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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q/A

AMENDMENT NO. 1



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



For the quarterly period ended December 31, 2003



or



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



For the transition period from  to



Commission File Number 1-15445



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DRUGMAX, INC.,

(Formerly DrugMax.com, Inc.)

(Exact name of registrant as specified in its
charter)



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



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

(Address of principal executive offices)



(727) 533-0431

(Registrants telephone number, including area code)



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



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



As of February 13, 2004 there were 7,185,642 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, 2003



TABLE OF CONTENTS



|                                                                                              |  |                                                                                                                                 |  |       
|--------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------- |  | ------
|                                                                                              |  |                                                                                                                                 |  | Page #
|PART I
FINANCIAL INFORMATION                                                                  |  |                                                                                                                                
|                                                                                              | 
|Item 1.
Financial Statements                                                                  |  |                                                                                                                                
|                                                                                              |  |                                                                                                                                
|                                                                                              |  | Condensed Consolidated Balance Sheets December 31, 2003 (unaudited) and March 31, 2003                                          |  | 4     
|                                                                                              |  |                                                                                                                                
|                                                                                              |  | Condensed Consolidated Statements of Operations Three and Nine Months Ended December 31, 2003 and December 31, 2002 (unaudited) |  | 5     
|                                                                                              |  |                                                                                                                                
|                                                                                              |  | Condensed Consolidated Statements of Cash Flows Nine Months Ended December 31, 2003 and December 31, 2002 (unaudited)           |  | 6     
|                                                                                              |  |                                                                                                                                
|                                                                                              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                                |  | 7     
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13                                                                                                                             
|                                                                                              |  |                                                                                                                                
|                                                                                              |  | Financial Condition, Liquidity and Capital Resources                                                                            |  | 18    
|                                                                                              | 
|Item 3.
Quantitative and Qualitative Disclosures About Market Risk                            |  | 19                                                                                                                             
|                                                                                              | 
|Item 4.
Controls and Procedures                                                               |  | 19                                                                                                                             
|                                                                                              | 
|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                                                      |  | 22                                                                                                                             
|                                                                                              | 
|Signature Page                                                                                |  | 25                                                                                                                             
|                                                                                              | 
|Exhibit 31.1 Certification of Principal Executive Officer Pursuant to Section 302             |  |                                                                                                                                
|                                                                                              | 
|Exhibit 31.2 Certification of Principal Financial Officer Pursuant to Section 302             |  |                                                                                                                                
|                                                                                              | 
|Exhibit 32.1 Certification Pursuant to Section 906                                            |  |                                                                                                                                
|                                                                                              | 
|Exhibit 32.2 Certification Pursuant to Section 906                                            |  |                                                                                                                                



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##### Table of Contents

Explanatory Note



DrugMax, Inc. is filing this Amendment to its Quarterly Report on Form 10-Q for the period ended December 31, 2003 to restate certain
financial information for the quarter ended December 31, 2003 as a result of the premature recognition of a gain, in that quarter, relating to the Companys lawsuit with Alliance Healthcare, Inc. The adjustment to the third quarter resulted in
an increase in accounts payable of approximately $629,000 and an increase in cost of good sold of approximately $629,000. With the exception of the changes necessary to reflect the correction of the premature gain, no other information in the
Quarterly Report on Form 10-Q for the period ended December 31,2003 has been supplemented, updated or amended.



3



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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



|                                                                                                         |  |                          |             |   |                |   |             |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------ | ----------- | - | -------------- | - | ----------- | -
|                                                                                                         |  | December 31, 2003        |             |   | March 31, 2003 |  
|                                                                                                         |  | (As Restated)(Unaudited) |             |   |                |  
|ASSETS                                                                                                   |  |                          |             |   |                |   |             |  
|Current assets:                                                                                          |  |                          |             |   |                |   |             |  
|Cash and cash equivalents                                                                                |  | $                        | 166,900     |   |                | $ | 161,489     |  
|Restricted cash                                                                                          |  |                          |            |   |                |   | 2,000,000   |  
|Accounts receivable, net of allowance for doubtful accounts of $1,247,468 and $1,253,826                 |  |                          | 13,624,445  |   |                |   | 11,339,842  |  
|Inventory                                                                                                |  |                          | 16,153,678  |   |                |   | 19,458,940  |  
|Due from affiliates                                                                                      |  |                          |            |   |                |   | 10,470      |  
|Deferred income tax asset                                                                                |  |                          | 668,294     |   |                |   | 668,294     |  
|Prepaid expenses and other current assets                                                                |  |                          | 1,652,004   |   |                |   | 1,079,740   |  
|                                                                                                         |  |                          |             |   |                |   |             |  
|Total current assets                                                                                     |  |                          | 32,265,321  |   |                |   | 34,718,775  |  
|                                                                                                         |  |                         
|Property and equipment, net                                                                              |  |                          | 1,163,268   |   |                |   | 767,550     |  
|Goodwill                                                                                                 |  |                          | 13,105,000  |   |                |   | 13,105,000  |  
|Patents and trademarks                                                                                   |  |                          | 129,718     |   |                |   |            |  
|Notes receivable                                                                                         |  |                          | 496,172     |   |                |   | 625,329     |  
|Stockholders notes receivable                                                                            |  |                          | 21,277      |   |                |   | 100,000     |  
|Net deferred income tax asset - long-term                                                                |  |                          | 749,336     |   |                |   | 749,336     |  
|Deferred financing costs, net                                                                            |  |                          | 425,207     |   |                |   | 78,912      |  
|Other assets                                                                                             |  |                          | 135,202     |   |                |   | 95,660      |  
|Deposits                                                                                                 |  |                          | 85,291      |   |                |   | 33,561      |  
|                                                                                                         |  |                          |             |   |                |   |             |  
|Total assets                                                                                             |  | $                        | 48,575,792  |   |                | $ | 50,274,123  |  
|                                                                                                         |  |                          |             |   |                |   |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                     |  |                          |             |   |                |   |             |  
|                                                                                                         |  |                         
|Current liabilities:                                                                                     |  |                          |             |   |                |   |             |  
|Accounts payable                                                                                         |  | $                        | 10,214,936  |   |                | $ | 14,619,341  |  
|Accrued expenses and other current liabilities                                                           |  |                          | 350,202     |   |                |   | 415,065     |  
|Credit line payable                                                                                      |  |                          | 19,857,960  |   |                |   | 15,943,619  |  
|Current portion of long-term liabilities                                                                 |  |                          | 215,632     |   |                |   | 470,176     |  
|Due to affiliates                                                                                        |  |                          |            |   |                |   | 4,377       |  
|                                                                                                         |  |                          |             |   |                |   |             |  
|Total current liabilities                                                                                |  |                          | 30,638,730  |   |                |   | 31,452,578  |  
|                                                                                                         |  |                         
|Long-term debt and capital leases                                                                        |  |                          | 184,073     |   |                |   | 35,847      |  
|Other long-term liabilities                                                                              |  |                          |            |   |                |   | 501,561     |  
|                                                                                                         |  |                          |             |   |                |   |             |  
|Total liabilities                                                                                        |  |                          | 30,822,803  |   |                |   | 31,989,986  |  
|                                                                                                         |  |                         
|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; 7,178,976 shares issued and outstanding     |  |                          | 7,177       |   |                |   | 7,120       |  
|Additional paid-in capital                                                                               |  |                          | 41,058,727  |   |                |   | 40,967,355  |  
|Accumulated deficit                                                                                      |  |                          | (23,312,915 | ) |                |   | (22,690,338 | )
|                                                                                                         |  |                          |             |   |                |   |             |  
|Total stockholders equity                                                                               |  |                          | 17,752,989  |   |                |   | 18,284,137  |  
|                                                                                                         |  |                          |             |   |                |   |             |  
|Total liabilities and stockholders equity                                                               |  | $                        | 48,575,792  |   |                | $ | 50,274,123  |  
|                                                                                                         |  |                          |             |   |                |   |             |  



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ---------- | - | ------------------------------------------ | - | ---------- | ------------------------------------------ |  | - | ------------------------------------------ | - |  | - | ----------- | -
|                                                                                            |  | For the ThreeMonths EndedDecember 31, 2003 |            |   | For the ThreeMonths EndedDecember 31, 2002 |   |            | For the Nine Months EndedDecember 31, 2003 |  |   | For the Nine Months EndedDecember 31, 2002 |  
|                                                                                            |  | (As Restated)                              |            |   |                                            |   |            | (As Restated)                              |  |   |                                            |  
|Revenues                                                                                    |  | $                                          | 50,245,129 |   |                                            | $ | 85,233,822 |                                            |  | $ | 171,093,405                                |   |  | $ | 222,073,763 |  
|Cost of goods sold                                                                          |  |                                            | 48,806,637 |   |                                            |   | 83,350,640 |                                            |  |   | 165,532,150                                |   |  |   | 215,929,273 |  
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Gross profit                                                                                |  |                                            | 1,438,492  |   |                                            |   | 1,883,182  |                                            |  |   | 5,561,255                                  |   |  |   | 6,144,490   |  
|                                                                                            |  |                                            |            |  
|Selling, general and administrative expenses                                                |  |                                            | 1,742,947  |   |                                            |   | 1,596,674  |                                            |  |   | 5,305,999                                  |   |  |   | 5,972,536   |  
|Amortization expense                                                                        |  |                                            |           |   |                                            |   |           |                                            |  |   |                                           |   |  |   | 18,000      |  
|Depreciation expense                                                                        |  |                                            | 61,325     |   |                                            |   | 72,517     |                                            |  |   | 167,791                                    |   |  |   | 220,048     |  
|Goodwill impairment loss                                                                    |  |                                            |           |   |                                            |   |           |                                            |  |   |                                           |   |  |   | 12,468,212  |  
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Total operating expenses                                                                    |  |                                            | 1,804,272  |   |                                            |   | 1,669,191  |                                            |  |   | 5,473,790                                  |   |  |   | 18,678,796  |  
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Operating (loss) income                                                                     |  |                                            | (365,780   | ) |                                            |   | 213,991    |                                            |  |   | 87,465                                     |   |  |   | (12,534,306 | )
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Other income (expense)                                                                      |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Interest income                                                                             |  |                                            | 8,979      |   |                                            |   | 33,045     |                                            |  |   | 27,514                                     |   |  |   | 72,659      |  
|Other income                                                                                |  |                                            | 2,562      |   |                                            |   | 14,413     |                                            |  |   | 459,595                                    |   |  |   | 39,408      |  
|Interest expense                                                                            |  |                                            | (269,402   | ) |                                            |   | (226,263   | )                                          |  |   | (1,197,151                                 | ) |  |   | (806,583    | )
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Total other (expense)                                                                       |  |                                            | (257,861   | ) |                                            |   | (178,805   | )                                          |  |   | (710,042                                   | ) |  |   | (694,516    | )
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|(Loss) income before income tax provision and equity earnings from unconsoliated subsidiary |  |                                            | (623,641   | ) |                                            |   | 35,186     |                                            |  |   | (622,577                                   | ) |  |   | (13,228,822 | )
|Income tax provision                                                                        |  |                                            |           |   |                                            |   | (24,853    | )                                          |  |   |                                           |   |  |   | 368,935     |  
|Equity earnings from unconsolidated subsidiary                                              |  |                                            | 2,162      |   |                                            |   |           |                                            |  |   | 2,162                                      |   |  |   |            |  
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Net (loss) income                                                                           |  | $                                          | (621,479   | ) |                                            | $ | 10,333     |                                            |  | $ | (620,415                                   | ) |  | $ | (12,859,887 | )
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Net (loss) income per common share - basic                                                  |  | $                                          | (0.09      | ) |                                            | $ | 0.00       |                                            |  | $ | (0.09                                      | ) |  | $ | (1.81       | )
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Net (loss) income per common share - diluted                                                |  | $                                          | (0.09      | ) |                                            | $ | 0.00       |                                            |  | $ | (0.09                                      | ) |  | $ | (1.81       | )
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Weighted average shares outstanding - basic                                                 |  |                                            | 7,178,976  |   |                                            |   | 7,160,938  |                                            |  |   | 7,160,938                                  |   |  |   | 7,119,172   |  
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  
|Weighted average shares outstanding - diluted                                               |  |                                            | 7,178,976  |   |                                            |   | 7,281,265  |                                            |  |   | 7,160,938                                  |   |  |   | 7,119,172   |  
|                                                                                            |  |                                            |            |   |                                            |   |            |                                            |  |   |                                            |   |  |   |             |  



See accompanying notes
to condensed consolidated financial statements.



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##### Table of Contents

DRUGMAX, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------- | ---------- | - | ------------------------------------------- | - | ----------- | -
|                                                                                                                                                                                                               |  | For the Nine Months Ended December 31, 2003 |            |   | For the Nine Months Ended December 31, 2002 |  
|                                                                                                                                                                                                               |  | (As Restated)                               |            |   |                                             |  
|Cash flows from operating activities:                                                                                                                                                                          |  |                                             |            |   |                                             |   |             |  
|Net loss                                                                                                                                                                                                       |  | $                                           | (620,415   | ) |                                             | $ | (12,859,887 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                                                                                                                    |  |                                             |            |   |                                             |   |             |  
|Amortization of financing costs charged to interest expense                                                                                                                                                    |  |                                             | 190,305    |   |                                             |   | 98,961      |  
|Depreciation and amortization                                                                                                                                                                                  |  |                                             | 167,791    |   |                                             |   | 238,048     |  
|Minority interest                                                                                                                                                                                              |  |                                             | (2,162     | ) |                                             |   |            |  
|Goodwill impairment loss and intangible assets charge                                                                                                                                                          |  |                                             |           |   |                                             |   | 12,468,212  |  
|Bad debt expense                                                                                                                                                                                               |  |                                             |           |   |                                             |   | 908,769     |  
|Forgiveness of liability                                                                                                                                                                                       |  |                                             | (501,561   | ) |                                             |   |            |  
|Loss on disposal of assets                                                                                                                                                                                     |  |                                             | 2,227      |   |                                             |   | 1,121       |  
|Increase in net deferred income tax asset                                                                                                                                                                      |  |                                             |           |   |                                             |   | (369,135    | )
|Changes in operating assets and liabilities, net of acquisition:                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|Accounts receivable, net                                                                                                                                                                                       |  |                                             | (2,290,149 | ) |                                             |   | (3,848,399  | )
|Inventory                                                                                                                                                                                                      |  |                                             | 3,529,905  |   |                                             |   | 2,787,821   |  
|Due from affiliates                                                                                                                                                                                            |  |                                             | 10,470     |   |                                             |   | 593         |  
|Prepaid expense and other current assets                                                                                                                                                                       |  |                                             | (580,744   | ) |                                             |   | (1,060,307  | )
|Other assets                                                                                                                                                                                                   |  |                                             | 8,525      |   |                                             |   | 2,780       |  
|Patents and trademarks                                                                                                                                                                                         |  |                                             | (3,034     | ) |                                             |   |            |  
|Shareholder notes receivable                                                                                                                                                                                   |  |                                             | 78,723     |   |                                             |   |            |  
|Notes receivable                                                                                                                                                                                               |  |                                             | 129,157    |   |                                             |   | 135,833     |  
|Deposits                                                                                                                                                                                                       |  |                                             | (42,400    | ) |                                             |   | (4,608      | )
|Accounts payable                                                                                                                                                                                               |  |                                             | (5,001,834 | ) |                                             |   | 480,383     |  
|Accrued expenses and other current lliabilities                                                                                                                                                                |  |                                             | (79,994    | ) |                                             |   | 234,020     |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|Net cash used in operating activities                                                                                                                                                                          |  |                                             | (5,005,190 | ) |                                             |   | (785,795    | )
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|Cash flows from investing activities:                                                                                                                                                                          |  |                                             |            |   |                                             |   |             |  
|Purchases of property and equipment                                                                                                                                                                            |  |                                             | (248,120   | ) |                                             |   | (36,159     | )
|Proceeds from sale of property and equipment                                                                                                                                                                   |  |                                             |           |   |                                             |   | 2,756       |  
|Cash paid for acquisition of Avery                                                                                                                                                                             |  |                                             | (34,071    | ) |                                             |   |            |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|Net cash used in investing activities                                                                                                                                                                          |  |                                             | (282,191   | ) |                                             |   | (33,403     | )
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|                                                                                                                                                                                                               |  |                                            
|Cash flows from financing activities:                                                                                                                                                                          |  |                                             |            |   |                                             |   |             |  
|Net change in restricted cash                                                                                                                                                                                  |  |                                             | 2,000,000  |   |                                             |   |            |  
|Net change in cash due to reclassification of account                                                                                                                                                          |  |                                             | 1,933      |   |                                             |   |            |  
|Net change under revolving line of credit agreement                                                                                                                                                            |  |                                             | 3,914,341  |   |                                             |   | 1,422,137   |  
|Increase in deferred financing costs                                                                                                                                                                           |  |                                             | (445,172   | ) |                                             |   | (53,006     | )
|Payments of long-term debt and capital leases                                                                                                                                                                  |  |                                             | (173,933   | ) |                                             |   | (509,121    | )
|(Payments to) proceeds from affiliates                                                                                                                                                                         |  |                                             | (4,377     | ) |                                             |   |            |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|Net cash provided by financing activities                                                                                                                                                                      |  |                                             | 5,292,792  |   |                                             |   | 860,010     |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|INCREASE IN CASH AND CASH EQUIVALENTS                                                                                                                                                                          |  |                                             | 5,411      |   |                                             |   | 40,812      |  
|                                                                                                                                                                                                               |  |                                            
|Cash and cash equivalents at beginning of period                                                                                                                                                               |  |                                             | 161,489    |   |                                             |   | 167,373     |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                                                                                                                                     |  | $                                           | 166,900    |   |                                             | $ | 208,185     |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOWS ACTIVITIES                                                                                                                                                              |  |                                             |            |   |                                             |   |             |  
|Cash paid for interest                                                                                                                                                                                         |  | $                                           | 1,006,846  |   |                                             | $ | 707,622     |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|Cash paid for income taxes                                                                                                                                                                                     |  | $                                           |           |   |                                             | $ |            |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                                                                                                                                          |  |                                             |            |   |                                             |   |             |  
|                                                                                                                                                                                                               |  |                                            
|Conversion of accounts receivable to notes receivable                                                                                                                                                          |  |                                             |            |   |                                             | $ | 201,197     |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|Asset acquired through long-term financing                                                                                                                                                                     |  |                                             |            |   |                                             | $ | 31,602      |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|In April 2003, pursuant to the agreement with W.A. Butler & Company, the Company recorded the reversal of a long-term debt to W.A. Butler
& Co.                                                                |  | $                                           | 501,561    |   |                                             |   |             |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|In May 2003, the Company purchased substantially all the assets of Avery Pharmaceuticals, Inc. No cash was paid for the acquisition. In
conjunction with the acquisition, liabilities were assumed as follows: |  |                                             |            |   |                                             |   |             |  
|Fair value of assets acquired                                                                                                                                                                                  |  | $                                           | 789,202    |   |                                             |   |             |  
|Acquisition note executed                                                                                                                                                                                      |  |                                             | (90,000    | ) |                                             |   |             |  
|Forgiveness of debt owed to the Company                                                                                                                                                                        |  |                                             | (52,571    | ) |                                             |   |             |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|Liabilities assumed                                                                                                                                                                                            |  | $                                           | 646,631    |   |                                             |   |             |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  
|In June 2003, the Company issued 57,143 shares of common stock of the Company to Jugal K. Taneja for his guaranty executed in favor of
Congress.                                                               |  | $                                           | 91,429     |   |                                             |   |             |  
|                                                                                                                                                                                                               |  |                                             |            |   |                                             |   |             |  



(concluded)



See accompanying notes to condensed consolidated financial statements.



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Notes to Condensed Consolidated Financial Statements (Unaudited)



For the Three and Nine Months Ended December 31, 2003 and 2002.



NOTE A-BASIS OF PRESENTATION



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



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



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



NOTE B - RECENT ACCOUNTING PROUNCEMENTS



In April 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, Rescission of
FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145). SFAS No. 145 will rescind SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated
and, if material, classified as an extraordinary item, net of related income tax benefit. As a result of SFAS No. 145, the criteria in APB No. 30 will be used to classify those gains and losses. The provisions of SFAS No. 145 related to of the
rescission of FASB No. 13 shall be applied in fiscal years beginning after May 15, 2002. Early application of the provisions of SFAS No. 145 related to the rescission of FSAB No. 13 is encouraged. The components of SFAS No. 145 adopted in fiscal
2003, resulted in the Company recording forgiveness of debt to other income in the nine months ended December 31, 2003.



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



In November 2002, the FASB issued FASB Interpretation Number (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(FIN 45). FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan



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guarantees such as standby letters of credit. It also requires that at all times a company issues a guarantee, the
company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement
provisions of FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. The Company will apply the provisions of FIN 45 to any guarantees issued after December 31, 2002. As of December 31, 2003, the Company did
not have any guarantees outstanding.



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



In January 2003, the FASB issued FIN 46,
Consolidation of Variable Interest Entities (FIN 46). FIN 46 clarifies the application of Accounting Research Bulletin No. 51 for certain entities in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January
31, 2003. Initially, FIN 46 was to apply in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. At its
October 2003 meeting, the FASB agreed to defer the effective date of FIN 46 for variable interests held by public companies in all entities that were acquired prior to February 1, 2003. The deferral will require that public companies adopt the
provisions of FIN 46 at the end of periods ending after December 15, 2003. The interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial
statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. The adoption of FIN 46 in the third fiscal quarter ended December 31, 2003 had no impact on the Company.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity (SFAS No. 150). SFAS No. 150 establishes standards for how an issuer classifies and measurers in its statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with SFAS No. 150, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except, mandatorily redeemable non-controlling (minority) interests which, on October 29, 2003, the FASB
decided to defer indefinitely. As of December 31, 2003, the adoption of SFAS No. 150 has had no impact on the Company.



In January 2004, the FASB issued a Financial Staff Position (FSP) pertaining to SFAS No. 106-1, Accounting and disclosure Requirements Related to
theMedicare Prescription Drug, Improvement and Modernization Act of 2003 (FSP SFAS No. 106-1). FSP SFAS No. 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a
one-time election to defer recognizing the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) until authoritative guidance on accounting for the federal subsidy is issued or until certain other
events occur. Accordingly, the condensed consolidated financial statements of the Company do not reflect the effect of the Act, if any. Currently, the Company does not sponsor a postretirement health care plan that provides a prescription drug
benefit.



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Stock Based Compensation



In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation(SFAS No. 123), which was effective for fiscal years
beginning after December 15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-based compensation expense based on the fair value of the awards or to account for stock-based compensation under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), and disclose in the consolidated financial statements the effects of SFAS No. 123 as if the recognition provisions were adopted. The
Company has adopted the recognition provisions of APB Opinion No. 25. The following table illustrates the effect on net income (loss) and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation for the three and nine months ended December 31, 2003 and 2002:



|                                                                                                                                    |  |                                           |            |   |                                           |   |          |                                          |  |   |                                          |   |  |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ---------- | - | ----------------------------------------- | - | -------- | ---------------------------------------- |  | - | ---------------------------------------- | - |  | - | ----------- | -
|                                                                                                                                    |  | For the ThreeMonths EndedDecember 31,2003 |            |   | For the ThreeMonths EndedDecember 31,2002 |   |          | For the NineMonths EndedDecember 31,2003 |  |   | For the NineMonths EndedDecember 31,2002 |  
|                                                                                                                                    |  | (As Restated)                             |            |   |                                           |   |          | (As Restated)                            |  |   |                                          |  
|Net (loss) income reported                                                                                                          |  | $                                         | (621,479   | ) |                                           | $ | 10,333   |                                          |  | $ | (620,415                                 | ) |  | $ | (12,857,887 | )
|Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                           | (912,270   | ) |                                           |   | (165,490 | )                                        |  |   | (1,510,685                               | ) |  |   | (496,467    | )
|                                                                                                                                    |  |                                           |            |   |                                           |   |          |                                          |  |   |                                          |   |  |   |             |  
|Pro forma net loss                                                                                                                  |  | $                                         | (1,533,749 | ) |                                           | $ | (155,157 | )                                        |  | $ | (2,131,100                               | ) |  | $ | (13,354,354 | )
|                                                                                                                                    |  |                                           |            |   |                                           |   |          |                                          |  |   |                                          |   |  |   |             |  
|Loss per common share as reported:                                                                                                  |  |                                           |            |   |                                           |   |          |                                          |  |   |                                          |   |  |   |             |  
|Basic                                                                                                                               |  | $                                         | (0.09      | ) |                                           | $ | 0.00     |                                          |  | $ | (0.09                                    | ) |  | $ | (1.81       | )
|Diluted                                                                                                                             |  | $                                         | (0.09      | ) |                                           | $ | 0.00     |                                          |  | $ | (0.09                                    | ) |  | $ | (1.81       | )
|Loss per common share - pro forma:                                                                                                  |  |                                           |            |   |                                           |   |          |                                          |  |   |                                          |   |  |   |             |  
|Basic                                                                                                                               |  | $                                         | (0.21      | ) |                                           | $ | (0.02    | )                                        |  | $ | (0.30                                    | ) |  | $ | (1.88       | )
|Diluted                                                                                                                             |  | $                                         | (0.21      | ) |                                           | $ | (0.02    | )                                        |  | $ | (0.30                                    | ) |  | $ | (1.88       | )



For purposes of the above disclosure,
the determination of the fair value of stock options granted in the three months ended December 31, 2003 and 2002 was based on the following: (i) a risk free interest rate of 3.94% (ii) expected option lives of 5 - 10 years; and (iii) expected
volatility in the market price of the Companys common stock of 67%.



In
addition to the 1999 Incentive Stock Option Plan, the shareholders of the Company approved the Restricted Stock Plan at the Companys annual meeting in October 2003. There has been no stock issued under the Restricted Stock Plan as of December
31, 2003.



NOTE C - ACQUISITIONS



VetMall, Inc.



In April 2003, W.A. Butler & Company (Butler), a 30% shareholder of VetMall, executed an agreement with the Company and
VetMall. The terms of the agreement provide for the transfer of Butlers 30% ownership of VetMall stock and the forgiveness of $.5 million of long-term liabilities, which is included in other income in the condensed consolidated financial
statements of the Company. The agreement also releases Butler from any present and future operational expenses of VetMall. The transfer of Butlers 30% interest in VetMall did not have an impact on the revenues or operating expenses of the
Company for the three and nine months ended December 31, 2003.



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Avery Pharmaceuticals, Inc.



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



Pursuant to the Avery Agreement, the Company acquired accounts receivable, inventory, equipment, furniture, the trade name and a patent pending for the process of the
manufacture of vials for the respiratory therapy industry, totaling approximately $789,000. The liabilities assumed, which were comprised principally of trade payables, amounted to approximately $646,000, in addition to the forgiveness of debt owed
to the Company of approximately $53,000. In addition, the Company executed a promissory note in the amount of $318,000 to the predecessor companys 50% shareholder, as additional consideration. The note includes a right of set off for accounts
payable in excess of an agreed upon amount assumed at closing. The original note may not be reduced below $90,000 after set off. Management believes the adjusted note amount will be $90,000 after the set off for accounts payables honored by the
Company since the acquisition; therefore, the Company has recorded the note in the amount of $90,000. Additionally, the Avery Agreement contains a provision whereby based on Avery Pharmaceuticals earnings, the note may be increased to the
original amount of $318,000 which would be treated as an addition to the purchase price. Terms of the note provide for principal payments due monthly beginning July 5, 2003 through the due date of January 5, 2006. Interest on the note is due
quarterly beginning September 5, 2003 at the rate of 6% per annum. Also, the Company executed a Consulting and Non-Competition Agreement (Consulting Agreement) with John VerVynck (VerVynck) an officer and shareholder of Avery
Pharmaceuticals and Infinity. The Consulting Agreement provided for the payment to VerVynck of $39,360, payable bi-monthly, over the six-month term of the Consulting Agreement. Upon completion of the Consulting Agreement in December 2003
VerVyncks employment with the Company was terminated. The Consulting Agreement prohibits VerVynck from competing for one year following his termination and the six-month term of the consulting agreement The Company operates the acquired
business through its wholly owned subsidiary Valley South.



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



|                                                 |  |   |          |  
|------------------------------------------------ |  | - | -------- | -
|Accounts receivable - trade                      |  | $ | 47,025   |  
|Accounts receivable - other                      |  |   | 39,920   |  
|Inventory                                        |  |   | 224,643  |  
|Property and equipment                           |  |   | 340,000  |  
|Other assets                                     |  |   | 10,930   |  
|Patent                                           |  |   | 126,684  |  
|Assumption of liabilities                        |  |   | (646,631 | )
|                                                 |  |   |          |  
|Net value of purchased assets                    |  |   | 142,571  |  
|Forgiveness of trade payables due to the Company |  |   | (52,571  | )
|Acquisition note payable                         |  |   | (90,000  | )
|                                                 |  |   |          |  
|Cash paid for acquisition                        |  | $ |         |  
|                                                 |  |   |          |  



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The unaudited pro forma effect of the acquisition of Avery on the Companys revenue, net income
(loss) and net income (loss) per share for the three and nine months ended December 31, 2003 and 2002 had the acquisition occurred on April 1, 2002, are as follows:



|                                |  |                                            |            |   |                                            |   |            |                                            |  |   |                                           |   |  |   |             |  
|------------------------------- |  | ------------------------------------------ | ---------- | - | ------------------------------------------ | - | ---------- | ------------------------------------------ |  | - | ----------------------------------------- | - |  | - | ----------- | -
|                                |  | For the ThreeMonths EndedDecember 31, 2003 |            |   | For the ThreeMonths EndedDecember 31, 2002 |   |            | For the Nine Months Ended December 31,2003 |  |   | For the NineMonths EndedDecember 31, 2002 |  
|                                |  | (As Restated)                              |            |   |                                            |   |            | (As Restated)                              |  |   |                                           |  
|Revenues                        |  | $                                          | 50,245,129 |   |                                            | $ | 86,454,356 |                                            |  | $ | 172,198,068                               |   |  | $ | 227,494,254 |  
|Net loss before tax benefit     |  |                                            | (621,479   | ) |                                            |   | (75,640    | )                                          |  |   | (640,013                                  | ) |  |   | (13,387,276 | )
|Tax benefit                     |  |                                            |           |   |                                            |   | (24,853    | )                                          |  |   |                                          |   |  |   | 368,935     |  
|Net Income (loss)               |  |                                            | (621,479   | ) |                                            |   | (100,493   | )                                          |  |   | (640,013                                  | ) |  |   | (13,018,341 | )
|Loss per common share - basic   |  |                                            | (0.09      | ) |                                            |   | (0.01      | )                                          |  |   | (0.09                                     | ) |  |   | (1.88       | )
|Loss per common share - diluted |  |                                            | (0.09      | ) |                                            |   | (0.01      | )                                          |  |   | (0.09                                     | ) |  |   | (1.83       | )



NOTE D - GOODWILL AND OTHER
INTANGIBLE ASSETS



The carrying value of goodwill did not change for the
nine months ended December 31, 2003. The Company has determined that it has one reporting unit in the distribution business. Management further has determined that the distribution reporting unit should be reported in the aggregate based upon
similar economic characteristics within each subsidiary within that segment.



The change in the carrying value of other intangible assets for the nine months ended December 31, 2003 is as follows:



|                              |  |                     |         |                         |   |                     |  |                         |   |  |   |  
|----------------------------- |  | ------------------- | ------- | ----------------------- | - | ------------------- |  | ----------------------- | - |  | - | -
|                              |  | December 31, 2003   |         | March 31, 2003         
|                              |  | GrossCarryingAmount |         | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Amortizable intangible asset: |  |                     |         |                         |   |                     |  |                         |   |  |   |  
|Patent                        |  | $                   | 129,718 |                         | $ |                    |  | $                       |  |  | $ | 



The Company did not record
amortization expense for the three and nine months ended December 31, 2003 on the patent recorded as a result of the Avery acquisition in May 2003, pending the final approval of the patent by the United States Patent and Trademark Office, and the
implementation of the patented asset by the Company. Amortization expense recorded for an intangible asset in the form of a non-compete agreement was $-0- and $18,000 for the three and nine months ended December 31, 2002.



NOTE E - INCOME TAXES



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



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NOTE F - DEBT



On April 15, 2003, the Company obtained from Congress Financial Corporation (Congress) a $40 million revolving line of credit and a $400,000 term loan. The
Congress credit facility along with the Mellon Bank N.A. (Mellon) restricted cash account of $2 million were used to satisfy the outstanding line of credit and term loan with Standard Federal Bank National Association
(Standard), formerly Michigan National Bank as successor in interest to Mellon.. The Congress revolving line of credit enables the Company to borrow a maximum of $40 million, with borrowings limited to 85% of eligible accounts receivable
and 65% of eligible inventory. The revolving line of credit and the term note currently bear interest at the rate of 0.50% per annum in excess of the Prime Rate. The Congress credit facility is collateralized by all of the Companys assets. The
line of credit is for a term of 36 months, and the term note is payable over the same 36-month period. The Congress credit facility imposes certain restrictive covenants on Tangible Net Worth and EBITDA. At December 31, 2003, as restated, the
Company was not in compliance with the EBITDA and tangible net worth covenants. All costs associated with the Congress credit facility will be amortized as interest expense over the term of the loan. The outstanding balance on the revolving line of
credit and term loan were approximately $19,900,000 and $311,000, respectively, at December 31, 2003. At December 31, 2003, the interest rate on the revolving line of credit and term loan was 4.5%.



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



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



NOTE G - SEGMENT INFORMATION



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



The Company has determined that is has one reportable segment because all distribution subsidiaries have similar economic characteristics, such as margins, products,
customers, distribution networks and regulatory oversight. The distribution line of business represents 100% of consolidated revenues in the three and nine months ended December 31, 2003 and 2002. The critical accounting policies of the operating
segment are those discussed in Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations.



The Company distributes product both within and outside the United States. Revenues from distribution within the United States represented approximately 99.4% and 99.5%
of gross revenues for the three and nine months ended December 31, 2003, respectively, and approximately 99.5% of gross revenues for each the three and nine months ended December 31, 2002. Foreign revenues were generated from distribution to
customers in Puerto Rico.



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NOTE H  CONTINGENCIES



On October 2, 2003, QK Healthcare, Inc. (QK) filed a complaint against Valley in the United States District Court of the Eastern
District of New York, which included several counts with regard to the sale of twenty bottles of Lipitor by Valley to QK, including breach of contract, violations of the implied warranty of merchantability and fraud. The complaint demands actual
damages, punitive damages and legal fees and expenses. On January 9, 2004, the Company filed an answer and counterclaim against QK, in which the Company seeks to recover from QK losses caused when QK refused to pay for pharmaceuticals ordered from
the Company. The Company intends to vigorously defend QKs action and prosecute the counterclaim. The Company cannot reasonably estimate any future possible loss or possible recovery as a result of this matter and has made no provision in the
accompanying condensed consolidated financial statements for the resolution of this matter.



On November 12, 2003, Phil & Kathys, Inc., d/b/a Alliance Wholesale Distributors (Alliance) served a complaint against the Company seeking to recover $2,000,535 based on an alleged breach of
contract for the sale of pharmaceuticals. On December 18, 2003, the Company filed an answer and counterclaim. The counterclaim seeks to recover lost profits and other damages related to the purchase of twenty bottles of Lipitor from Alliance, which
the Company later sold to QK. The Company intends to vigorously defend Alliances breach of contract action and prosecute the counterclaim. The Company cannot reasonably estimate any future possible loss as a result of the Alliance complaint or
possible recovery through the Companys counterclaim and has made no provision in the accompanying condensed consolidated financial statements for the resolution of this matter.



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



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



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



Important factors that could cause the actual results to differ
materially from those in the forward-looking statements include, among other items, (i) changes in the regulatory and general economic environment related to the health care and pharmaceutical industries, including possible changes in reimbursement
for healthcare products and in manufacturers pricing or distribution policies; (ii) conditions in the capital markets, including the interest rate environment and the availability of capital; (iii) changes in the



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



Overview



DrugMax, Inc. (Nasdaq: DMAX) is a full-line, wholesale distributor of pharmaceuticals,
over-the-counter products, health and beauty care aids, nutritional supplements, and other related products. The Company is headquartered in Clearwater, Florida and maintains distribution centers in Pennsylvania, Ohio, 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 condensed
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 the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going
basis, the Company evaluates its estimates and judgments, including those related to customer incentives, product returns, bad debts, inventories, intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates and
judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



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



Revenue Recognition



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



The Company accepts return of product from its customers for product which is saleable, in unopened containers and carries a current date. Generally, product returns are received via the Companys own



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delivery vehicles, thereby eliminating a direct shipping cost from being incurred by the customer or the Company.
Depending on the length of time the customer has held the product; the Company may charge a handling and restocking fee. Overall, the percentage of the return of product to the Company is extremely low. The Company has no sales incentive or rebate
programs with its customers.



Inventory Valuation



Inventory is stated at the lower of cost or market. Cost is determined using the first-in,
first-out basis of accounting. Inventories consist of brand and generic drugs, over-the-counter products, health and beauty aids, nutritional supplements, and other related products held for resale. The inventories of the Companys three
distribution centers are constantly monitored for out-of-date or damaged products, which if exist, are reclassed and physically relocated out of saleable inventory to a holding area, referred to as the morgue inventory, for return to and
credit from the manufacturer. However, if market acceptance of the Companys existing products or the successful introduction of new products should significantly decrease, inventory write-downs could be required. As of December 31, 2003 and
2002, no inventory valuation allowances were necessary.



Goodwill and
Intangible Assets



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



Impairment of Long-Lived Assets



Long-lived assets are reviewed for impairment when events or circumstances indicate that a
diminution in value may have occurred, based on a comparison of undiscounted future cash flows to the carrying amount of the long-lived asset. Periodically, the Company evaluates the recoverability of the net carrying value of its property and
equipment, by comparing the carrying values to the estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down
would be the difference between the carrying amounts and the fair value of these assets. Losses on impairments are recognized by a charge to earnings. The Company recorded an impairment of assets charge as a result of its annual impairment testing
at September 30, 2002. The Company completed its impairment testing at September 30, 2003 and determined that no impairment existed.



Results of Operations



For the Three and Nine Months Ended December 31, 2003 and 2002.



Revenues. The Company generated revenues of $50.2 million and $171.1 million for the three and nine months ended December 31, 2003, respectively, compared to revenues of $85.2 million and $222.1 million for the
three and nine months ended December 31, 2002, respectively



The net decrease
in revenues were the result of several factors:



1. Branded
drug sales declined by approximately $35 million and $47 million during the three and nine months ended December 31, 2003, respectively, as compared to the same periods during the prior year. The decline is the result of the Companys continued
focus on its core business of servicing



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independent pharmacies, hospitals and small chain stores, and less emphasis on sales to warehouse customers, which
generate nominal gross profit. Sales to warehouse customers decreased during three and nine months ended December 31, 2003 as a result of:



| |  | Changes in vendor programs affecting alternate source customers;
| | - | ----------------------------------------------------------------



| |  | Loss of business due to the complaint filed by QK Healthcare;
| | - | -------------------------------------------------------------



| |  | Expensive branded drugs going off patent which were replaced by generic equivalent drugs at substantially lower cost; and
| | - | -------------------------------------------------------------------------------------------------------------------------



| |  | Decreased sales to primary pharmacy customers serviced by the Louisiana distribution center due to change in business focus to a generic distributor in 2002.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



2. During the three and nine
months ended December 31, 2003, total over the counter and respiratory sales amounted to $1,747,310 and $3,687,866, respectively, as compared to $1,696,574 and $7,666,867 for the same periods in 2002. The decline for the nine-month period was caused
by the Companys lesser degree of participation in special buy-in programs due to products not available from suppliers in the quantities previously supplied.



|                             |  |                                        |            |                                        |   |                                        |  |                                       |             |  |   |            
|---------------------------- |  | -------------------------------------- | ---------- | -------------------------------------- | - | -------------------------------------- |  | ------------------------------------- | ----------- |  | - | -----------
|                             |  | For Three MonthsEnded December 31,2003 |            | For Three MonthsEnded December 31,2002 |   | For Nine MonthsEnded December 31, 2003 |  | For Nine MonthsEnded December 31,2002
|Revenues from:               |  |                                        |            |                                        |   |                                        |  |                                       |             |  |   |            
|Branded pharmaceuticals      |  | $                                      | 45,744,028 |                                        | $ | 80,449,831                             |  | $                                     | 157,373,089 |  | $ | 203,703,235
|Generic pharmaceuticals      |  |                                        | 2,753,791  |                                        |   | 3,087,417                              |  |                                       | 10,032,450  |  |   | 10,703,661 
|Over-the-counter and general |  |                                        | 1,386,391  |                                        |   | 1,696,574                              |  |                                       | 3,206,092   |  |   | 7,666,867  
|Respiratory products         |  |                                        | 360,919    |                                        |   |                                       |  |                                       | 481,774     |  |   |           
|                             |  |                                        |            |                                        |   |                                        |  |                                       |             |  |   |            
|Total Revenues               |  | $                                      | 50,245,129 |                                        | $ | 85,233,822                             |  | $                                     | 171,093,405 |  | $ | 222,073,763
|                             |  |                                        |            |                                        |   |                                        |  |                                       |             |  |   |            



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



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



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



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



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



Gross Profit. The Company achieved gross profit of approximately $1.4 million and $5.6 million for the three and nine months ended December 31, 2003, respectively,
compared to approximately $1.9 million and $6.1 million for the three and nine months ended December 31, 2002, respectively. The Companys margin, as a percentage of revenue, was 2.9% and 3.3% for the three and nine months ended December 31,
2003, respectively, and 2.2% and 2.8% for the three and nine months ended December 31, 2002, respectively. The increase in gross margin percentage for the three and nine months ended December 31, 2003 over the gross margin percentage for the three
and nine months ended December 31, 2002 was primarily due the increased percentage of total sales of the more profitable generic, over the counter and respiratory product sales as compared to the lower margin brand pharmaceutical sales. Generic
sales represented approximately 5.5% and 5.9% of the total sales for the three and nine months ended December 31, 2003, respectively, as compared to approximately 3.6% and 4.8% of the total sales for the three and nine months ended December 31,2002,
respectively. Emphasis on generic sales continues to be part of the Companys focus to improve gross profit.



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Operating Expenses and Other Income and Expenses. The Company incurred operating expenses of approximately $1.8
million and $5.5 million for the three and nine months ended December 31, 2003, respectively, compared to approximately $1.7 million and $18.7 million for the three and nine months ended December 31, 2002, respectively. The following schedule
details the major components of operating expenses:



|                                                                     |  |                                            |           |                                            |   |                                           |  |                                           |           |  |   |           
|-------------------------------------------------------------------- |  | ------------------------------------------ | --------- | ------------------------------------------ | - | ----------------------------------------- |  | ----------------------------------------- | --------- |  | - | ----------
|                                                                     |  | For the ThreeMonths EndedDecember 31, 2003 |           | For the ThreeMonths EndedDecember 31, 2002 |   | For the NineMonths EndedDecember 31, 2003 |  | For the NineMonths EndedDecember 31, 2002
|Operating expenses:                                                  |  |                                            |           |                                            |   |                                           |  |                                           |           |  |   |           
|Administrative, sales, marketing and other direct operating expenses |  | $                                          | 1,742,947 |                                            | $ | 1,596,674                                 |  | $                                         | 5,305,999 |  | $ | 5,075,536 
|Amortization and depreciation expense                                |  |                                            | 61,325    |                                            |   | 72,517                                    |  |                                           | 167,791   |  |   | 238,048   
|Bad debt expense                                                     |  |                                            |          |                                            |   |                                          |  |                                           |          |  |   | 897,000   
|Goodwill impairment loss and intangible asset charge                 |  |                                            |          |                                            |   |                                          |  |                                           |          |  |   | 12,468,212
|                                                                     |  |                                            |           |                                            |   |                                           |  |                                           |           |  |   |           
|Total operating expenses                                             |  | $                                          | 1,804,272 |                                            | $ | 1,669,191                                 |  | $                                         | 5,473,790 |  | $ | 18,678,796
|                                                                     |  |                                            |           |                                            |   |                                           |  |                                           |           |  |   |           



Administrative, sales, marketing and
other direct operating expenses and bad debt were approximately 3.6% and 3.2% of gross revenues for the three and nine months ended December 31, 2003, respectively, and approximately 2.0% and 2.8% of gross revenues for the three and nine months
ended December 31, 2002, respectively. The increases of 1.6% and 0.4% in the administrative, sales, marketing and other direct operating expenses for the three and nine months ended December 31, 2003 over the three and nine months ended December 31,
2002, respectively, were due primarily to the decline in gross revenues in 2003 and increased operating costs associated with the acquisition of Avery in May 2003.



The Company acquired the business of Avery in May 2003. Based upon initial projections management received from Avery personnel, it was
anticipated that the Avery operations would impact the Company positively, primarily as a result of the Companys acquisition of a patent on the manufacture of respiratory products. For the three and nine months ended December 31, 2003, the
Avery operations incurred a net loss of $162,000 and $292,000, respectively, resulting from merger and reorganization costs, personnel changes, and other costs of operations. The Company has completed the testing of the patented product in January
2004 and anticipates production to begin in March 2004.



The Company realized
approximately $12,000 and $487,000 in other income for the three and nine months ended December 31, 2003, respectively, compared to approximately $47,000 and $112,000 for the three and nine months ended December 31, 2002, respectively. In April
2003, the Company recorded approximately $73,000 in costs associated with the termination of the Standard credit facility, which were charged as other expense, and recorded as other income the reversal of a long-term liability due to Butler of
approximately $502,000 in connection with the agreement between the Company and Butler whereby Butler assigned its 30% ownership in VetMall to the Company. (See Acquisitions.)



For the three and nine months ended December 31, 2003 the Company recorded $2,162 in income from minority interests. The joint venture with
MorepenMax has begun initial operations during this period and currently has nominal sales. The income recorded represents 49% of the joint ventures net income.



Interest expense. Interest expense was approximately $269,000 and $1,197,000 for the three and nine months ended December 31, 2003,
respectively, and approximately $226,000 and $807,000 for the three and nine months ended December 31, 2002, respectively. Included in interest expense is the amortization of loan financing costs, which were approximately $47,000 and $190,000 for
the three and nine months ended December 31, 2003, respectively, and the early termination fee of $350,934 and the 90-day notice waiver fee of $30,000 charged by Standard for the early termination of that credit facility in April 2003. Included in
interest expense is the amortization of loan financing costs for the three and nine months ended December 31, 2002 is approximately $26,000 and $99,000, respectively.



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Net (loss) income per share. EPS is calculated by dividing the net income (loss) by the weighted average number of
shares of common stock outstanding for the period. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of options and warrants,
using the treasury stock method. The net loss per share for the three and nine months ended December 31, 2003 was ($.09) per basic and diluted shares, compared to a net income of $.00 and a net loss of ($1.81) per basic and diluted share,
respectively, for the three and nine months ended December 31, 2002. The Company had issued and outstanding 1,515,817 and 1,434,048 options to purchase shares of the Companys common stock, in addition to warrants to purchase 150,000 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, 2003. These anti-dilutive shares could potentially dilute the basic EPS in the future.
Shares of common stock used in the calculation of basic and dilutive net loss per share for the nine months ended December 31, 2003 were 7,160,938.



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



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



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



During the three and nine months
ended December 31, 2003, no tax effect was recorded due to the insignificant impact on the operating results. During the three and nine months ended December 31, 2002, the Company recorded income tax expense of $24,853 and a net deferred income tax
benefit of $368,935, respectively. As of December 31, 2003, management continues to believe that it is more likely than not that the Company will be able to generate sufficient taxable income to utilize the recorded deferred income tax asset.



Inflation and Seasonality. Management believes that there was no
material effect on operations or the financial condition of the Company as a result of inflation for the three and nine months ended December 31, 2003 and 2002. Management also believes that its business is not seasonal; however, significant
promotional activities can have a direct impact on sales volume in any given quarter.



Financial Condition, Liquidity and Capital Resources



The Company has working capital and cash and cash equivalents of approximately $1.6 million and $.02 million, respectively, at December 31, 2003.



The Companys principal commitments at December 31, 2003 consist of the outstanding loan agreement with Congress and leases on its office and warehouse space. There
were no material commitments for capital expenditures at that date.



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Net cash used in operating activities was $5.0 million for the nine months ended December 31, 2003. Cash was used
primarily by increases in accounts receivables, prepaid and other current assets and deposits, decreases in accounts payables, and accrued expenses and other current liabilities; offset by decreases in inventory, due from affiliates, other assets
and notes receivable.



Net cash used in investing activities was
approximately $.3 million for the nine months ended December 31, 2003, which represented cash invested in property and equipment and legal expenses incurred with the acquisition of Avery.



Net cash provided by financing activities was approximately $5.3 million for the nine months ended December 31, 2003, primarily representing
a decrease in the Companys restricted cash account of $2 million, which was used along with the new Congress revolving line of credit to satisfy the Standard credit facility, an increase in the line of credit of approximately $3.9 million,
offset by an increase in deferred financing costs associated with the Congress credit facility and payments of long-term debt, capital leases.



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



Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



The Company is subject to market risk from exposure to changes in interest rates based on its financing and cash management activities, which could affect its results of operations and financial condition. At December
31, 2003, the Companys outstanding debt with Congress was approximately $19.9 million on the line of credit and $.3 million on the term loan. The interest rates charged on the line of credit and term loan are floating rates subject to periodic
adjustment, with certain options for management to choose from. At December 31, 2003, the interest rate charged on the line of credit and term loan was 4.5%. The company manages its risk by choosing the most advantageous interest option offered by
its lender. See Managements Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition, Liquidity and Capital Resources. The Company holds several notes receivable from its customers which do not carry
variable interest rates. The Company does not currently utilize derivative financial instruments to address market risk.



Item 4. CONTROLS AND PROCEDURES.



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



At December 31, 2003, the Company performed an evaluation of the effectiveness of the design and operation of its disclosure controls and
procedures. The evaluation was performed with the participation of senior management of key corporate functions, and under the supervision of the CEO and CFO. Based on the evaluation, the Companys management, including the CEO and CFO,
concluded that its disclosure controls and procedures were effective.



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



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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. (HCT), 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 filed its answer, counterclaim against the Company and cross-claim against the plaintiffs. In December 2003, a
Settlement Agreement and Release (the Release) was executed by HCT and the Company whereby HCT and the Company unconditionally, fully and finally released each other from any future claims relative to the matter. HCT paid $1,000 to the
Company in consideration for the Release. There has been little activity by Messrs. Miller and Fagala with regard to this matter, and the Company is currently considering how to proceed in light of this inactivity. The Company intends to vigorously
defend the actions filed against it and to pursue its counterclaim. The Company cannot reasonably estimate any possible future loss or recover as a result of this matter; therefore, the Company has made no provision in the accompanying condensed
consolidated financial statements for resolution of this matter.



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



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



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On October 2, 2003, QK Healthcare, Inc. (QK) filed a complaint against Valley in the United States District
Court of the Eastern District of New York, which included several counts with regard to the sale of twenty bottles of Lipitor by Valley to QK, including breach of contract, violations of the implied warranty of merchantability and fraud. The
complaint demands actual damages, punitive damages and legal fees and expenses. On January 9, 2004, the Company filed an answer and counterclaim against QK, in which the Company seeks to recover from QK losses caused when QK refused to pay for
pharmaceuticals ordered from the Company. The Company intends to vigorously defend QKs action and prosecute the counterclaim. The Company cannot reasonably estimate any future possible loss or recovery as a result of this matter and has made
no provision in the accompanying condensed consolidated financial statements for the resolution of this matter.



On November 12, 2003, Phil & Kathys, Inc., d/b/a Alliance Wholesale Distributors (Alliance) served a complaint against the Company seeking to
recover $2,000,535 based on an alleged breach of contract for the sale of pharmaceuticals. On December 18, 2003, the Company filed an answer and counterclaim. The counterclaim seeks to recover lost profits and other damages related to the purchase
of twenty bottles of Lipitor from Alliance, which the Company later sold to QK. The Company intends to vigorously defend Alliances breach of contract action and prosecute the counterclaim. The Company cannot reasonably estimate any future
possible loss as a result of the Alliance complaint or possible recovery through the Companys counterclaim and has made no provision in the accompanying condensed consolidated financial statements for the 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, 2003 should have a material adverse impact on its financial position, results of operations, or cash flows.



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



The Annual Meeting of the Stockholders of the Company was held on October 10, 2003. At the meeting, the following actions were taken by the shareholders:



Jugal K. Taneja, William L. LaGamba, Ronald J. Patrick,
Howard L. Howell, DDS, Martin Sperber, Robert G. Loughrey and Sushil Suri were elected as Directors to serve until the next annual meeting and until their respective successors are elected and qualified or until their earlier resignation, removal
from office or death. The votes cast for and against each were as follows:



|                      |  |           |  |         |  |        
|--------------------- |  | --------- |  | ------- |  | -------
|                      |  | For       |  | Against |  | Abstain
|Jugal K. Taneja       |  | 5,732,398 |  | -0-     |  | 19,877 
|William L. LaGamba    |  | 5,735,865 |  | -0-     |  | 16,410 
|Ronald J. Patrick     |  | 5,735,938 |  | -0-     |  | 16,337 
|Howard L. Howell, DDS |  | 5,736,260 |  | -0-     |  | 16,015 
|Martin Sperber        |  | 5,735,949 |  | -0-     |  | 16,326 
|Robert G. Loughrey    |  | 5,736,549 |  | -0-     |  | 15,726 
|Sushil Suri           |  | 5,735,086 |  | -0-     |  | 18,189 



The proposal to ratify
the appointment of BDO Seidman, LLP as the independent certified public accountants to the Company for the fiscal year ending March 31, 2004 received the following votes:



|          |  |         |  |        
|--------- |  | ------- |  | -------
|For       |  | Against |  | Abstain
|5,748,183 |  | 1,649   |  | 2,443  



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##### Table of Contents

The proposal to approve the Companys 2003 Restricted Stock Plan received the following votes for a
against:



|          |  |         |  |        
|--------- |  | ------- |  | -------
|For       |  | Against |  | Abstain
|3,649,229 |  | 81,997  |  | 33,749 



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



(a) Exhibits.



The following exhibits are filed with this report:



|     |  |                                                                                                                                                                                             
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*    |  | Filed herewith.                                                                                                                                                                             
|     | 
|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  |  | Restated Articles of Incorporation of DrugMax, Inc. filed September 5, 2001. (18)                                                                                                           
|     | 
|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 DrugMax, Inc. and William L. LaGamba dated April 1, 2003. (16)                                                                                          
|     | 
|10.2 |  | Employment Agreement by and between DrugMax, Inc. and Ronald J. Patrick dated April 1, 2003 (16)                                                                                            
|     | 
|10.3 |  | Employment Agreement by and between DrugMax, Inc. and Jugal K. Taneja, dated April 1, 2003. (16)                                                                                            
|     | 
|10.4 |  | DrugMax.com, Inc. 1999 Incentive and Non-Statutory Stock Option Plan. (8)                                                                                                                   
|     | 
|10.5 |  | Amendment No. 1 to DrugMax, Inc. 1999 Incentive and Non-Statutory Stock Option Plan, dated June 5, 2002. (14)                                                                               
|     | 
|10.6 |  | Loan and Security Agreement by an between Congress Financial Corporation and DrugMax, Inc., Valley Drug Company, Valley Drug Company South and Discount Rx, Inc., dated April 15, 2003.
(15)
|     | 
|10.7 |  | DrugMax, Inc. 2003 Restricted Stock Plan dated August 27, 2003. (17)                                                                                                                        
|     | 
|21.0 |  | Subsidiaries of DrugMax, Inc. (18)                                                                                                                                                          



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##### Table of Contents

|     |  |                                                                                                                          
|---- |  | -------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                
|     | 
|31.2 |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *                
|     | 
|32.1 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
|     | 
|32.2 |  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

---

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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



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##### Table of Contents

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

|(17) | Incorporated by reference to the Companys Definitive Proxy Statement filed September 8, 2003.
|---- | ----------------------------------------------------------------------------------------------

|(18) | Incorporated by reference to the Companys Form 10-Q, filed November 14, 2003.
|---- | ------------------------------------------------------------------------------



(b) Reports on Form 8-K.



During the three months ended December 31, 2003, the Company filed no reports on Form 8-K.



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##### Table of Contents

SIGNATURES



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



|                         |  |               |  |                                                                            
|------------------------ |  | ------------- |  | ---------------------------------------------------------------------------
|                         |  | DrugMax, Inc.
|                         |  |              
|Date: September 28, 2004 |  | By:           |  | /s/ Jugal K. Taneja                                                        
|                         |  |               |  | Jugal K. Taneja                                                            
|                         |  |               |  | Chief Executive Officer                                                    
|                         |  |              
|Date: September 28, 2004 |  | By:           |  | /s/ Ronald J. Patrick                                                      
|                         |  |               |  | Ronald J. Patrick                                                          
|                         |  |               |  | Chief Financial Officer, Vice President of
Finance, Secretary and Treasurer
|                         |  |              
|Date: September 28, 2004 |  | By:           |  | /s/ William L. LaGamba                                                     
|                         |  |               |  | William L. LaGamba                                                         
|                         |  |               |  | President and Chief Operations Officer                                     



25