|Current liabilities:                                                                                                                                                  |  |               |             |   |                |  
|Accounts payable                                                                                                                                                      |  | $             | 12,937,528  |   |                | $
|Accrued expenses and other current liabilities                                                                                                                        |  |               | 462,282     |   |                |  
|Credit lines payable                                                                                                                                                  |  |               | 17,335,105  |   |                |  
|Current portion of long-term debt and capital leases                                                                                                                  |  |               | 302,756     |   |                |  
|Due to affiliates                                                                                                                                                     |  |               |            |   |                |  
|                                                                                                                                                                      |  |               |             |   |                |  
|Total current liabilities                                                                                                                                             |  |               | 31,037,671  |   |                |  
|                                                                                                                                                                      |  |              
|Long-term debt and capital leases                                                                                                                                     |  |               | 257,081     |   |                |  
|Other long-term liabilities                                                                                                                                           |  |               | 17,118      |   |                |  
|                                                                                                                                                                      |  |               |             |   |                |  
|Total liabilities                                                                                                                                                     |  |               | 31,311,870  |   |                |  
|                                                                                                                                                                      |  |               |             |   |                |  
|Commitments and contingencies                                                                                                                                         |  |               |             |   |                |  
|                                                                                                                                                                      |  |              
|Stockholders equity:                                                                                                                                                 |  |               |             |   |                |  
|Preferred stock, $.001 par value; 2,000,000 shares authorized; no preferred shares issued or outstanding                                                              |  |               |            |   |                |  
|Common stock, $.001 par value; 24,000,000 shares authorized; 7,176,315 and 7,119,172 shares issued and outstanding at June 30,
2003 and March 31, 2003, respectively. |  |               | 7,177       |   |                |  
|Additional paid-in capital                                                                                                                                            |  |               | 41,058,727  |   |                |  
|Accumulated deficit                                                                                                                                                   |  |               | (22,726,066 | ) |                |  
|                                                                                                                                                                      |  |               |             |   |                |  
|Total stockholders equity                                                                                                                                            |  |               | 18,339,838  |   |                |  
|                                                                                                                                                                      |  |               |             |   |                |  
|Total liabilities and stockholders equity                                                                                                                            |  | $             | 49,651,708  |   |                | $
|                                                                                                                                                                      |  |               |             |   |                |  



See accompanying notes
to condensed consolidated financial statements.



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DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                             |  | For the ThreeMonths EndedJune 30, 2003 |            |   | For the ThreeMonths EndedJune 30, 2002 |  
|-------------------------------------------- |  | -------------------------------------- | ---------- | - | -------------------------------------- | -
|Revenues                                     |  | $                                      | 60,659,545 |   |                                        | $
|Cost of goods sold                           |  |                                        | 58,672,332 |   |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Gross profit                                 |  |                                        | 1,987,213  |   |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Selling, general and administrative expenses |  |                                        | 1,741,552  |   |                                        |  
|Amortization expense                         |  |                                        |           |   |                                        |  
|Depreciation expense                         |  |                                        | 52,502     |   |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Total operating expenses                     |  |                                        | 1,794,054  |   |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Operating income (loss)                      |  |                                        | 193,159    |   |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Other income (expense):                      |  |                                        |            |   |                                        |  
|Interest income                              |  |                                        | 9,709      |   |                                        |  
|Other income                                 |  |                                        | 434,016    |   |                                        |  
|Interest expense                             |  |                                        | (672,612   | ) |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Total other expense                          |  |                                        | (228,887   | ) |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Loss before income tax benefit               |  |                                        | (35,728    | ) |                                        |  
|Income tax benefit                           |  |                                        |           |   |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Net loss                                     |  | $                                      | (35,728    | ) |                                        | $
|                                             |  |                                        |            |   |                                        |  
|Net loss per common sharebasic              |  | $                                      | (0.01      | ) |                                        | $
|                                             |  |                                        |            |   |                                        |  
|Net loss per common sharediluted            |  | $                                      | (0.01      | ) |                                        | $
|                                             |  |                                        |            |   |                                        |  
|Weighted average shares outstandingbasic    |  |                                        | 7,130,475  |   |                                        |  
|                                             |  |                                        |            |   |                                        |  
|Weighted average shares outstandingdiluted  |  |                                        | 7,130,475  |   |                                        |  
|                                             |  |                                        |            |   |                                        |  



See accompanying notes
to condensed consolidated financial statements.



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DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                                                                                                                                               |  | For the ThreeMonths EndedJune 30, 2003 |            |   | For the ThreeMonths EndedJune 30, 2002 |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------- | ---------- | - | -------------------------------------- | -
|OPERATING ACTIVITIES:                                                                                                                                                                                          |  |                                        |            |   |                                        |  
|Net loss                                                                                                                                                                                                       |  | $                                      | (35,728    | ) |                                        | $
|                                                                                                                                                                                                               |  |                                       
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities, net of assets acquired and liabilities
assumed:                                                                      |  |                                        |            |   |                                        |  
|Amortization of financing costs charged to interest expense                                                                                                                                                    |  |                                        | 96,602     |   |                                        |  
|Depreciation and amortization                                                                                                                                                                                  |  |                                        | 52,502     |   |                                        |  
|Forgiveness of liability                                                                                                                                                                                       |  |                                        | (501,561   | ) |                                        |  
|Bad debt expense                                                                                                                                                                                               |  |                                        |           |   |                                        |  
|Loss on disposal of assets                                                                                                                                                                                     |  |                                        |           |   |                                        |  
|Increase in net deferred income tax asset                                                                                                                                                                      |  |                                        |           |   |                                        |  
|Changes in operating assets and liabilities:                                                                                                                                                                   |  |                                        |            |   |                                        |  
|Accounts receivable                                                                                                                                                                                            |  |                                        | (1,006,790 | ) |                                        |  
|Merchandise inventory                                                                                                                                                                                          |  |                                        | 785,561    |   |                                        |  
|Due from affiliated companies                                                                                                                                                                                  |  |                                        | 10,470     |   |                                        |  
|Prepaid expenses and other current assets                                                                                                                                                                      |  |                                        | (58,457    | ) |                                        |  
|Other assets                                                                                                                                                                                                   |  |                                        | 46,660     |   |                                        |  
|Notes receivable                                                                                                                                                                                               |  |                                        | 58,809     |   |                                        |  
|Deposits                                                                                                                                                                                                       |  |                                        | (5,679     | ) |                                        |  
|Accounts payable                                                                                                                                                                                               |  |                                        | (2,452,065 | ) |                                        |  
|Accrued expenses and other current liabilities                                                                                                                                                                 |  |                                        | (117,914   | ) |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES                                                                                                                                                            |  |                                        | (3,127,590 | ) |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|INVESTING ACTIVITIES                                                                                                                                                                                           |  |                                        |            |   |                                        |  
|Purchases of property and equipment                                                                                                                                                                            |  |                                        | (33,059    | ) |                                        |  
|Proceeds from sale of property and equipment                                                                                                                                                                   |  |                                        |           |   |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|NET CASH USED IN INVESTING ACTIVITIES                                                                                                                                                                          |  |                                        | (33,059    | ) |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|FINANCING ACTIVITIES                                                                                                                                                                                           |  |                                        |            |   |                                        |  
|Net change in restricted cash                                                                                                                                                                                  |  |                                        | 2,000,000  |   |                                        |  
|Net change under revolving line of credit agreements                                                                                                                                                           |  |                                        | 1,391,486  |   |                                        |  
|Increase in deferred financing costs                                                                                                                                                                           |  |                                        | (270,008   | ) |                                        |  
|Payments of long-term debt and capital leases                                                                                                                                                                  |  |                                        | (79,068    | ) |                                        |  
|Payments to affiliatesnet                                                                                                                                                                                     |  |                                        | (4,377     | ) |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                                                                                                                                            |  |                                        | 3,038,033  |   |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|DECREASE IN CASH AND CASH EQUIVALENTS                                                                                                                                                                          |  |                                        | (122,616   | ) |                                        |  
|                                                                                                                                                                                                               |  |                                       
|Cash and cash equivalents at beginning of period                                                                                                                                                               |  |                                        | 161,489    |   |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                                                                                                                                     |  | $                                      | 38,873     |   |                                        | $
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOWS ACTIVITIES                                                                                                                                                              |  |                                        |            |   |                                        |  
|Cash paid for interest                                                                                                                                                                                         |  | $                                      | 195,076    |   |                                        | $
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|Cash paid for income taxes                                                                                                                                                                                     |  | $                                      |           |   |                                        | $
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                                                                                                                                          |  |                                        |            |   |                                        |  
|Conversion of accounts receivable to notes receivable                                                                                                                                                          |  |                                        |            |   |                                        | $
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|In April 2003, pursuant to the agreement with W.A. Butler & Company, the Company recorded the reversal of a long-term debt to
W.A. Butler & Co.                                                                |  | $                                      | 501,561    |   |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|In May 2003, the Company purchased substantially all the assets of Avery Pharmaceuticals, Inc. No cash was paid for the
acquisition. In conjunction with the acquisition, liabilities were assumed as follows: |  |                                        |            |   |                                        |  
|Fair value of assets acquired                                                                                                                                                                                  |  | $                                      | 987,954    |   |                                        |  
|Acquisition note executed                                                                                                                                                                                      |  |                                        | (150,000   | ) |                                        |  
|Forgiveness of debt owed to the Company                                                                                                                                                                        |  |                                        | (52,571    | ) |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|Liabilities assumed                                                                                                                                                                                            |  | $                                      | 785,383    |   |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|In June 2003, the Company issued 57,143 shares of common stock of the Company to Jugal K. Taneja for his guaranty executed in
favor of Congress.                                                               |  | $                                      | 91,429     |   |                                        |  
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  
|                                                                                                                                                                                                               |  |                                       
|                                                                                                                                                                                                               |  |                                        |            |   |                                        |  



See accompanying notes
to condensed consolidated financial statements.



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Notes to Condensed Consolidated Financial Statements (Unaudited)



For the Three Months Ended June 30, 2003 and 2002.



NOTE ABASIS OF PRESENTATION



The accompanying condensed
consolidated financial statements include the accounts of DrugMax, Inc. (formerly known as DrugMax.com, Inc.) and its wholly-owned subsidiaries, Discount Rx, Inc., a Louisiana corporation (Discount), Valley Drug Company
(Valley) and its wholly-owned subsidiary Valley Drug Company South (Valley South), Desktop Media Group, Inc. (Desktop) and its wholly-owned subsidiary VetMall, Inc. (VetMall), and Discount Rx, Inc., a
Nevada corporation (Discount Nevada), doing business as Avery Pharmaceuticals (Avery), (collectively referred to as the Company). All significant intercompany accounts and transactions have been eliminated.



The accompanying unaudited condensed consolidated financial statements have
been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring items) considered necessary for a fair presentation have been
included. Interim results are not necessarily indicative of the results that may be expected for a full year. These statements should be read in conjunction with the consolidated financial statements included in the Companys Form 10-K for the
fiscal year ended March 31, 2003.



The Companys fiscal year begins on
April 1 and ends on March 31. Unless otherwise noted, all references to a particular year shall mean the Companys fiscal year.



NOTE BRECENT ACCOUNTING PROUNCEMENTS



In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections
(SFAS No. 145). SFAS No. 145 will rescind SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax benefit. As a result
of SFAS No. 145, the criteria in APB No. 30 will be used to classify those gains and losses. The provisions of SFAS No. 145 related to of the rescission of FASB No. 13 shall be applied in fiscal years beginning after May 15. 2002. Early application
of the provisions of SFAS No. 145 related to the rescission of FSAB No. 13 is encouraged. The components of SFAS No. 145 adopted in fiscal 2003, resulted in the Company recording forgiveness of debt to other income in the three months ended June 30,
2003.



In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS No. 146), which replaces Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity.SFAS No. 146 requires that liabilities associated with exit or disposal activities be recognized when they are incurred. Under EITF Issue No. 94-3, a liability for exit costs is recognized at the date of a commitment to an exit plan.
SFAS No. 146 also requires that the liability be measured and recorded at fair value. Accordingly, the adoption of this standard may affect the timing of recognizing future restructuring costs as well as the amounts recognized. The Company adopted
the provisions of SFAS No. 146 for any restructuring activities initiated after December 31, 2002. As of June 30, 2003, the Company had not undertaken any such restructuring activities.



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN 45). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also requires that at
all times a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements.
The initial recognition and measurement provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company will apply the provisions



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of FIN 45 to any guarantees issued after December 31, 2002. As of June 30, 2003, the Company did not have any guarantees outstanding.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure(SFAS 148) which addresses financial accounting and reporting for recording expenses for the fair value of stock options. SFAS 148 provides alternative methods of transition for a voluntary
change to fair value-based method of accounting for stock-based employee compensation. Additionally, SFAS No. 148 requires more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. The
provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002, with early application permitted in certain circumstances. The interim disclosure provisions are effective for financial reports containing financial
statements for interim periods beginning after December 15, 2002. The Company has elected to continue to apply the intrinsic value-based method of accounting as allowed by APB No. 25. See Stock Based Compensation below.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in July 2003 to variable interest entities in which the Company may hold a variable interest that is acquired before February 1, 2003. The provisions of FIN 46 require that the Company
immediately disclose certain information if it is reasonably possible that the Company will be required to consolidate or disclose variable interest entities when FIN 46 becomes effective. The Company is currently assessing the impact of the
adoption of FIN 46 as it relates to the Company.



In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measurers in its statement of
financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No. 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS
No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As of June 30, 2003, the adoption of SFAS No. 150 has
had no impact on the Company.



Stock Based Compensation



In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
123, Accounting for Stock-Based Compensation(SFAS No. 123), which was effective for fiscal years beginning after December 15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-based compensation expense based on
the fair value of the awards or to account for stock-based compensation under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), and disclose in the
consolidated financial statements the effects of SFAS No. 123 as if the recognition provisions were adopted. The Company has adopted the recognition provisions of APB Opinion No. 25. The following table illustrates the effect on net (loss) income
and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months ended June 30, 2003 and 2002:



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|                                                                                                                                         |  | 2003 |          |   | 2002 |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | -
|Net loss reported                                                                                                                        |  | $    | (35,728  | ) |      | $
|Add: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |      | 579,161  |   |      |  
|                                                                                                                                         |  |      |          |   |      |  
|Pro forma net loss                                                                                                                       |  | $    | (614,889 | ) |      | $
|                                                                                                                                         |  |      |          |   |      |  
|Loss per common share as reported:                                                                                                       |  |      |          |   |      |  
|Basic                                                                                                                                    |  | $    | (0.01    | ) |      | $
|Diluted                                                                                                                                  |  | $    | (0.01    | ) |      | $
|Loss per common sharepro forma:                                                                                                         |  |      |          |   |      |  
|Basic                                                                                                                                    |  | $    | (0.09    | ) |      | $
|Diluted                                                                                                                                  |  | $    | (0.09    | ) |      | $



The Company did not grant any options
in the three months ended June 30, 2003. For purposes of the above disclosure, the determination of the fair value of stock options granted in the three months ended June 30, 2002 was based on the following: (i) a risk free interest rate of 3.94%
(ii) expected option lives of 5 - 10 years; and (iii) expected volatility in the market price of the Companys common stock of 67%.



The Company has no other equity based compensation plans for its employees.



NOTE CACQUISITIONS



VetMall, Inc.



In April 2003, W.A. Butler & Company (Butler), a 30% shareholder of VetMall, executed an agreement with the Company and VetMall. The terms of the agreement provide for the transfer of Butlers 30%
ownership of VetMall stock and the forgiveness of $.5 million of long-term liabilities, which is included in other income of the condensed consolidated financial statements, of the Company to Butler. The agreement also releases Butler from any
present and future operational expenses of VetMall. The transfer of Butlers 30% interest in VetMall did not have an impact on the revenues or operating expenses of the Company for the three months ended June 30, 2003.



Avery Pharmaceuticals, Inc.



On May 14, 2003, Discount Rx, Inc., a Nevada corporation and a wholly owned subsidiary of
the Company, purchased substantially all of the assets, and assumed certain liabilities, of Avery Pharmaceuticals, Inc., Avery Wholesale Pharmaceuticals, Inc., also known as Texas Vet Supply (jointly Avery), and Infinity Custom Plastics,
Inc. (Infinity), wholesale distributors of pharmaceuticals and respiratory products based in Texas, pursuant to an Asset Purchase Agreement dated May 14, 2003 (the Avery Agreement).



Pursuant to the Avery Agreement, the Company acquired accounts receivable, inventory,
equipment, furniture, the trade name and a patent pending for the process of the manufacture of vials for the respiratory therapy industry, which totals $1,062,518. The liabilities assumed, which were comprised principally of trade payables,
amounted to $785,383, and forgiveness of debt owed to the Company of approximately $60,000. In addition, the Company executed a promissory note in the amount of $150,000 to the predecessor companys 50% shareholder, as additional consideration.
The $150,000 note includes a right of set off for accounts payable in excess of an agreed upon amount assumed at closing. The original note may not be reduced below $90,000 after set off, management believes the adjusted note amount will be between
$90,000 and $150,000; therefore, the Company has recorded the note in the amount of $150,000. Additionally, the Avery Agreement contains a provision whereby based on Averys earnings, the note may be increased to $318,000 which would be treated
as an addition to the purchase price. Terms of the note provide for principal payments due monthly beginning July 5, 2003 through the due date of January 5,



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2006. Interest on the note is due quarterly beginning September 5, 2003 at the rate of 6% per annum. Also, the Company executed a Consulting and
Non-Competition Agreement (Consulting Agreement) with John VerVynck (VerVynck) an officer and shareholder of Avery and Infinity. The Consulting Agreement provides for the payment to VerVynck of $39,360, payable bi-monthly,
over the six-month term of the Consulting Agreement. The Consulting Agreement prohibits VerVynck from competing for one year following his termination and the six-month term of the consulting agreement. The Company will operate the acquired business
through its wholly owned subsidiary Discount Nevada under the fictitious name of Avery Pharmaceuticals.



The acquisition of Avery was accounted for by the purchase method of accounting. The result of the operations of the acquired business is included in the condensed consolidated financial statements from the purchase
date. The Company acquired the following assets and liabilities in the Avery acquisition:



|Accounts receivabletrade                     |  | $ | 47,025   |  
|--------------------------------------------- |  | - | -------- | -
|Accounts receivableother                     |  |   | 39,920   |  
|Inventory                                     |  |   | 224,643  |  
|Property and equipment                        |  |   | 340,000  |  
|Other assets                                  |  |   | 10,930   |  
|Patent                                        |  |   | 325,436  |  
|Assumption of liabilities                     |  |   | (785,383 | )
|                                              |  |   |          |  
|Net value of purchased assets                 |  |   | 202,571  |  
|Forgiveness of trade payables due the Company |  |   | (52,571  | )
|Acquisition note payable                      |  |   | (150,000 | )
|                                              |  |   |          |  
|Cash paid for acquisition                     |  | $ |         |  
|                                              |  |   |          |  



The unaudited pro forma effect of the
acquisition of Avery on the Companys revenue, net losses and net income (loss) per share for the three months ended June 30, 2003 and 2002 had the acquisition occurred on April 1, 2001, are as follows:



|                            |  | For the ThreeMonths EndedJune 30, 2003 |            |   | For the ThreeMonths EndedJune 30, 2002 |  
|--------------------------- |  | -------------------------------------- | ---------- | - | -------------------------------------- | -
|Revenues                    |  | $                                      | 61,764,207 |   |                                        | $
|Net Loss before tax benefit |  |                                        | (53,163    | ) |                                        |  
|Tax benefit                 |  |                                        |           |   |                                        |  
|Net loss                    |  |                                        | (53,163    | ) |                                        |  
|Basic and diluted net loss  |  |                                        | (0.01      | ) |                                        |  



NOTE DGOODWILL AND OTHER
INTANGIBLE ASSETS



The carrying value of goodwill did not
change for the three months ended June 30, 2003. The Company has determined that it has one reporting unit in the distribution business. Management further has determined that the distribution reporting unit should be reported in the aggregate based
upon similar economic characteristics within each subsidiary within that segment.



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The change in the carrying value of other intangible assets for the three months ended June 30, 2003 is as follows:



|                              |  | June 30, 2003       |         | March 31, 2003         
|----------------------------- |  | ------------------- | ------- | -----------------------
|                              |  | GrossCarryingAmount |         | AccumulatedAmortization
|Amortizable intangible asset: |  |                     |         |                        
|Patent                        |  | $                   | 325,436 |                        



The Company did not record
amortization expense for the three months ended June 30, 2003 on the patent recorded as a result of the Avery acquisition in May 2003 pending finalization of the purchase accounting. Amortization expense recorded for a non compete agreement, an
other intangible asset existing at June 30, 2002, was $9,000 for the three months ended June 30, 2002.



NOTE EINCOME TAXES



The Company
recognizes deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Temporary differences giving rise to deferred income
tax assets and liabilities primarily include certain accrued liabilities and net operating loss carry forwards. The provision for income taxes includes the amount of income taxes payable for the period as determined by applying the provisions of the
current tax law to the taxable income for the period and the net change during the period in the Companys deferred income tax assets and liabilities. The Company continually reviews the adequacy of the valuation allowance and recognized
deferred income tax asset benefits only as reassessment indicated that it is more likely than not that the benefits will be realized.



NOTE FCOMMITMENTS AND CONTINGENCIES



In March 2000, the Company acquired all of the issued and outstanding shares of common stock of Desktop Corporation, a Texas corporation located in Dallas, Texas,
pursuant to an Agreement and Plan of Reorganization by and among the Company, K. Sterling Miller, Jimmy L. Fagala and HCT Capital Corp. (the Reorganization Agreement). On February 7, 2002, Messrs. Miller and Fagala filed a complaint
against the Company in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, alleging, among other things, that the Company had breached the Reorganization Agreement by failing to pay 38,809 shares of the
Companys common stock to plaintiffs. The complaint also includes a count of conversion and further alleges that the Company breached its employment agreements with Messrs. Miller and Fagala, for which the plaintiffs seek monetary damages. On
March 11, 2002, the Company filed its answer, affirmative defenses and counterclaim against plaintiffs and HCT Capital Corp., in which it alleged, among other things, that plaintiffs had breached the Reorganization Agreement by misrepresenting the
state of the acquired business, that the Company was entitled to set off its damages against the shares which the plaintiffs are seeking and further seeking contractual indemnity against the plaintiffs. On April 16, 2002, HCT Capital Corp. filed its
answer, counterclaim against the Company and cross-claim against the plaintiffs. In September of 2002, Plaintiffs served the Company with written discovery requests. Since then, there has been no activity by Plaintiffs or HCT, and the Company is
currently considering how to proceed in light of this inactivity. The Company intends to vigorously defend the actions filed against it and to pursue its counterclaim. The Company has made no provision in the accompanying consolidated financial
statements for resolution of this matter.



The Company previously executed an
engagement letter with GunnAllen Financial (GAF) with an effective date of August 20, 2001, for consulting services over a three month period from the effective date, and renewable month to month thereafter until terminated by either
party with a thirty day notice. The GAF agreement required that the Company pay to GAF, for consulting services performed, $5,000 per month plus expenses capped at $2,000 per month, and further required the Company to issue a warrant to GAF
exercisable for a period of five years to purchase 100,000 shares of the Companys common stock at an exercise price of $5.80 per share. However, on October 12, 2001, the Company terminated the agreement with GAF and informed GAF that GAF was
in breach of contract under the Agreement and that, accordingly, no warrants would be issued to GAF and no further fees would be paid to GAF. The Company also demanded the return of all fees previously paid to GAF. At March 31, 2003, no warrants had
been issued to GAF. As of June 30, 2003, GAF had not instituted any legal proceedings against the Company. The Company cannot reasonably estimate any future possible loss as a result of this matter. The Company has made no provision in the
accompanying consolidated financial statements for resolution of this matter.



On May 1, 2002, the Company filed suit against an established customer of the Companys Pittsburgh distribution center for collection of past due accounts receivable. The customer accounted for approximately $4.1 million, or 1.5%, of
the gross revenue of the Company in the fiscal year ended March 31, 2002. The Company has an



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unconditional personal guaranty signed by the customers owner. On May 23, 2002, the customer filed a voluntary petition in bankruptcy in the U.S.
Bankruptcy Court, under Chapter Eleven of the United States Bankruptcy Act, subsequent to which the customer failed to file the proper financial data with the court, causing the voluntary bankruptcy filing to be withdrawn. Management is continuing
to pursue its claim for payment through the courts and working with the major creditors to process return of inventory; therefore based upon Managements participation in the discovery phase of the suit, the allowance account is $669,000,
representing approximately 75% of the account balance reserved at June 30, 2003.



On April 15, 2003, the Company obtained from Congress a $40 million revolving line of credit and a $400,000 term loan. The Congress credit facility along with the Mellon restricted cash account of $2 million were used to satisfy the
outstanding line of credit and term loan with Standard Federal Bank National Association (Standard). The Congress revolving line of credit enables the Company to borrow a maximum of $40 million, with borrowings limited to 85% of eligible
accounts receivable and 65% of eligible inventory. The revolving line of credit and the term note currently bear interest at the rate of 0.50% per annum in excess of the Prime Rate. The Congress credit facility is collateralized by all of the
Companys assets. The line of credit is for a term of 36 months, and the term note is payable over the same 36-month period. The Congress credit facility imposes certain restrictive covenants on Tangible Net Worth and EBITDA. All costs
associated with the Congress credit facility will be amortized as interest expense over the term of the loan. The outstanding balance on the revolving line of credit and term loan were $17,335,105 and $377,778, respectively, at June 30, 2003. The
availability on the revolving line of credit at June 30, 2003 was approximately $734,000. At June 30, 2003, the interest rate on the revolving line of credit and term loan was 4.75%.



In April 2003, the Company recorded as interest expense the remaining unamortized financing costs of the Standard credit facility in the
amount of $78,913. Additionally, the Company recorded as interest expense the early termination fee of approximately $351,000 and a fee for the waiver of the 90-day notice of termination of $30,000 paid to Standard.



On April 15, 2003, Jugal K. Taneja, the Chairman of the Board, CEO and a Director of the
Company executed a Guarantee (the Guarantee) in favor of Congress. The Guarantee provides Congress with Mr. Tanejas unconditional guaranty of all obligations, liabilities, and indebtedness of any kind of the Company to Congress,
provided that the Guarantee shall not exceed $2 million in year one; is reduced to $1.5 million in year two; and is further reduced to $1 million in year three, subject to the Company achieving collateral availability objectives. In June 2003, the
Company issued 57,143 shares of common stock of the Company to Mr. Taneja as compensation for his guarantee in favor of Congress, valued at $91,429, based on the fair market value of the stock on the date of the grant. The cost of the common stock
has been recorded as a financing cost related the Congress credit facility and will be amortized as interest expense over the term of the loan.



NOTE GSEGMENT INFORMATION



The Company has adopted SFAS No. 131, Disclosures About Segments of Enterprise and Related Information, which established standards for reporting information
about a Companys operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision
making group, in deciding how to allocate resources to an individual segment and in assessing performance of the segment.



The Company has determined that is has one reportable segment because all distribution subsidiaries have similar economic characteristics, such as margins, products,
customers, distribution networks and regulatory oversight. The distribution line of business represents 100% of consolidated revenues in the three months ended June 30, 2003 and 2002. The critical accounting policies of the operating segment are
those discussed in Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations.



The Company distributes product both within and outside the United States. Revenues from distribution within the United States represented approximately 99.6% and 99.8%
of gross revenues for the three months ended June 30, 2003 and 2002, respectively. Foreign revenues were generated from distribution to customers in Puerto Rico.



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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



The following management discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements presented elsewhere in this Form 10-Q.



Certain oral statements made by management from time to time and certain
statements contained in press releases and periodic reports issued by the Company, including those contained herein, that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Because such statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Forward-looking statements, including those in Managements
Discussion and Analysis of Financial Condition and Results of Operations, are statements regarding the intent, belief or current expectations, estimates or projections of the Companys Directors or Officers about the Company and the industry in
which it operates, and assumptions made by management, and include among other items, (a) the Companys strategies regarding growth and business expansion, including future acquisitions; (b) the Companys financing plans; (c) trends
affecting the Companys financial condition or results of operations; (d) the Companys ability to continue to control costs and to meet its liquidity and other financing needs; (e) the declaration and payment of dividends; and (f) the
Companys ability to respond to changes in customer demands and regulations. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that the anticipated results will occur. When used in
this report, the words expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions are generally intended to identify forward-looking
statements.



Important factors that could cause the actual results to differ
materially from those in the forward-looking statements include, among other items, (i) changes in the regulatory and general economic environment related to the health care and pharmaceutical industries, including possible changes in reimbursement
for healthcare products and in manufacturers pricing or distribution policies; (ii) conditions in the capital markets, including the interest rate environment and the availability of capital; (iii) changes in the competitive marketplace that
could affect the Companys revenue and/or cost bases, such as increased competition, lack of qualified marketing, management or other personnel, and increased labor and inventory costs; (iv) changes in technology or customer requirements, which
could render the Companys technologies noncompetitive or obsolete; (v) changes regarding the availability and pricing of the products which the Company distributes, as well as the loss of one or more key suppliers for which alternative sources
may not be available, (vi) changes in the Companys estimates and assumptions relating to its critical accounting policies; and (vii) the Companys ability to integrate recently acquired businesses. Further information relating to factors
that could cause actual results to differ from those anticipated is included but not limited to information under the headings Business, particularly under the subheading, Risk Factors, and Managements Discussion
and Analysis of Financial Condition and Results of Operations in the Companys Form 10-K for the year ended March 31, 2003, as well as information contained in this Form 10-Q. The Company disclaims any intention or obligation to update or
revise forward-looking statements, whether as a result of new information, future events or otherwise.



Overview



DrugMax, Inc. (Nasdaq: DMAX)
is a full-line, wholesale distributor of pharmaceuticals, over-the-counter products, health and beauty care aids, nutritional supplements, and other related products. The Company is headquartered in Clearwater, Florida and maintains distribution
centers in Pennsylvania, Ohio, Louisiana, and Texas. The Company distributes its products primarily to independent pharmacies in the continental United States, and secondarily to small and medium-sized pharmacy chains, alternative care facilities
and other wholesalers. The Company maintains an inventory in excess of 20,000 stock keeping units from leading manufacturers and holds licenses to ship to all 50 states and Puerto Rico.



Critical Accounting Policies and Estimates



Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains a discussion of the Companys
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires



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the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates and judgments, including those related to customer
incentives, product returns, bad debts, inventories, intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates and judgments on historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under
different assumptions or conditions.



Management believes the following
critical accounting policies, among others, affect the Companys more significant judgments and estimates used in the preparation of its condensed consolidated financial statements. The Companys significant accounting policies are more
fully described in Note 2 to its consolidated financial statements contained in its Form 10-K for the year ended March 31, 2003.



Revenue Recognition



The Company recognizes revenue when goods are shipped and title or risk of loss resides with unaffiliated customers, and at which time the appropriate provisions are recorded for estimated contractual chargeback
credits from the manufacturers based on the Companys contract with the manufacturer. Rebates and allowances are recorded as a component of cost of sales in the period they are received from the vendor or manufacturer unless such rebates and
allowances are reasonably estimable at the end of a reporting period. The Company records chargeback credits due from its vendors in the period when the sale is made to the customer which is eligible for contract pricing from the manufacturer.



The Company accepts return of product from its customers for product which is
saleable, in unopened containers and carries a current date. Generally, product returns are received via the Companys own delivery vehicles, thereby eliminating a direct shipping cost from being incurred by the customer or the Company.
Depending on the length of time the customer has held the product, the Company may charge a handling and restocking fee. Overall, the percentage of the return of product to the Company is extremely low. The Company has no sales incentive or rebate
programs with its customers.



Inventory Valuation



Inventory is stated at the lower of cost or market. Cost is determined using the first-in,
first-out basis of accounting. Inventories consist of brand and generic drugs, over-the-counter products, health and beauty aids, nutritional supplements, and other related products held for resale. The inventories of the Companys three
distribution centers are constantly monitored for out of date or damaged products, which if exist, are reclassed and physically relocated out of saleable inventory to a holding area, referred to as the morgue inventory, for return to and
credit from the manufacturer. However, if market acceptance of the Companys existing products or the successful introduction of new products should significantly decrease, inventory write-downs could be required. As of June 30, 2003 and 2002,
no inventory valuation allowances were necessary.



Goodwill and Intangible
Assets



The Company has completed several acquisitions which have
generated significant amounts of goodwill and intangible assets and related amortization. The values assigned to goodwill and intangibles, as well as their related useful lives, are subject to judgment and estimation by the Company. In addition,
upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), the Company ceased amortization of goodwill effective April 2001, and reviews goodwill
annually for impairment. Goodwill and intangibles related to acquisitions are determined based on purchase price allocations. Valuation of intangible assets is generally based on the estimated cash flows related to those assets, while the initial
value assigned to goodwill is the residual of the purchase price over the fair value of all identifiable assets acquired and liabilities assumed. Thereafter, the value of goodwill cannot be greater than the excess of the fair value of the
Companys reportable unit over the fair value of identifiable assets and liabilities, based on the annual impairment test. Useful lives are determined based on the expected future period of benefit of the asset, the assessment of which
considers various characteristics of the asset, including historical cash flows.



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Impairment of Long-Lived Assets



Long-lived assets are reviewed for impairment when events or circumstances indicate that a diminution in value may have occurred, based on a
comparison of undiscounted future cash flows to the carrying amount of the long-lived asset. Periodically, the Company evaluates the recoverability of the net carrying value of its property and equipment, by comparing the carrying values to the
estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down would be the difference between the carrying
amounts and the fair value of these assets. Losses on impairments are recognized by a charge to earnings.



Results of Operations



For the Three
Months Ended June 30, 2003 and 2002.



Revenues. The Company generated
revenues of $60.7 million and $63.1 million for the three months ended June 30, 2003 and 2002, respectively, which represents a decrease of approximately $2.4 million or 4% for the three months ended June 30, 2003 compared to the three months ended
June 30, 2002. The decrease in revenues resulted from managements decision to revise the Valley South business plan during the three months ended June 30, 2002. Originally, Valley South was operating as a full-line distributor acting as a
primary wholesaler to the independent pharmacies in the Louisiana area. The revenue reported for the three months ended June 30, 2002 included approximately $8 million of branded drugs, of which approximately $4 million were sold to independent
pharmacies, where Valley South was their primary wholesaler. For the three months ended June 30, 2003, Valley South operated as a generic drug distribution center carrying only the fastest moving branded drugs and selling over 38% generic-to-brand
mix, and for the three months ended June 30, 2002, the generic-to-brand mix was approximately 18%. Going forward, the Company is committed to expanding its generic, over-the-counter and other product lines. Also, management believes the
Companys growth will continue to be fueled by the growth of the pharmaceutical industry. The following schedule details sales achieved in the Companys three product lines for the three months ended June 30:



|                             |  | 2003 |            | 2002
|---------------------------- |  | ---- | ---------- | ----
|Revenue from:                |  |      |            |     
|Branded pharmaceuticals      |  | $    | 55,911,236 |     
|Generic pharmaceuticals      |  |      | 3,672,093  |     
|Over-the-counter and general |  |      | 1,076,217  |     
|                             |  |      |            |     
|Total revenues               |  | $    | 60,659,545 |     
|                             |  |      |            |     



The Company historically has primarily
grown its business through strategic acquisitions. The Company currently has four distribution centers, all of which were acquired as follows:



| |  |  | In November 1999 the Company acquired Becan Distributors, Inc., and its subsidiary Discount;
| | - |  | --------------------------------------------------------------------------------------------

| |  |  | In April 2000, the Company acquired Valley;
| | - |  | -------------------------------------------

| |  |  | In October 2001, the Company acquired Penner; and
| | - |  | -------------------------------------------------

| |  |  | In May 2003, the Company acquired Avery.
| | - |  | ----------------------------------------



The impact of the Avery acquisition was nominal on the Companys operations for the three months ended June 30, 2003. (See Acquisitions).



Gross Profit. The Company achieved gross profit of approximately $2.0 million for each
of the three months ended June 30, 2003 and 2002. The Companys margin, as a percentage of revenue, was 3.3% and 3.1% for the three months ended June 30, 2003 and 2002, respectively. The increase in gross margin percentage was primarily due to
expanded generic sales as compared to the lower margin branded pharmaceutical sales. Emphasis on generic sales continues to be part of the companys focus to improve gross profit.



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Operating Expenses and Other Income and Expenses. The Company incurred operating expenses of approximately $1.8
million and $2.6 million for the three months ended June 30, 2003 and 2002, respectively. These expenses include various administrative, sales, marketing and other direct operating expenses of approximately $1.7 million and $2.6 million for the
three months ended June 30, 2003 and 2002, respectively, and approximately $.05 million and $.08 million in combined amortization and depreciation expense for the three months ended June 30, 2003 and 2002, respectively. The percentage of operating
expenses decreased from 4.2% of gross revenues for the three months ended June 30, 2002, to 3.0% of gross revenues for the three months ended June 30, 2003. During the three months ended June 30, 2002, the Company established an allowance for an
account receivable of $897,000 and accrued $19,132 for legal costs, which accounted for approximately 1.5% of gross revenues, which amounted to the majority of the decrease in operating expenses for the three months ended June 30, 2003 over the
three months ended June 30, 2002. The Company does not anticipate an effect on its operating results due to the acquisition of Butlers 30% interest in VetMall. The Company does not expect the relocation of the Ohio distribution center
scheduled for the third quarter of fiscal 2004 to have a significant impact on operating expenses in future periods.



In the three months ended June 30, 2003, the Company incurred approximately $78,000 in costs associated to the termination of the Standard credit facility, which were
charged as other expense in along with various other expenses in the amount of approximately $11,000. During the three months ended June 30, 2003, the Company recorded as other income the reversal of a long-term liability due to W.A. Butler &
Company (Butler) of approximately $502,000 in connection with the agreement between the Company and Butler whereby Butler assigned its 30% ownership in VetMall to the Company. In the three months ended June 30, 2002, the Company incurred
approximately $9,000 in various other expenses.



Interest expense.
Interest expense was approximately $673,000 and $290,000 for the three months ended June 30, 2003 and 2002, respectively. Included in interest expense is the amortization of loan financing costs, which were $96,602 and $32,893 for the three months
ended June 30, 2003 and 2002, respectively, and the early termination fee of $350,934 and the 90-day notice waiver fee of $30,000, in the three months ended June 30, 2003, charged by Standard for the early termination of the credit facility in April
2003. The increase in the amortization of the loan financing costs is also attributed to the early termination of the Standard credit facility, which resulted in the Company recording to interest expense the amount of $78,913 in unamortized loan
costs. The Company does not expect the new credit facility with Congress to have a material impact on interest expense for fiscal 2004.



Net income (loss) per share. EPS is calculated by dividing the net income (loss) by the weighted average number of shares of common stock outstanding for the
period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of options and warrants, using the treasury stock method. The net
loss per share for the three months ended June 30, 2003 was $.01 per the basic and diluted shares, compared to a net loss of $.08 per the basic and diluted shares, for the three months ended June 30, 2002. At June 30, 2003 and 2002, the Company had
1,977,148 and 1,295,400 options, respectively, to purchase shares of the Companys common stock, in addition to warrants to purchase 350,000 shares of the Companys common stock, which were anti-dilutive and not included in the computation
of diluted EPS for the three months ended June 30, 2003 and 2002, respectively. These anti-dilutive shares could potentially dilute the basic EPS in the future. Shares of common stock used in the calculation of basic and dilutive net loss per share
as of June 30, 2003 and 2002 were 7,130,475 and 7,119,172, respectively.



Income Taxes.SFAS No. 109 requires a valuation allowance to reduce the deferred income tax assets reported, if based on the weight of the evidence, it is more likely than not that a portion or all of the deferred income tax assets
will not be realized. As such, a valuation allowance of $1,458,500 was established at March 31, 2001.



In assessing the realizability of deferred income tax assets, management considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate
realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management evaluated the scheduled reversal of deferred income tax
liability, the Companys profitability for the year ended March 31, 2002, reviewed the Companys business model, and future earnings projections, and believes the evidence indicates that the Company will be able to generate sufficient
taxable income to utilize the deferred income tax asset; therefore, the Company recognized the full $1,458,500 deferred income tax asset, offset by current year deferred income tax expense of $354,952, for a net deferred income tax benefit of
$1,103,548 for the year ended March 31, 2002.



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The Company determines a valuation allowance based on its analysis of amounts available in the statutory carryback
period, consideration of future deductible amounts, and assessment of future profitability. As a result of the substantial operating losses incurred during fiscal year 2003, the Company established valuation allowances as a portion of the net
deferred tax asset in the amount of $580,100 as of March 31, 2003, as it will take more than a few years to realize the deferred tax asset.



During the three months ended June 30, 2003, no tax effect was recorded due to the insignificant impact of the operating results. During the three months ended June 30,
2002, the Company recorded deferred income tax benefit of $342,629. As of June 30, 2003, management continues to believe that it is more likely than not that the Company will be able to generate sufficient taxable income to utilize the recorded
deferred income tax asset.



Inflation and Seasonality. Management
believes that there was no material effect on operations or the financial condition of the Company as a result of inflation for the three months ended June 30, 2003 and 2002. Management also believes that its business is not seasonal; however,
significant promotional activities can have a direct impact on sales volume in any given quarter.



Financial Condition, Liquidity and Capital Resources



The Companys net loss reduced by non-cash expenses produced positive cash flow for the quarter ended June 30, 2003. The Company has working capital and cash and cash equivalents of approximately $2.2 million and $.03 million,
respectively, at June 30, 2003.



The Companys principal commitments at
June 30, 2003 were leases on its office and warehouse space. There were no material commitments for capital expenditures at that date.



Net cash used in operating activities was $3.1 million for the three months ended June 30, 2003. Cash was used primarily by increases in accounts receivables, prepaid and
other current assets, decreases in accounts payables, and accrued expenses and other current liabilities; offset by decreases in inventory, due from affiliates, other assets and notes receivable.



Net cash used in investing activities was $33,059 for the three months ended June 30, 2003,
which represented cash invested in property and equipment.



Net cash provided
by financing activities was $3.0 million for the three months ended June 30, 2003, representing a decrease in the Companys restricted cash account of $2 million, which was used along with the new Congress revolving line of credit to satisfy
the Standard credit facility, an increase in the line of credit of $1,391,486, offset by an increase in deferred financing costs associated with the Congress credit facility and payments of long-term debt, capital leases.



Management believes the Company has sufficient capital resources to fund the Companys
operations for at least the next twelve months. Management does not believe the acquisition of Avery will have a material impact on the liquidity of the Company.



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



The Company is subject to market risk from exposure to changes in interest rates based on its financing and cash management activities, which could effect its results of operations and financial condition. At June 30,
2003, the Companys outstanding debt with was approximately $17.3 million on the line of credit and $.4 million on the term loan. The interest rates charged on the line of credit and term loan are floating rates subject to periodic adjustment,
with certain options for management to choose from. At June 30, 2003, the interest rate charged on the line of credit and term loan was 4.75%. The company manages its risk by choosing the most advantageous interest option offered by its lender. See
Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Condition, Liquidity and Capital Resources. The Company holds several notes receivable from its customers which do not carry variable
interest rates. The Company does not currently utilize derivative financial instruments to address market risk.



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Item 4. CONTROLS AND PROCEDURES.



The Company
maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the
SECs rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily is required to use its judgment in evaluating the cost to benefit relationship of possible controls and procedures.



At June 30, 2003, the Company performed an evaluation of the effectiveness of the design and operation of its disclosure controls and
procedures. The evaluation was performed with the participation of senior management of key corporate functions, and under the supervision of the CEO and CFO. Based on the evaluation, the Companys management, including the CEO and CFO,
concluded that its disclosure controls and procedures were effective.



There
have been no significant changes in the Companys internal controls over financial reporting during the most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, the Companys internal
controls over financial reporting.



PART IIOTHER INFORMATION



Item 1. LEGAL PROCEEDINGS.



In March 2000, the
Company acquired all of the issued and outstanding shares of common stock of Desktop Corporation, a Texas corporation located in Dallas, Texas, pursuant to an Agreement and Plan of Reorganization by and among the Company, K. Sterling Miller, Jimmy
L. Fagala and HCT Capital Corp. (the Reorganization Agreement). On February 7, 2002, Messrs. Miller and Fagala filed a complaint against the Company in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida,
alleging, among other things, that the Company had breached the Reorganization Agreement by failing to pay 38,809 shares of the Companys common stock to plaintiffs. The complaint also includes a count of conversion and further alleges that the
Company breached its employment agreements with Messrs. Miller and Fagala, for which the plaintiffs seek monetary damages. On March 11, 2002, the Company filed its answer, affirmative defenses and counterclaim against plaintiffs and HCT Capital
Corp., in which it alleged, among other things, that plaintiffs had breached the Reorganization Agreement by misrepresenting the state of the acquired business, that the Company was entitled to set off its damages against the shares which the
plaintiffs are seeking and further seeking contractual indemnity against the plaintiffs. On April 16, 2002, HCT Capital Corp. filed its answer, counterclaim against the Company and cross-claim against the plaintiffs. In September of 2002, Plaintiffs
served the Company with written discovery requests. Since then, there has been no activity by Plaintiffs or HCT, and the Company is currently considering how to proceed in light of this inactivity. The Company intends to vigorously defend the
actions filed against it and to pursue its counterclaim.. The Company has made no provision in the accompanying condensed consolidated financial statements for resolution of this matter.



The Company previously executed an engagement letter with GunnAllen Financial (GAF) with an effective date of August 20, 2001,
for consulting services over a three month period from the effective date, and renewable month to month thereafter until terminated by either party with a thirty day notice. The GAF agreement required that the Company pay to GAF, for consulting
services performed, $5,000 per month plus expenses capped at $2,000 per month, and further required the Company to issue a warrant to GAF exercisable for a period of five years to purchase 100,000 shares of the Companys common stock at an
exercise price of $5.80 per share. However, on October 12, 2001, the Company terminated the agreement with GAF and informed GAF that GAF was in breach of contract under the Agreement and that, accordingly, no warrants would be issued to GAF and no
further fees would be paid to GAF. The Company also demanded the return of all fees previously paid to GAF. At March 31, 2003, no warrants had been issued to GAF. As of June 30, 2003, GAF had not instituted any legal proceedings against the Company.



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The Company cannot reasonably estimate any future possible loss as a result of this matter. The Company has made no
provision in the accompanying consolidated financial statements for resolution of this matter.



On May 1, 2002, the Company filed suit against an established customer of the Companys Pittsburgh distribution center for collection of past due accounts receivable. The customer accounted for approximately $4.1
million, or 1.5%, of the gross revenue of the Company in the fiscal year ended March 31, 2002. The Company has an unconditional personal guaranty signed by the customers owner. On May 23, 2002, the customer filed a voluntary petition in
bankruptcy in the U.S. Bankruptcy Court, under Chapter Eleven of the United States Bankruptcy Act, subsequent to which the customer failed to file the proper financial data with the court, causing the voluntary bankruptcy filing to be withdrawn.
Management is continuing to pursue its claim for payment through the courts and working with the major creditors to process return of inventory. The Company currently has reserved an allowance account of $669,000, representing approximately 75% of
the account balance.



The Company is, from time to time, involved in
litigation relating to claims arising out of its operations in the ordinary course of business. The Company believes that none of the claims that were outstanding as of June 30, 2003 should have a material adverse impact on its financial position,
results of operations, or cash flows.



Item 4. SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS.



None



Item 6. EXHIBITS AND REPORTS ON FORM 8-K.



(a)
Exhibits.



|    | 
|--- | 
|    | 
|    | 
|*   | 
|    | 
|2.1 | 
|    | 
|2.2 | 
|    | 
|2.3 | 
|    | 
|2.4 | 
|    | 
|2.5 | 
|    | 
|2.6 | 
|    | 
|3.1 | 
|    | 
|3.2 | 
|    | 
|3.3 | 
|    | 
|3.4 | 
|    | 
|3.5 | 



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##### Table of Contents

|     | 
|---- | 
|3.6  | 
|     | 
|3.7  | 
|     | 
|4.2  | 
|     | 
|10.1 | 
|     | 
|10.2 | 
|     | 
|10.3 | 
|     | 
|10.4 | 
|     | 
|10.5 | 
|     | 
|10.6 | 
|     | 
|10.8 | 
|     | 
|21.0 | 
|     | 
|31.1 | 
|     | 
|31.2 | 
|     | 
|32.1 | 
|     | 
|32.2 | 

---

| | * |  | Filed herewith.
| | - |  | ---------------



| | (1) |  | Incorporated by reference to the Companys Registration Statement on Form SB-2, filed June 29, 1999, File Number 0-24362, as amended.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------



| | (2) |  | Incorporated by reference to Amendment No. 1 to the Companys Registration Statement on Form SB-2, filed on September 13, 1999, File No. 0-24362.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| | (3) |  | Incorporated by reference to the Companys Report on Form 8-K, filed April 6, 2000, File Number 0-24362.
| | --- |  | --------------------------------------------------------------------------------------------------------



| | (4) |  | Incorporated by reference to the Companys Report on Form 8-K, filed May 3, 2000, File Number 0-24362.
| | --- |  | ------------------------------------------------------------------------------------------------------



| | (5) |  | Incorporated by reference to Amendment No. 2 to the Companys Registration Statement on Form SB-2, filed on November 12, 1999, File No. 0-24362.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| | (6) |  | Incorporated by reference to the Companys Report on Form 8-K, filed February 8, 2000, File No. 0-24362.
| | --- |  | --------------------------------------------------------------------------------------------------------



| | (7) |  | Incorporated by reference to the Companys Form 10-KSB, filed June 29, 2000, File No. 0-24362.
| | --- |  | ----------------------------------------------------------------------------------------------



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##### Table of Contents

| | (8) |  | Incorporated by reference to the Companys Form 10-KSB/A, filed July 14, 2000, File No. 0-24362.
| | --- |  | ------------------------------------------------------------------------------------------------



| | (9) |  | Incorporated by reference to the Companys Registration Statement on Form SB-2, filed on November 1, 2000.
| | --- |  | ----------------------------------------------------------------------------------------------------------



| | (10) |  | Incorporated by reference to the Companys Form 10-QSB, filed November 14, 2000, File No. 1-15445.
| | ---- |  | --------------------------------------------------------------------------------------------------



| | (11) |  | Incorporated by reference to the Companys Report on Form 8-K, filed November 9, 2001.
| | ---- |  | --------------------------------------------------------------------------------------



| | (12) |  | Incorporated by reference to the Companys Form 10-QSB, filed November 14, 2001.
| | ---- |  | --------------------------------------------------------------------------------



| | (13) |  | Incorporated by reference to the Companys Form 10-QSB, filed February 14, 2002.
| | ---- |  | --------------------------------------------------------------------------------



| | (14) |  | Incorporated by reference to the Companys Form 10-KSB, filed July 1, 2002.
| | ---- |  | ---------------------------------------------------------------------------



| | (15) |  | Incorporated by reference to the Companys Form 10-K, filed July 15, 2003.
| | ---- |  | --------------------------------------------------------------------------



| | (16) |  | Incorporated by reference to the Companys Form 10-K/A, filed July 29, 2003.
| | ---- |  | ----------------------------------------------------------------------------



(b) Reports on Form 8-K.



During the three months ended June 30, 2003, the Company filed no reports on Form 8-K.



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##### Table of Contents

SIGNATURES



In accordance with the requirements of
the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|      |  |                 |  | DrugMax, Inc.
|----- |  | --------------- |  | -------------
|      |  |                 |  |              
|Date: |  | August 13, 2003 |  |              
|      |  |                 |  |              
|      |  |                 |  |              
|Date: |  | August 13, 2003 |  |              
|      |  |                 |  |              
|      |  |                 |  |              
|Date: |  | August 13, 2003 |  |              
|      |  |                 |  |              



21