##### Table of Contents



SECURITIES
AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q





[ X ] QUARTERLY REPORT UNDER SECTION 13 OR

15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended December 31, 2002



or



[    ] TRANSITION REPORT UNDER SECTION 13

OR 15 (d) OF THE EXCHANGE ACT



For the transition period from  to



Commission File Number 1-15445





DRUGMAX, INC.,

(Formerly DrugMax.com, Inc.)

(Exact name of registrant as specified in its charter)





|NEVADA                          |  | 34-1755390         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)





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

(Address of principal executive offices)



(727) 533-0431

(Registrants telephone number, including area code)





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



As of February 6, 2003, there were 7,119,172 shares of common stock, par value $0.001 per share, outstanding.



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DRUGMAX, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2002



TABLE OF CONTENTS



|                                                                                                      |  | Page #
|----------------------------------------------------------------------------------------------------- |  | ------
|PART I FINANCIAL INFORMATION                                                                          |  |       
|                                                                                                     
|Item 1. Financial Statements                                                                          |  |       
|Condensed Consolidated Balance SheetsDecember 31, 2002 and March 31, 2002                             |  | 3     
|Condensed Consolidated Statements of OperationsThree and Nine Months Ended December 31, 2002 and 2001 |  | 4     
|Condensed Consolidated Statements of Cash FlowsNine Months Ended December 31, 2002 and 2001           |  | 5     
|Notes to Condensed Consolidated Financial Statements                                                  |  | 6     
|                                                                                                     
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations         |  | 13    
|Financial Condition, Liquidity and Capital Resources                                                  |  | 19    
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                    |  | 19    
|Item 4. Controls and Procedures                                                                       |  | 20    
|                                                                                                     
|PART II OTHER INFORMATION                                                                             |  |       
|                                                                                                     
|Item 1. Legal Proceedings                                                                             |  | 20    
|Item 4. Submission of Matters to a Vote of Security Holders                                           |  | 21    
|Item 6. Exhibits and Reports on Form 8-K                                                              |  | 21    
|                                                                                                     
|Signature Page                                                                                        |  | 24    
|Section 302 Certification by Principal Executive Officer                                              |  | 25    
|Section 302 Certification by Principal Financial Officer                                              |  | 26    



2



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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



|ASSETS                                                                                                   |  | December 31, 2002 (UNAUDITED) |             |   | March 31, 2002 (As Restated-See Note I) |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ----------- | - | --------------------------------------- | -
|Current assets:                                                                                          |  |                               |             |   |                                         |  
|Cash and cash equivalents                                                                                |  | $                             | 208,185     |   |                                         | $
|Restricted cash                                                                                          |  |                               | 2,000,000   |   |                                         |  
|Accounts receivable, net of allowance for doubtful accounts of $1,237,575 and
$340,575                   |  |                               | 16,740,129  |   |                                         |  
|Inventory                                                                                                |  |                               | 17,894,618  |   |                                         |  
|Due from affiliates                                                                                      |  |                               | 22,905      |   |                                         |  
|Net deferred income tax assetcurrent                                                                    |  |                               | 723,347     |   |                                         |  
|Prepaid expenses and other current assets                                                                |  |                               | 1,742,655   |   |                                         |  
|                                                                                                         |  |                               |             |   |                                         |  
|Total current assets                                                                                     |  |                               | 39,331,839  |   |                                         |  
|                                                                                                        
|Property and equipment, net                                                                              |  |                               | 833,756     |   |                                         |  
|Goodwill                                                                                                 |  |                               | 13,105,000  |   |                                         |  
|Intangible assets, net                                                                                   |  |                               |            |   |                                         |  
|Shareholder notes receivable                                                                             |  |                               | 100,000     |   |                                         |  
|Notes receivable                                                                                         |  |                               | 614,640     |   |                                         |  
|Net deferred income tax assetlong term                                                                  |  |                               | 749,336     |   |                                         |  
|Deferred financing costs, net                                                                            |  |                               | 169,523     |   |                                         |  
|Other assets                                                                                             |  |                               | 148,446     |   |                                         |  
|Deposits                                                                                                 |  |                               | 49,351      |   |                                         |  
|                                                                                                         |  |                               |             |   |                                         |  
|Total assets                                                                                             |  | $                             | 55,101,891  |   |                                         | $
|                                                                                                         |  |                               |             |   |                                         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                     |  |                               |             |   |                                         |  
|                                                                                                        
|Current liabilities:                                                                                     |  |                               |             |   |                                         |  
|Accounts payable                                                                                         |  | $                             | 14,325,149  |   |                                         | $
|Accrued expenses and other current liabilities                                                           |  |                               | 655,338     |   |                                         |  
|Credit lines payable                                                                                     |  |                               | 20,351,712  |   |                                         |  
|Current portion of long-term debt and capital leases                                                     |  |                               | 636,498     |   |                                         |  
|Due to affiliates                                                                                        |  |                               | 4,377       |   |                                         |  
|                                                                                                         |  |                               |             |   |                                         |  
|Total current liabilities                                                                                |  |                               | 35,973,074  |   |                                         |  
|                                                                                                        
|Long-term debt and capital leases                                                                        |  |                               | 40,548      |   |                                         |  
|Other long-term liabilities                                                                              |  |                               | 501,561     |   |                                         |  
|                                                                                                         |  |                               |             |   |                                         |  
|Total liabilities                                                                                        |  |                               | 36,515,183  |   |                                         |  
|                                                                                                         |  |                               |             |   |                                         |  
|                                                                                                        
|Commitments and contingencies (Note F)                                                                   |  |                               |             |   |                                         |  
|                                                                                                        
|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; 7,119,172 shares issued
and outstanding     |  |                               | 7,120       |   |                                         |  
|Additional paid-in capital                                                                               |  |                               | 40,967,355  |   |                                         |  
|Accumulated deficit                                                                                      |  |                               | (22,387,767 | ) |                                         |  
|                                                                                                         |  |                               |             |   |                                         |  
|Total stockholders equity                                                                               |  |                               | 18,586,708  |   |                                         |  
|                                                                                                         |  |                               |             |   |                                         |  
|Total liabilities and stockholders equity                                                               |  | $                             | 55,101,891  |   |                                         | $
|                                                                                                         |  |                               |             |   |                                         |  



See
accompanying notes to condensed consolidated financial statements.



3



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DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                             |  | For the Three Months Ended December 31, 2002 |            |   | For the Three Months Ended December 31, 2001 |   |            | For the Nine Months Ended December 31, 2002 |  |   | For the Nine Months Ended December 31, 2001 |  
|-------------------------------------------- |  | -------------------------------------------- | ---------- | - | -------------------------------------------- | - | ---------- | ------------------------------------------- |  | - | ------------------------------------------- | -
|Revenues                                     |  | $                                            | 85,233,822 |   |                                              | $ | 63,735,331 |                                             |  | $ | 222,073,763                                 |  
|                                            
|Cost of goods sold                           |  |                                              | 83,350,640 |   |                                              |   | 61,613,598 |                                             |  |   | 215,929,273                                 |  
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Gross profit                                 |  |                                              | 1,883,182  |   |                                              |   | 2,121,733  |                                             |  |   | 6,144,490                                   |  
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Selling, general and administrative expenses |  |                                              | 1,596,674  |   |                                              |   | 1,443,509  |                                             |  |   | 5,972,536                                   |  
|Amortization expense                         |  |                                              |           |   |                                              |   | 6,026      |                                             |  |   | 18,000                                      |  
|Depreciation expense                         |  |                                              | 72,517     |   |                                              |   | 75,822     |                                             |  |   | 220,048                                     |  
|Goodwill impairment                          |  |                                              |           |   |                                              |   |           |                                             |  |   | 12,209,298                                  |  
|Intangible asset impairment                  |  |                                              |           |   |                                              |   |           |                                             |  |   | 258,914                                     |  
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|Total operating expenses                     |  |                                              | 1,669,191  |   |                                              |   | 1,525,357  |                                             |  |   | 18,678,796                                  |  
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Operating (loss) income                      |  |                                              | 213,991    |   |                                              |   | 596,376    |                                             |  |   | (12,534,306                                 | )
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Other income (expense):                      |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|Interest income                              |  |                                              | 33,045     |   |                                              |   | 24,228     |                                             |  |   | 72,659                                      |  
|Other income (expense)                       |  |                                              | 14,413     |   |                                              |   | 5,207      |                                             |  |   | 39,408                                      |  
|Interest expense                             |  |                                              | (226,263   | ) |                                              |   | (248,801   | )                                           |  |   | (806,583                                    | )
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|Total other expense                          |  |                                              | (178,805   | ) |                                              |   | (219,366   | )                                           |  |   | (694,516                                    | )
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Income (loss) before income tax benefit      |  |                                              | 35,186     |   |                                              |   | 377,010    |                                             |  |   | (13,228,822                                 | )
|Income tax (expense) benefit                 |  |                                              | (24,853    | ) |                                              |   |           |                                             |  |   | 368,935                                     |  
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Net income (loss)                            |  | $                                            | 10,333     |   |                                              | $ | 377,010    |                                             |  | $ | (12,859,887                                 | )
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Net income (loss) per common sharebasic     |  | $                                            | 0.00       |   |                                              | $ | 0.05       |                                             |  | $ | (1.81                                       | )
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Net income (loss) per common sharediluted   |  | $                                            | 0.00       |   |                                              | $ | 0.05       |                                             |  | $ | (1.81                                       | )
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Weighted average shares outstandingbasic    |  |                                              | 7,119,172  |   |                                              |   | 7,089,742  |                                             |  |   | 7,119,172                                   |  
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  
|                                            
|Weighted average shares outstandingdiluted  |  |                                              | 7,131,038  |   |                                              |   | 7,325,095  |                                             |  |   | 7,119,172                                   |  
|                                             |  |                                              |            |   |                                              |   |            |                                             |  |   |                                             |  



See
accompanying notes to condensed consolidated financial statements.



4



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DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                                                                                                                                                                                                  |  | For the Nine Months Ended December 31, 2002 |             |   | For the Nine Months Ended December 31, 2001 |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ----------- | - | ------------------------------------------- | -
|Cash flows from operating activities:                                                                                                                                                                                                                             |  |                                             |             |   |                                             |  
|Net (loss) income                                                                                                                                                                                                                                                 |  | $                                           | (12,859,887 | ) |                                             | $
|                                                                                                                                                                                                                                                                 
|Adjustments to reconcile net (loss) income to net cash used in operating
activities:                                                                                                                                                                              |  |                                             |             |   |                                             |  
|Depreciation and amortization of assets                                                                                                                                                                                                                           |  |                                             | 238,048     |   |                                             |  
|Amortization of financing costs                                                                                                                                                                                                                                   |  |                                             | 98,961      |   |                                             |  
|Goodwill impairment                                                                                                                                                                                                                                               |  |                                             | 12,209,298  |   |                                             |  
|Intangible asset impairment                                                                                                                                                                                                                                       |  |                                             | 258,914     |   |                                             |  
|Bad debt expense                                                                                                                                                                                                                                                  |  |                                             | 908,769     |   |                                             |  
|Loss on disposal of assets                                                                                                                                                                                                                                        |  |                                             | 1,121       |   |                                             |  
|Increase in net deferred income tax asset                                                                                                                                                                                                                         |  |                                             | (369,135    | ) |                                             |  
|Changes in operating assets and liabilities:                                                                                                                                                                                                                      |  |                                             |             |   |                                             |  
|Increase in accounts receivable                                                                                                                                                                                                                                   |  |                                             | (3,848,399  | ) |                                             |  
|Decrease (increase) in inventory                                                                                                                                                                                                                                  |  |                                             | 2,787,821   |   |                                             |  
|Decrease in due from affiliates                                                                                                                                                                                                                                   |  |                                             | 593         |   |                                             |  
|(Increase) decrease in prepaid expenses and other current assets                                                                                                                                                                                                  |  |                                             | (1,060,307  | ) |                                             |  
|Decrease in other assets                                                                                                                                                                                                                                          |  |                                             | 2,780       |   |                                             |  
|Decrease in notes receivable                                                                                                                                                                                                                                      |  |                                             | 135,833     |   |                                             |  
|Increase in deposits                                                                                                                                                                                                                                              |  |                                             | (4,608      | ) |                                             |  
|Increase (decrease) in accounts payable                                                                                                                                                                                                                           |  |                                             | 480,383     |   |                                             |  
|Increase in accrued expenses and other current liabilities                                                                                                                                                                                                        |  |                                             | 234,020     |   |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|Net cash used in operating activities                                                                                                                                                                                                                             |  |                                             | (785,795    | ) |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|                                                                                                                                                                                                                                                                 
|Cash flows from investing activities:                                                                                                                                                                                                                             |  |                                             |             |   |                                             |  
|Purchases of property and equipment                                                                                                                                                                                                                               |  |                                             | (36,159     | ) |                                             |  
|Proceeds from sale of property and equipment                                                                                                                                                                                                                      |  |                                             | 2,756       |   |                                             |  
|Cash paid for acquisitions, net                                                                                                                                                                                                                                   |  |                                             |            |   |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|Net cash used in investing activities                                                                                                                                                                                                                             |  |                                             | (33,403     | ) |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|                                                                                                                                                                                                                                                                 
|Cash flows from financing activities:                                                                                                                                                                                                                             |  |                                             |             |   |                                             |  
|Decrease in restricted cash                                                                                                                                                                                                                                       |  |                                             |            |   |                                             |  
|Net change under revolving line of credit agreements                                                                                                                                                                                                              |  |                                             | 1,422,137   |   |                                             |  
|Increase in deferred financing costs                                                                                                                                                                                                                              |  |                                             | (53,006     | ) |                                             |  
|Payments of long-term debt and capital leases                                                                                                                                                                                                                     |  |                                             | (509,121    | ) |                                             |  
|Payments to affiliates  net                                                                                                                                                                                                                                      |  |                                             |            |   |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|Net cash provided by financing activities                                                                                                                                                                                                                         |  |                                             | 860,010     |   |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|                                                                                                                                                                                                                                                                 
|Net increase (decrease) in cash and cash equivalents                                                                                                                                                                                                              |  |                                             | 40,812      |   |                                             |  
|                                                                                                                                                                                                                                                                 
|Cash and cash equivalents at beginning of period                                                                                                                                                                                                                  |  |                                             | 167,373     |   |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|                                                                                                                                                                                                                                                                 
|Cash and cash equivalents at end of period                                                                                                                                                                                                                        |  | $                                           | 208,185     |   |                                             | $
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|                                                                                                                                                                                                                                                                 
|Supplemental disclosures of cash flows information:                                                                                                                                                                                                               |  |                                             |             |   |                                             |  
|Cash paid for interest                                                                                                                                                                                                                                            |  | $                                           | 716,098     |   |                                             | $
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|Cash paid for income taxes                                                                                                                                                                                                                                        |  |                                             |            |   |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|Supplemental schedule of non-cash activities:                                                                                                                                                                                                                     |  |                                             |             |   |                                             |  
|Conversion of accounts receivable to notes receivable                                                                                                                                                                                                             |  | $                                           | 201,197     |   |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|Asset acquired through long-term financing                                                                                                                                                                                                                        |  | $                                           | 31,602      |   |                                             |  
|                                                                                                                                                                                                                                                                  |  |                                             |             |   |                                             |  
|                                                                                                                                                                                                                                                                 
|In July 2001, the Company released from escrow 500,000 shares of common stock (fair
value of $1,968,750) due to Dynamic Health Products, Inc. earned through the contingent consideration clauses in conjunction with the acquisition of Becan Distributors, Inc. |  |                                             |             |   |                                             |  
|                                                                                                                                                                                                                                                                 
|In October 2001, the Company purchased substantially all the assets of Penner &
Welsch, Inc. for $482,536 cash, 125,418 shares of the Companys common stock (fair value of $750,000), and $1,604,793 in forgiveness of debt owed to the Company. The Company     |  |                                             |             |   |                                             |  



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|also issued 25,000 shares of stock (fair value of $142,500) in conjunction with a
non-compete agreement. |  |   |          
|-------------------------------------------------------------------------------------------------------- |  | - | ---------
|In conjunction with the acquisition, liabilities were assumed as
follows:                                |  |   |          
|Fair value of assets acquired                                                                            |  | $ | 3,083,975
|Cash and stock issued for acquisition                                                                    |  |   | 1,375,036
|Forgiveness of debt owed to the Company                                                                  |  |   | 1,604,793
|                                                                                                         |  |   |          
|Liabilities assumed                                                                                      |  | $ | 104,146  
|                                                                                                         |  |   |          



See
accompanying notes to condensed consolidated financial statements.



6



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DrugMax, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)



For the Three and Nine Months Ended December 31, 2002 and 2001.



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. (Discount), Valley Drug Company (Valley) and its wholly-owned subsidiary Valley Drug Company South
(Valley South), and Desktop Media Group, Inc. (Desktop); and its 70% owned subsidiary VetMall, Inc. (VetMall), (collectively referred to as the Company). Beginning July 1, 2002 the operations of
Discount have been reported as Valley South. 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. The interim statements should be read in conjunction with the financial statements and notes thereto included in the Companys annual report on Form 10-KSB for its fiscal year ended March 31, 2002 as filed with
the Securities and Exchange Commission. 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.



Where appropriate,
certain amounts have been reclassified to conform with this fiscal period.



NOTE BRECENTLY ISSUED AUTHORITATIVE GUIDANCE



In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144), which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of, and was effective for the Company on April 1, 2002. The adoption of SFAS No. 144 did not have an impact on the results of operations or financial position of the Company.



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 145). Under SFAS 145, gains and losses on extinguishments of debt are to be classified as income or loss from continuing operations rather
than extraordinary items. The Company will adopt SFAS No. 145 for its fiscal year ending March 31, 2004.



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 will adopt the provisions of SFAS No. 146, for any restructuring activities initiated after December 31, 2002.



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 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 SFAS No. 123.



7



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NOTE CACQUISITIONS



On October 25, 2001, Discount purchased substantially all of the net assets of Penner & Welsch, Inc.
(Penner), a wholesale distributor of pharmaceuticals based in Louisiana, pursuant to an Agreement for the Purchase and Sale of Assets dated October 12, 2001 (the Agreement). Penner was a Chapter 11 debtor which had
voluntarily filed for Chapter 11 protection in the US Bankruptcy Court Eastern Division of Louisiana. Prior to this acquisition, and commencing in September 2000, the Company managed the day-to-day operations of Penner, in exchange for a management
fee equal to a percentage of the gross revenues of Penner each month. Also in September 2000, the Company entered into a management agreement with Dynamic Health Products, Inc. (Dynamic) (an affiliated company whose Chairman of the Board
is Jugal K. Taneja, the Companys Chairman of the Board, Chief Executive Officer and majority shareholder), pursuant to which Dynamic provided accounting support services to the Company in connection with the Companys management
responsibilities relating to Penner. Pursuant to this agreement, Dynamic was entitled to receive one-third of all fees collected by the Company from Penner. Both agreements were terminated in October 2001, in connection with the closing of the
acquisition. During the management period, the Company provided Penner with a collateralized revolving line of credit for the sole purpose of purchasing inventory from the Company. Pursuant to the Agreement, Penner received an aggregate of 125,418
shares of restricted common stock of the Company, valued at $5.98 per share, cash in the amount of $488,619, and forgiveness of $1,604,793 in trade accounts payable and management fees owed to Discount. The Agreement, including the nature and amount
of the consideration paid to Penner, was negotiated between the parties and, on October 15, 2001, was approved by the US Bankruptcy Court, Eastern Division of Louisiana.



On October 19, 2001, the Company entered into an Employment Agreement with Gregory M. Johns (Johns), former owner
of Penner, for an annual salary of $125,000, payable bi-weekly for an initial term of three years, through October 18, 2004, renewable for subsequent terms of one year thereafter. In accordance with the Employment Agreement, the Company agreed to
issue a total of 100,000 employee non-qualified stock options (the Options) to Johns at a price of $8.00 per share contingent upon the attainment of gross profit goals by Discount over the three year term of the Employment Agreement. The
Options, provided the goals are attained, would be issued one third of the total 100,000 each year for three years, and would be issued within sixty days of each anniversary date of the Employment Agreement. The Company attained the gross profit
goal for the first year of the Employment Agreement; therefore, 33,334 Options were issued to Johns on November 11, 2002, which was within the sixty-day period following the anniversary date of the Employment Agreement. Since the fair value of the
common stock was less than the exercise price on the date of grant, no compensation expense was recorded for issuance of these options.



In conjunction with the Employment Agreement, on October 19, 2001, Johns executed a Restrictive Covenants Agreement and Agreement Not to Compete
(Non Compete Agreement) with the Company. The Non Compete Agreement constrains Johns during the minimum three-year term of the Employment Agreement in addition to a period of one year following his termination. In consideration for
Johns execution of the Non Compete Agreement, the Company issued to Johns 25,000 shares of common stock of the Company, with a fair market value of $142,500. As a result of the Companys annual impairment testing, the unamortized balance
of $109,500 for the Non Compete Agreement was recorded as an impairment loss in the Companys second quarter for fiscal year 2003.



In October 2001, the Company executed a Commercial Lease Agreement (the Lease) with River Road Real Estate, LLC (River Road), a
Florida limited liability company, to house the operations of Discount in St. Rose, Louisiana. The officers of River Road are Jugal K. Taneja, a Director, Chief Executive Officer, Chairman of the Board and a majority shareholder of the Company,
William L. LaGamba, a Director and the President of the Company, Gregory M. Johns, an employee of the Company, and Stephen M. Watters, a former Director of the Company. The Lease is for an initial period of five years with a base monthly lease
payment of $15,000, and an initial deposit of $15,000 made to River Road by the Company.



The business combination of Penner was accounted for by the purchase method of accounting. The result of the operations of the acquired business is included in the consolidated financial statements from the purchase date.
The Company acquired the following assets and liabilities in the Penner acquisition as adjusted at March 31, 2002:



|Accounts receivable    |  | $ | 1,180,756
|---------------------- |  | - | ---------
|Inventory              |  |   | 717,954  
|Property and equipment |  |   | 670,000  



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|Other assets                                      |  |   | 94,391     |  
|------------------------------------------------- |  | - | ---------- | -
|Intangible assets                                 |  |   | 291,914    |  
|Goodwill                                          |  |   | 135,043    |  
|Assumption of liabilities                         |  |   | (104,146   | )
|                                                  |  |   |            |  
|Net value of purchased assets                     |  |   | 2,985,912  |  
|Forgiveness of trade payables and management fees |  |   | (1,604,793 | )
|Value of common stock issued                      |  |   | (892,500   | )
|                                                  |  |   |            |  
|Cash paid for acquisitions                        |  | $ | 488,619    |  
|                                                  |  |   |            |  



The unaudited pro forma
effect of the acquisition of Penner on the Companys revenue, net income (loss) and net income (loss) per share, for the three and nine months ended December 31, 2001 had the acquisition occurred on April 1, 2001 rather than on October 18,
2001are as follows:



|                                    |  | For the Three Months
Ended December 31, 2001 |            | For the Nine Months
Ended December 31, 2001 |  
|----------------------------------- |  | -------------------------------------------- | ---------- | ------------------------------------------- | -
|Revenues                            |  | $                                            | 63,949,096 |                                             | $
|Net income (loss)                   |  |                                              | 142,349    |                                             |  
|Basic net income (loss) per share   |  |                                              | 0.02       |                                             |  
|Diluted net income (loss) per share |  |                                              | 0.02       |                                             |  



The proforma information
for the three and nine months ended December 31, 2001, has been presented after the elimination of revenues and net income derived from the sales to Penner by Discount prior to the acquisition. In addition, the proforma information for the three and
nine months ended December 31, 2001, has been presented after the elimination of non-recurring charges from the Penner operations as follows:



|                |  | For the Three Months
Ended December 31, 2001 |        | For the Nine Months
Ended December 31, 2001
|--------------- |  | -------------------------------------------- | ------ | -------------------------------------------
|Management fees |  | $                                            | 25,060 |                                            
|Trustee fees    |  |                                              | 5,000  |                                            
|Legal fees      |  |                                              | 24,472 |                                            



NOTE DGOODWILL
AND OTHER INTANGIBLE ASSETS



In June 2001, the FASB issued
SFAS No. 142, Goodwill and Other Intangible Assets, which addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets
subsequent to their acquisition. This accounting standard requires that goodwill be separately disclosed from other intangible assets in the statement of financial position and no longer be amortized, but tested for impairment on a periodic basis.
SFAS No. 142 also requires the completion of a transitional impairment test within six months of adoption with any impairments identified treated as a cumulative effect of a change in accounting principle. On April 1, 2001, the Company adopted SFAS
No. 142, performed its transitional impairment test and determined that no impairment of goodwill existed. 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 company within that segment.



During the second quarter of fiscal 2003, the Company completed its annual two-step process of the goodwill impairment test prescribed in SFAS No. 142,
based upon September 30, 2002 values. The first step of the impairment test was the measurement of the Companys fair market value versus book value, as defined under SFAS No. 142. Because the Companys fair market value, as determined by
independent valuation using a discounted cash flow approach, was below book value at September 30, 2002, the Company was required to perform the second step of the impairment test. The second step involved comparing the implied fair value of the
Companys goodwill to its fair market value to measure the amount of impairment. The goodwill impairment test resulted in the Company recognizing a non-cash goodwill impairment loss of approximately $12.2 million relating to the goodwill
recorded



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with the acquisitions of Becan Distributors, Inc. (Becan) in November 1999, Valley in April
2000 and Penner in October 2001. During the second quarter of fiscal 2003, the Company also reviewed for impairment the Non-Compete Agreement and the domain name that were recorded as a result of the acquisition of Penner in October 2001. These
other intangible assets were determined by an independent appraisal to have no value. Accordingly, the Company recognized an impairment loss of $258,914 related to these other intangible assets.



Management believes that the circumstances leading to the impairments were
principally related to declines in market conditions and valuations of wholesale pharmaceutical distribution companies since the acquisitions of Becan, Valley and Penner.



The change in the carrying value of goodwill and other intangible assets for the nine months ended December 31, 2002 is as
follows:



|                                |  | Goodwill |            | Domain Name |   | Non Compete Agreement
|------------------------------- |  | -------- | ---------- | ----------- | - | ---------------------
|Balance as of March 31, 2002    |  | $        | 25,314,298 |             | $ | 149,414              
|Amortization                    |  |          |           |             |   |                     
|Impairment loss                 |  |          | 12,209,298 |             |   | 149,414              
|                                |  |          |            |             |   |                      
|Balance as of December 31, 2002 |  | $        | 13,105,000 |             |   |                     
|                                |  |          |            |             |   |                      



The following table
reflects the components of other intangible assets as of March 31, 2002:



|                                   |  | Gross Carrying Amount |         | Accumulated Amortization
|---------------------------------- |  | --------------------- | ------- | ------------------------
|Amortizable intangible assets:     |  |                       |         |                         
|Non compete agreement              |  | $                     | 142,500 |                         
|Domain name                        |  |                       | 200     |                         
|                                   |  |                       |         |                         
|Total                              |  | $                     | 142,700 |                         
|                                   |  |                       |         |                         
|Non-amortizable intangible assets: |  |                       |         |                         
|Domain name                        |  | $                     | 149,414 |                         
|                                   |  |                       |         |                         



Amortization expense for
the three months ended December 31, 2002 and 2001 was $0 and $6,000, respectively, and for the nine months ended December 31, 2002 and 2001 was $18,000 and $6,000, respectively.



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 recognizes deferred income tax asset benefits only as reassessment indicates that it is more likely than not that the benefits will be realized.



The Company had an estimated gross deferred income tax asset and valuation
allowance of approximately $1.5 million at March 31, 2001, which primarily represented the potential future tax benefit associated with its operating losses through the fiscal year ended 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;



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therefore, the Company recognized the full $1.5 million deferred income tax asset, offset by deferred
income tax expense of $.4 million, for a net deferred income tax benefit of $1.1 million for the year ended March 31, 2002.



During the three and nine months ended December 31, 2002, the Company recorded income tax expense of $24,853 and benefit of $368,935. The income tax
benefit resulted from operating losses incurred for the six months ended September 30, 2002. During the three and nine months ended December 31, 2001, the Company recorded income tax benefit of $0 and $1,110,280, respectively. The $1,110,280 income
tax benefit resulted from the reversal of the prior years valuation allowance. As of December 31, 2002, management continues to believe that is more likely than not that the Company will be able to generate sufficient taxable income to utilize
the deferred income tax asset.



NOTE FCOMMITMENTS AND
CONTINGENCIES



On October 24, 2000, the Company obtained from
Mellon Bank N.A. (Mellon) a $15 million line of credit and a $2 million term loan to refinance its prior bank indebtedness, to provide additional working capital and for other general corporate purposes. The line of credit enabled the
Company to borrow a maximum of $15 million, with borrowings limited to 85% of eligible accounts receivable and 65% of eligible inventory. The revolving credit facility bears interest at the floating rate of 0.25% per annum over the base rate. The
term loan is payable over a 36-month period with interest at 0.75% per annum over the base rate, which is the higher of Mellons prime rate or the effective federal funds rate plus 0.50% per annum. In conjunction with the closing of the credit
facility, the Company deposited $2 million in a restricted cash account with Mellon. The credit facility prohibits the payment of dividends. On October 29, 2001, the Company executed a loan modification agreement modifying the original Mellon line
of credit with Standard Federal Bank National Association (Standard), formerly Michigan National Bank as successor in interest to Mellon, increasing the line to $23 million. On October 28, 2002, the Company executed a Fourth Amendment
and Modification to Loan and Security Agreement with Standard. The amendment extended the contract period of the loan and security agreement to expire on October 24, 2004, from the original contract period which would have expired on October 24,
2003. In addition, the amendment modified the borrowing base, quarterly and annual net income, net worth and current ratio covenants commencing with the fiscal quarter ended September 30, 2002, and the applicable interest rate margin commencing
April 1, 2003. The amendment also imposed certain accounts receivable limitations and instituted a new indebtedness to net worth ratio for the fiscal year ending March 31, 2003 and for each fiscal year end thereafter. The Company was not in
compliance with the net income covenant for the quarter ended December 31, 2002. The Company is however in negotiations with Standard along with other banks and expects to resolve this matter shortly. The interest rate on the term loan was 5.5%, and
the interest rate on the revolving credit facility was 4.25% at December 31, 2002. The outstanding balances on the revolving line of credit and term loan were approximately $20.4 million and $.6 million, respectively, as of December 31, 2002. The
availability on the line of credit at December 31, 2002 was approximately $2.1 million, based on eligible borrowing limits at that date.



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. The Company intends to vigorously defend the actions filed against it and to pursue its counterclaim. The Company cannot reasonably estimate any future possible loss as
a result of this matter. The Company has made no provision in the accompanying unaudited 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



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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 fees in the amount of $10,000 previously paid to GAF. At December 31, 2002, no warrants had been issued to GAF. As of February 14, 2003, GAF had not instituted any legal proceedings against the Company, and the Company
cannot reasonably estimate future possible loss as a result of this matter. The Company has made no provision in the accompanying unaudited condensed consolidated financial statements for resolution of this matter.



NOTE GSEGMENT INFORMATION



The Company has determined that it 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 and nine
months ended December 31, 2002 and 2001.



The Company distributes
product both within and outside the United States. Revenues from distribution within the United States represented approximately 99.6% of gross revenues for the three and nine months ended December 31, 2002 and approximately 99.7% for the three
months ended December 31, 2001. Foreign revenues were generated primarily from distribution to customers in Puerto Rico through Valley South which was acquired by the Company in October 2001.



The following table presents distribution revenues from the Companys
only segment for each of the Companys three primary product lines for the three and nine months ended December 31, 2002 and 2001:



|                           |  | For the Three Months Ended December 31, 2002 |            | For the Three Moths Ended December 31, 2001 |   | For the Nine Months Ended December 31, 2002 |  | For the Nine Months Ended December 31, 2001
|-------------------------- |  | -------------------------------------------- | ---------- | ------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------------
|Revenue from:              |  |                                              |            |                                             |   |                                             |  |                                            
|Branded pharmaceuticals    |  | $                                            | 80,449,831 |                                             | $ | 59,048,558                                  |  | $                                          
|Generic pharmaceuticals    |  |                                              | 3,087,417  |                                             |   | 2,353,973                                   |  |                                            
|Over the counter and other |  |                                              | 1,696,574  |                                             |   | 2,332,800                                   |  |                                            
|                           |  |                                              |            |                                             |   |                                             |  |                                            
|Total revenues             |  | $                                            | 85,233,822 |                                             | $ | 63,735,331                                  |  | $                                          
|                           |  |                                              |            |                                             |   |                                             |  |                                            



NOTE HEARNINGS
PER SHARE



Basic earnings 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. Diluted EPS for the three and nine months ended December 31, 2002 includes the effect of 11,866 and 0, respectively, dilutive
common stock options, and for the three and nine months ended December 31, 2001 includes the effect of 235,353 and 213,313, respectively, diluted common stock options. The Company had issued and outstanding 1,725,700 options 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 and nine months ended December 31,
2002. These anti-dilutive shares could potentially dilute the basic EPS in the future.



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A reconciliation of the number of shares of common stock used in calculation of basic and diluted net
income (loss) per share is presented below:



|                                                            |  | For the Three Months Ended December 31, 2002 |  | For the Three Months Ended December 31, 2001 |  | For the Nine Months Ended December 31, 2002 |  | For the Nine Months Ended December 31, 2001
|----------------------------------------------------------- |  | -------------------------------------------- |  | -------------------------------------------- |  | ------------------------------------------- |  | -------------------------------------------
|Basic shares                                                |  | 7,119,172                                    |  | 7,089,742                                    |  | 7,119,172                                   |  | 7,007,412                                  
|Additional shares assuming effect of dilutive stock options |  | 11,866                                       |  | 235,353                                      |  |                                            |  | 213,313                                    
|                                                            |  |                                              |  |                                              |  |                                             |  |                                            
|Diluted shares                                              |  | 7,131,038                                    |  | 7,325,095                                    |  | 7,119,172                                   |  | 7,220,725                                  
|                                                            |  |                                              |  |                                              |  |                                             |  |                                            



NOTE
IRESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS



Subsequent to the issuance of the Companys consolidated financial statements as of and for the year ended March 31, 2002, the Company determined that the accounting treatment for a warrant issued to a director and non-employee
consultant on January 23, 2000 as a result of the director acting as a guarantor of the Companys $5,000,000 Merrill Lynch line of credit was not in accordance with guidance established under Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. Because the warrants were issued to a non-employee
director for services outside his role as a director, the warrants should have been accounted for under SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the fair value of the warrants of $1,625,000 should have been
recognized as deferred financing costs in January 2000 and amortized to interest expense over the one-year term of the line of credit, beginning in March 2000. The Merrill Lynch line of credit was paid in full on October 24, 2000 with proceeds from
the new Mellon credit facility; therefore, the unamortized balance of the financing costs of $677,083 should have been recognized as an extraordinary loss on the early extinguishment of debt in October 2000. The Company has not treated the warrant
expense as a deductible item in its tax returns, and has concluded that its expense will be treaded as a permanent difference, which does not create tax benefits for the Company. As a result, the accompanying condensed consolidated balance sheet as
of March 31, 2002 has been restated from the amounts previously reported. The Company expects to file an amended March 31, 2002 Form 10-KSB and an amended June 30, 2002 Form 10-Q as soon as practicable.



A summary of the significant effects of the restatement on the Companys
consolidated balance sheet as of March 31, 2002 is as follows:



|                           |  | As of March 31, 2002   |           
|-------------------------- |  | ---------------------- | ----------
|                           |  | As Previously Reported |           
|Additional paid-in capital |  | $                      | 39,342,355
|Accumulated deficit        |  |                        | (7,902,880
|Total stockholders equity |  |                        | 31,446,595





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



As discussed in Note I to the unaudited condensed consolidated financial statements included in Item 1, the Company has restated its consolidated balance
sheet as of March 31, 2002, for the incorrect accounting for warrants issued to a director. The Company intends to amend its Annual Report on Form 10-KSB for the year ended March 31, 2002, to include the restated consolidated financial statements
for fiscal years ended March 31, 2002 and 2001, and its Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as soon as practicable.



A summary of the significant effects of the restatement on the Companys annual consolidated statement of operations are as follows:



|                                             |  | Year Ended March 31, 2001 |           | Year Ended March 31, 2000
|-------------------------------------------- |  | ------------------------- | --------- | -------------------------
|                                             |  | As Previously Reported    |           | Adjustments              
|Interest Expense                             |  | $                         | 1,124,242 |                          
|Loss before extraordinary item               |  |                           | 7,816,583 |                          
|Extraordinary loss on extinguishment of debt |  |                           |          |                          
|Net loss                                     |  |                           | 7,816,583 |                          
|Net loss per common sharebasic and diluted: |  |                           |           |                          
|Loss before extraordinary item               |  | $                         | 1.22      |                          
|Extraordinary loss on extinguishment of debt |  |                           |          |                          
|                                             |  |                           |           |                          
|Net loss per common share                   |  |                           |           |                          
|Basic and diluted                            |  | $                         | 1.22      |                          
|                                             |  |                           |           |                          
|Weighted Average Shares:                     |  |                           |           |                          
|Basic and diluted                            |  |                           | 6,419,950 |                          



A summary of the
significant effects of the restatement on the Companys consolidated balance sheets as of March 31, 2002, 2001, and 2000 is as follows:



|                                          |  | As of March 31, 2002   |            |   | As of March 31, 2001 |   |            | As of March 31, 2000 | 
|----------------------------------------- |  | ---------------------- | ---------- | - | -------------------- | - | ---------- | -------------------- | 
|                                          |  | As Previously Reported |            |   | Adjustments          |   |            | As Restated          | 
|Deferred financing costs                  |  |                        |            |   |                      |   |            |                      | 
|Total current assets                      |  |                        |            |   |                      |   |            |                      | 
|Total assets                              |  |                        |            |   |                      |   |            |                      | 
|Additional paid-in capital                |  | $                      | 39,342,355 |   |                      | $ | 1,625,000  |                      | 
|Accumulated Deficit                       |  |                        | (7,902,880 | ) |                      |   | (1,625,000 | )                    | 
|Total stockholders equity                |  |                        | 31,446,595 |   |                      |   |           |                      | 
|Total liabilities and stockholders equity |  |                        |            |   |                      |   |            |                      | 



A summary of the
significant effects of the restatement on the Companys consolidated balance sheet as of June 30, 2002 is as follows:



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|                           |  | As of June 30, 2002   
|-------------------------- |  | ----------------------
|                           |  | As Previously Reported
|Additional paid-in capital |  | $                     
|Accumulated deficit        |  |                       
|Total stockholders equity |  |                       



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, its Directors or
its 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; and (e) 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-KSB for the year ended March 31, 2002, 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. Certain amounts in the December 31, 2001 condensed consolidated financial statements have been reclassified
to conform to December 31, 2002 presentation.



Overview



DrugMax, Inc. (Nasdaq: DMAX) is
a full-line, wholesale distributor of pharmaceuticals, over-the-counter products, health and beauty care aids, and nutritional supplements. The Company is headquartered in Clearwater, Florida and maintains distribution centers in Pennsylvania, Ohio,
and Louisiana. 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.



In December 2001, the SEC requested that all registrants list their three to five most critical accounting policies in MD&A. The SEC indicated that a critical accounting policy is one which is both
important to the portrayal of the companys financial condition and results and requires managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are
inherently uncertain. 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.



Revenue Recognition.The Company recognizes revenue on
its core distribution segment 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 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.



Inventory Valuation.Inventory is stated at the lower of cost of 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, and nutritional supplements 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 out of saleable inventory to 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 December 31, 2002 and 2001, 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 SFAS 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. During the second quarter of fiscal 2003, the
Company completed its annual two-step process of the goodwill impairment test prescribed in SFAS No. 142, based upon September 30, 2002 values. The first step of the impairment test was the measurement of the Companys fair market value versus
book value, as defined under SFAS No. 142. Because the Companys fair market value, as determined by independent valuation using a discounted cash flow approach, was below book value at September 30, 2002, the Company was required to perform
the second step of the impairment test. The second step involved comparing the implied fair value of the Companys goodwill to its fair market value to measure the amount of impairment. The goodwill impairment test resulted in the Company
recognizing a non-cash goodwill impairment loss of approximately $12.2 million relating to the goodwill recorded with the acquisitions of Becan Distributors, Inc. (Becan) in November 1999, Valley in April 2000 and Penner in October 2001.
During the second quarter of fiscal 2003, the Company also reviewed for impairment the Non-Compete Agreement and the domain name that were recorded as a result of the acquisition of Penner in October 2001. These other intangible



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assets were determined by an independent appraisal to have no value. Accordingly, the Company recognized
an impairment loss of $258,914 related to these other intangible assets.



Impairment of Long-Lived Assets.Long-lived assets, including goodwill and other intangibles, 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.



Allowance for Deferred Income Tax Asset. The Company had a deferred income tax asset and valuation allowance at March 31, 2001, which primarily represented the potential future tax benefit
associated with its operating losses through the fiscal year ended 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. Based upon the evaluations made, management concluded that realization of the deferred income tax asset was more likely than not; therefore, the
valuation allowance was reversed in fiscal 2002.



Results of Operations



For the
Three and Nine Months Ended December 31, 2002 and 2001.



Revenues. The Company generated revenues of $85.2 million and $63.7 million for the three months ended December 31, 2002 and 2001, respectively, and $222.1 million and $200.8 million for the nine months ended December 31, 2002
and 2001, respectively. Revenues for the three months ended December 31, 2002 increased approximately 33.7% as compared to the three months ended December 31, 2001, and revenues for the nine months ended December 31, 2002 increased approximately
10.6% as compared to the revenues for the nine months ended December 31, 2001. The Company generated sales growth in its brand and generic product lines for the three months ended December 31, 2002 compared to the three months ended December 31,
2001, and growth in all three of its product lines for the nine months ended December 31, 2002 compared to the nine months ended December 31, 2001, as a result of aggressive marketing, expanded sales efforts and cross selling to common customers,
and the Companys commitment to expand its generic and over-the-counter and other products lines. The acquisition which took place in October 2001 had minimal effect on the increase in sales for the period since the Company had previously sold
to Penner and now sells directly to its customers. The Companys sales of over the counter and other products declined in the three months ended December 31, 2002 as compared to the three months ended December 31, 2001, but increased in the
nine months ended December 31, 2002 as compared to the nine months ended December 31, 2001. Going forward, management believes that the Companys growth will continue to be fueled by the growth of the pharmaceutical industry market. The
following schedule details sales achieved in the Companys three product lines:



|                           |  | For the Three Months Ended December 31, 2002 |            | For the Three Moths Ended December 31, 2001 |   | For the Nine Months Ended December 31, 2002 |  | For the Nine Months Ended December 31, 2001
|-------------------------- |  | -------------------------------------------- | ---------- | ------------------------------------------- | - | ------------------------------------------- |  | -------------------------------------------
|Revenue from:              |  |                                              |            |                                             |   |                                             |  |                                            
|Branded pharmaceuticals    |  | $                                            | 80,449,831 |                                             | $ | 59,048,558                                  |  | $                                          
|Generic pharmaceuticals    |  |                                              | 3,087,417  |                                             |   | 2,353,973                                   |  |                                            
|Over-the-counter and other |  |                                              | 1,696,574  |                                             |   | 2,332,800                                   |  |                                            
|                           |  |                                              |            |                                             |   |                                             |  |                                            
|Total revenues             |  | $                                            | 85,233,822 |                                             | $ | 63,735,331                                  |  | $                                          
|                           |  |                                              |            |                                             |   |                                             |  |                                            



Gross Profit. The
Company achieved gross profit of $1.9 million and $2.1 million for the three months ended December 31, 2002 and 2001, respectively, and $6.1 million and $5.6 million for the nine months ended December



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31, 2002 and 2001, respectively. The Companys gross profit, as a percentage of revenue, was 2.2% and 3.3% for the three months ended
December 31, 2002 and 2001, respectively, reflecting a decrease in gross profit of approximately 1.1%. The decline in gross profit percentage for the quarter was principally the result of increased sales of branded pharmaceutical drugs, which,
generally are high sales dollar items with low gross profit margins. The Companys gross profit, as a percentage of revenue, was 2.8% for both the nine months ended December 31, 2002 and 2001. Continued emphasis on the expansion of generic drug
sales should result in improved gross profit margins for the Companys future operations.



Operating Expense. The Company incurred operating expenses of $1.7 million and $1.5 million for the three months ended December 31, 2002 and 2001, respectively. These expenses include various
administrative, sales, marketing and other direct operating expenses of approximately $1.6 million, and depreciation and amortization expenses of approximately $.07 million for the three months ended December 31, 2002, compared to approximately $1.4
million in various administrative, sales, marketing and other direct operating expenses and depreciation and amortization expenses of approximately $.08 million for the three months ended December 31, 2001. The Company incurred operating expenses of
approximately $18.7 million and $3.9 million for the nine months ended December 31, 2002 and 2001, respectively. These expenses include various administrative, sales, marketing and other direct operating expenses of approximately $6.0 million,
depreciation and amortization expenses of approximately $.2 million, a goodwill impairment loss of approximately $12.2 million, and other intangible assets impairment loss of approximately $.3 million for the nine months ended December 31, 2002,
compared to approximately $3.8 million and various administrative, sales, marketing and other direct operating expenses, and depreciation and amortization expenses of approximately $.2 million for the nine months ended December 31, 2001. As
discussed in Note D, during the second quarter of fiscal 2003, the Company completed its annual goodwill and other intangible asset impairment tests prescribed in SFAS No. 142, based upon September 30, 2002 values. The impairment test resulted in
the Company recognizing non-cash goodwill and other intangible assets impairment losses of approximately $12.5 million. Management believes that the circumstances leading to the impairments were principally related to declines in market conditions
and valuations of wholesale pharmaceutical distribution companies since the acquisitions of Becan, Valley and Penner.



The percentage of operating expenses, excluding the non-cash impairment losses, decreased from 2.4% of gross revenues for the three months ended December
31, 2001, to 2.0% of gross revenues for the three months ended December 31, 2002, and increased from 2.0% for the nine months ended December 31, 2001 to 2.8% for the nine months ended December 31, 2002. The increase in operating expense is due
partially to the operations of Valley South whose operating expenses represent approximately 18% of the total operating expenses for the nine months ended December 31, 2002. Prior to the acquisition of Penner in October 2001, Discount, now operating
as Valley South, had extremely low operating expenses. In addition, in the first fiscal quarter of 2003, the Company established an allowance for an account receivable of a customer which went bankrupt of $897,000 and accrued $19,132 for legal
costs, which amounted to approximately .4% of gross revenues for the nine months ended December 31, 2002.



Interest expense. Interest expense, excluding amortization of financing costs, was approximately $200,679 and $217,888 for the three months ended December 31, 2002 and 2001, respectively, and
approximately $707,622 and $754,527 for the nine months ended December 31, 2002 and 2001, respectively. The decrease was due to more favorable interest terms under the Companys revolving line of credit and term loan with Standard.



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 income (loss) per share for the three and nine months ended December 31, 2002 was $0.001 and ($1.81), respectively, for both the basic and
diluted shares. Net income per share for the three and nine months ended December 31, 2001 was $0.05 and $0.28 per share, respectively, for the basic and diluted shares. At March 31, 2001, the Company had a deferred income tax asset valuation
allowance of approximately $1.5 million. During the nine month period ended December 31, 2001, the Company reduced the entire valuation allowance, and recognized $1,110,280 deferred income tax benefit, net of deferred income tax expense of $202,220,
which provided the Company with net income of $.16 per basic and diluted share. During the second quarter of fiscal 2003, the Company completed its annual impairment tests prescribed in SFAS No. 142, based upon September 30, 2002 values. The results
of these tests indicated an impairment of approximately $12.5 million to goodwill and other intangible assets during the quarter ended September 30, 2002, which accounts for a net loss of $1.75 per basic and diluted share during the nine months
ended December 31, 2002.



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Diluted EPS for the three and nine months ended December 31, 2002 includes the effect of 11,866 and 0,
respectively, dilutive common stock options, and for the three and nine months ended December 31, 2001 includes the effect of 235,353 and 213,313, respectively, diluted common stock options. The Company had issued and outstanding 1,725,700 options
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 and nine months
ended December 31, 2002. These anti-dilutive shares could potentially dilute the basic EPS in the future.



Income Taxes. The Company had an estimated gross deferred income tax asset and valuation allowance of approximately $1.5 million as of the fiscal year ended March 31, 2001, which primarily
represented the potential future tax benefit associated with its operating losses through the fiscal year ended March 31, 2001. 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 based on such evaluation 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 $1.5 million deferred income tax asset, offset by deferred income tax expense of $.4 million, for a net deferred income tax benefit of $1.1 for the year ended March 31, 2002.
During the nine months ended December 31, 2002, the Company recorded income tax benefit of $368,935. During the nine months ended December 31, 2001, the Company recorded deferred income tax benefit of $1,110,280, which represented the reversal of
the prior years valuation allowance. As of December 31, 2002, 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 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 and nine months ended December 31, 2002 and 2001. 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 has working capital of approximately $3.4 million at December 31, 2002. Working capital includes cash and cash equivalents of $.2 million and restricted cash of $2 million at December 31, 2002.



The Companys principal commitments at December 31, 2002 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 $785,795 for the nine months ended December 31, 2002. Cash was used primarily by increases in accounts receivable, and prepaid expenses and other current
assets, offset by decreases in inventory and notes receivable, and increases in accounts payable and accrued expenses and other current liabilities.



Net cash used in investing activities was $33,403 for the nine months ended December 31, 2002. Cash was invested in property and equipment in the amount
of $36,159, and $2,756 was received for the sale of miscellaneous property and equipment no longer used by the Company.



Net cash provided by financing activities was $860,010 for the nine months ended December 31, 2002, representing a net increase in the Companys
revolving line of credit of $1,422,137, offset by payments of long-term debt and capital leases of $509,121, and financing costs of $53,006 associated with the modification of the credit line with Standard.



On October 24, 2000, the Company obtained from Mellon Bank N.A.
(Mellon) a $15 million line of credit and a $2 million term loan to refinance its prior bank indebtedness, to provide additional working capital and for other general corporate purposes. The line of credit enabled the Company to borrow a
maximum of $15 million, with borrowings limited to 85% of eligible accounts receivable and 65% of eligible inventory. The revolving credit facility bears interest at the floating rate of 0.25% per annum over the base rate. The term loan is payable
over a 36-month period with interest at 0.75% per annum over the base rate, which is the higher of Mellons prime rate or the effective federal funds rate plus 0.50% per annum. In conjunction with the closing of the credit facility, the Company
deposited $2 million in a restricted cash account with Mellon. The credit facility prohibits the payment of dividends. On October 29, 2001, the Company executed a loan modification agreement modifying the original Mellon line of credit with Standard
Federal Bank National Association (Standard), formerly Michigan National Bank as successor in interest to Mellon, increasing the line to $23 million. On October 28, 2002, the Company executed a Fourth Amendment and Modification to Loan
and Security Agreement with Standard. The amendment extended the contract period of the loan and security agreement to expire on October 24, 2004, from the original contract period which would have expired on October 24, 2003. In addition, the
amendment modified the borrowing base, quarterly and annual net income, net worth and current ratio covenants commencing with the fiscal quarter ended September 30, 2002, and the applicable interest rate margin commencing April 1, 2003. The
amendment also imposed certain accounts receivable limitations and instituted a new indebtedness to net worth ratio for the fiscal year ending March 31, 2003 and for each fiscal year end thereafter. The Company was not in compliance with the net
income covenant for the quarter ended December 31, 2002. The Company is however in negotiations with Standard along with other banks and expects to resolve this matter shortly. The interest rate on the term loan was 5.5%, and the interest rate on
the revolving credit facility was 4.25% at December 31, 2002. The outstanding balances on the revolving line of credit and term loan were approximately $20.4 million and $.6 million, respectively, as of December 31, 2002. The availability on the
line of credit at December 31, 2002 was approximately $2.1 million, based on eligible borrowing limits at that date.



The Company has sufficient liquidity to meet its projections for the next 12 months. However, if the Company looks into acquisitions, then it may need to
obtain outside financing, which may be in the form of bank financing or from the capital markets.



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 December 31, 2002, the Companys outstanding debt with Standard was approximately $20.4 million on the line of credit and $.6 million on the term loan. The interest rates charged on the line of credit and term loan are floating
rates subject to periodic



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##### Table of Contents

adjustment. At December 31, 2002, the interest rates charged on the line of credit and term loan were
4.25% and 5.5%, respectively. 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.



Item 4. CONTROLS AND PROCEDURES.



Based
on their most recent evaluation, which was completed within 90 days of the filing of this Form 10-Q, the Companys Chief Executive Officer and Chief Financial Officer believe that the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure that information required to be disclosed by the Company in this report which it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and
communicated to the Companys management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to ensure that such information is
recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. There were no significant changes in the Companys internal controls or in other factors that could significantly affect those
controls subsequent to the date of their evaluation.



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. The Company intends to
vigorously defend the actions filed against it and to pursue its counterclaim. The Company cannot reasonably estimate any future possible loss as a result of this matter. The Company has made no provision in the accompanying unaudited condensed
consolidated financial statements for resolution of this matter.



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 December 31, 2002
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.



The
following exhibits are filed with this report:



* Filed herewith.



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|2.1 |  | Agreement and Plan of Merger by and between NuMed Surgical, Inc. and Nutriceuticals.com Corporation, dated as of January 15, 1999. (1)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------



|2.2 |  | Agreement and Plan of Reorganization dated September 8, 1999 by and between Nutriceuticals.com Corporation and Dynamic Health Products, Inc. (2)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



|2.3 |  | Agreement and Plan of Reorganization between DrugMax.com, Inc., Jimmy L. Fagala, K. Sterling Miller, and HCT Capital Corp. dated as of March 20, 2000. (3)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|2.4 |  | Stock Purchase Agreement between DrugMax.com, Inc. and W.A. Butler Company dated as of March 20, 2000. (3)
|--- |  | ----------------------------------------------------------------------------------------------------------



|2.5 |  | Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A. Blundo dated as of
April 19, 2000. (4)
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2.6 |  | Agreement for Purchase and Sale of Assets by and between Discount Rx, Inc., and Penner & Welsch, Inc., dated October 12, 2001. (11)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------



|3.1 |  | Articles of Incorporation of NuMed Surgical, Inc., filed October 18, 1993. (1)
|--- |  | ------------------------------------------------------------------------------



|3.2 |  | Articles of Amendment to the Articles of Incorporation of NuMed Surgical, Inc., filed March 18, 1999. (1)
|--- |  | ---------------------------------------------------------------------------------------------------------



|3.3 |  | Articles of Merger of NuMed Surgical, Inc. and Nutriceuticals.com Corporation, filed March 18, 1999. (1)
|--- |  | --------------------------------------------------------------------------------------------------------



|3.4 |  | Certificate of Decrease in Number of Authorized Shares of Common Stock of Nutriceuticals.com Corporation, filed October 29, 1999. (5)
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------



|3.5 |  | Articles of Amendment to Articles of Incorporation of Nutriceuticals.com Corporation, filed January 11, 2000. (8)
|--- |  | -----------------------------------------------------------------------------------------------------------------



|3.6 |  | Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com, Inc., filed March 29, 2000. (8)
|--- |  | --------------------------------------------------------------------------------------------------------



|3.7 |  | Amended and Restated Bylaws, dated November 11, 1999. (5)
|--- |  | ---------------------------------------------------------



|4.2 |  | Specimen of Stock Certificate. (8)
|--- |  | ----------------------------------



|10.1 |  | Employment Agreement by and between Nutriceuticals.com Corporation and William L. LaGamba dated January 1, 2000. (7)
|---- |  | --------------------------------------------------------------------------------------------------------------------



|10.2 |  | Employment Agreement by and between Valley Drug Company and Ronald J. Patrick dated April 19, 2000 (8)
|---- |  | ------------------------------------------------------------------------------------------------------



|10.3 |  | Employment Agreement by and between DrugMax, Inc. and Jugal K. Taneja, dated October 1, 2001. (12)
|---- |  | --------------------------------------------------------------------------------------------------



|10.4 |  | Consulting Agreement by and between DrugMax.com, Inc. and Stephen M. Watters dated August 10, 2000. (9)
|---- |  | -------------------------------------------------------------------------------------------------------



|10.5 |  | Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug Company and Mellon Bank, N.A., dated October 24, 2000. (9)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------



|10.6 |  | Second Amended Loan and Security Agreement among DrugMax, Inc., Valley Drug Company, Discount Rx, Inc., Valley Drug Company South, and Standard Federal Bank
National Association, as successor in interest to Mellon Bank, N.A., dated October 22, 2001. (12)
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.7 |  | Third Amendment and Modification to Loan and Security Agreement among DrugMax, Inc., Valley Drug Company, Discount Rx, Inc, Valley Drug Company South and Standard
Federal Bank National Association, dated June 5, 2002. (14)
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|10.8 |  | DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. (8)
|---- |  | ------------------------------------------------------------------------



|10.9 |  | Amendment No. 1 to DrugMax, Inc. 1999 Incentive and Non-Statutory Stock Option Plan, dated June 5, 2002. (14)
|---- |  | -------------------------------------------------------------------------------------------------------------



|10.10 |  | Fourth Amendment and Modification to Loan and Security Agreement among DrugMax, Inc., Valley Drug Company, Discount Rx, Inc., Valley Drug Company South and Standard
Federal Bank National Association dated October 28, 2002. (15)
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|21.0 |  | Subsidiaries of DrugMax.com, Inc. (9)
|---- |  | -------------------------------------



|99.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|---- |  | -------------------------------------------------------------------------------------------------------------------------



|99.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|---- |  | -------------------------------------------------------------------------------------------------------------------------

---

| | (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.
| | --- |  | ----------------------------------------------------------------------------------------------



| | (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-Q, filed October 17, 2002.
| | ---- |  | -----------------------------------------------------------------------------



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(b) Reports on Form 8-K.



During the three months ended December 31, 2002, the Company filed no reports on Form 8-K.



Subsequent to December 31, 2002, the Company filed one Form 8-K on February
10, 2003, in connection with the change of independent accountants.



23



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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: |  | February 14, 2003 |  |  |  | By:          
|      |  |                   |  |  |  |              
|      |  |                   |  |  |  |              
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|Date: |  | February 14, 2003 |  |  |  | By:          
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|Date: |  | February 14, 2003 |  |  |  | By:          
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##### Table of Contents



CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002



I, Jugal K. Taneja, certify that:



1.     I have reviewed this quarterly report on Form 10-Q of DrugMax, Inc.;



2.     Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this quarterly report;



3.
    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;



4.     The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant, and we have:



a)     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others, particularly
during the period in which this quarterly report is being prepared;



b)     evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and



c)     presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5.     The registrants other
certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



a)     all significant
deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and



b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6.     The registrants other
certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



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|Dated:   February 14, 2003
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|                          



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##### Table of Contents



CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO SECTION 302 OF THE

SARBANES-OXLEY ACT OF 2002



I, Ronald J. Patrick, certify that:



1.     I have reviewed this quarterly report on Form 10-Q of DrugMax, Inc.;



2.     Based on my knowledge, this
quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this quarterly report;



3.
    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;



4.     The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:



a)     designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others, particularly
during the period in which this quarterly report is being prepared;



b)     evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the
Evaluation Date); and



c)     presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;



5.     The registrants other
certifying officer and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):



a)     all significant
deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize and report financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and



b)     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and



6.     The registrants other
certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.



|                          
|--------------------------
|Dated:   February 14, 2003
|                          
|                          



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