**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**









**FORM
      10-Q**









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




**For
      the quarterly period ended April 1, 2006**




**Commission
      File Number 1-15445**







**DRUGMAX,
      INC.**


**(Exact
      name of registrant as specified in its charter)**







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




**312
      Farmington Avenue, Farmington, CT 06032**


**(Address
      of principal executive offices)**




**(860)
      676-1222**


**(Registrant’s
      telephone number, including area code)**







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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
      (Check one):




Large
      Accelerated Filer o Accelerated Filer o Non-Accelerated
      Filer þ





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No þ




As
      of May
      1, 2006, there were 66,107,406 shares of common stock, par value $0.001 per
      share, outstanding.







**DRUGMAX,
      INC. AND SUBSIDIARIES**


**FORM
      10-Q**


**FOR
      THE THREE MONTHS ENDED APRIL 1, 2006**


**TABLE
      OF CONTENTS**




**Page No.****PART
                I- FINANCIAL INFORMATION**Item
                1. Condensed Consolidated Financial Statements of DrugMax, Inc. and
                SubsidiariesCondensed
                Consolidated Balance Sheets as of April 1, 2006 (unaudited) and December
                31, 2005
            1Condensed
                Consolidated Statements of Operations Three Months Ended April 1,
                2006 and
                April 2, 2005 (unaudited)
            2Condensed
                Consolidated Statements of Cash Flows Three Months Ended April 1,
                2006 and
                April 2, 2005 (unaudited)
            3Notes
                to Condensed Consolidated Financial Statements
            4Item
                2.Management’s
                Discussion and Analysis of Financial Condition and Results of Operations
            11Item
                3.Quantitative
                and Qualitative Disclosures About Market Risk
            24Item
                4.Controls
                and Procedures
            24**PART
                II - OTHER INFORMATION**Item
                1. Legal Proceedings
            25Item
                1A. Risk FactorsItem
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            25Item
                3. Default upon Senior Securities
            25Item
                4. Submission of Matters to a Vote of Security Holders
            25Item
                5. Other Information
            25Item
                6. Exhibits
            25**SIGNATURES**




i


**PART
      I - FINANCIAL INFORMATION**




**Item
      1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**




**DRUGMAX,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**APRIL
      1, 2006 AND DECEMBER 31, 2005**


**(in
      thousands, except per share data)**


**(UNAUDITED)**




**ASSETS**
            
            **April
                1, 2006**
            
            **December
                31, 2005**CURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            6,458
            
            $
            6,681Trade
                receivables, net of allowance for doubtful accounts of approximately
                $2,428 and $2,777 in 2006 and 2005, respectively
            
            
            11,287
            
            
            12,855Inventories
            
            
            29,805
            
            
            30,631Prepaid
                expenses and other current assets
            
            
            2,181
            
            
            2,487Total
                current assets
            
            
            49,731
            
            
            52,654PROPERTY
                AND EQUIPMENT—Net of accumulated depreciation and amortization of
                approximately $13,434 and $13,080 in 2006 and 2005,
                respectively
            
            
            5,450
            
            
            4,959GOODWILL
            
            
            1,355
            
            
            1,355INTANGIBLE
                ASSETS—Net of accumulated amortization of approximately $18,233 and
                $17,675 in 2006 and 2005, respectively
            
            
            4,293
            
            
            4,852OTHER
                NONCURRENT ASSETS
            
            
            316
            
            
            207TOTAL
                ASSETS
            
            $
            61,145
            
            $
            64,027**LIABILITIES
                AND STOCKHOLDERS’ DEFICIT**CURRENT
                LIABILITIESRevolving
                credit facility
            
            $
            36,384
            
            $
            36,251Promissory
                notes payable
            
            
            496
            
            
            915Accounts
                payable
            
            
            10,306
            
            
            9,014Accrued
                expenses
            
            
            5,742
            
            
            6,100Current
                portion of notes payable
            
            
            4,721
            
            
            4,721Total
                current liabilities
            
            
            57,649
            
            
            57,001NOTES
                PAYABLE
            
            
            17,669
            
            
            18,184OTHER
                LONG-TERM LIABILITIES
            
            
            88
            
            
            135COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                DEFICIT:DrugMax
                Series A Convertible Preferred Stock, $1,000 par value, 500,000 authorized
                (involuntary liquidation value $17,000 for 2005), 17,000 shares retired
                in
                2005 and none outstanding in 2006
            
            
            –
            
            
            –Common
                stock, $.001 par value, 200,000,000 shares authorized for
                2006 and 2005; 66,007,406 and 65,740,436 shares issued and outstanding
                for
                2006 and 2005, respectively
            
            
            66
            
            
            66Additional
                paid in capital
            
            
            228,299
            
            
            227,336Accumulated
                deficit
            
            
            (242,187
            )
            
            (238,131
            )Unearned
                compensation
            
            
            (439
            )
            
            (564
            )Total
                stockholders’ deficit
            
            
            (14,261
            )
            
            (11,293
            )TOTAL
                LIABILITIES AND STOCKHOLDERS' DEFICIT
            
            $
            61,145
            
            $
            64,027




See
      notes
      to condensed consolidated financial statements.




1


**DRUGMAX,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**THREE
      MONTHS ENDED APRIL 1, 2006 and APRIL 2, 2005**


**(in
      thousands, except per share data)**


**(Unaudited)**





**Three
                Months Ended****April
                1, 2006**
            
            **April
                2, 2005**NET
                REVENUES
            
            $
            56,040
            
            $
            57,201COST
                OF SALES
            
            
            45,125
            
            
            45,258Gross
                margin
            
            
            10,915
            
            
            11,943SELLING,
                GENERAL AND ADMINISTRATIVE EXPENSES
            
            
            12,987
            
            
            13,943DEPRECIATION
                AND AMORTIZATION EXPENSE
            
            
            838
            
            
            1,202OPERATING
                LOSS
            
            
            (2,910
            )
            
            (3,202
            )OTHER
                INCOME (EXPENSE):Interest
                expense
            
            
            (1,396
            )
            
            (763
            )Interest
                income
            
            
            10
            
            
            10Other
                income
            
            
            59
            
            
            186Total
                other expense, net
            
            
            (1,327
            )
            
            (567
            )Net
                loss from continuing operations
            
            
            (4,237
            )
            
            (3,769
            )Net
                income (loss) from discontinued operations
            
            
            181
            
            
            (1,226
            )NET
                LOSS
            
            
            (4,056
            )
            
            (4,995
            )DrugMax
                preferred stock dividends
            
            
            –
            
            
            (632
            )NET
                LOSS AVAILABLE TO COMMON STOCKHOLDERS
            
            $
            (4,056
            )
            $
            (5,627
            )BASIC
                AND DILUTED LOSS PER COMMON SHARE:Loss
                from continuing operations available to common
                shareholders
            
            $
            (0.06
            )
            $
            (0.23
            )Loss
                from discontinued operations
            
            
            –
            
            
            (0.06
            )Net
                loss available to common shareholders
            
            $
            (0.06
            )
            $
            (0.29
            )WEIGHTED
                AVERAGE SHARES OUTSTANDING:Basic
                and Diluted Shares
            
            
            65,874
            
            
            19,653




See
      notes
      to condensed consolidated financial statements.




2


**DRUGMAX,
      INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**THREE
      MONTHS ENDED APRIL 1, 2006 and APRIL 2, 2005**


**(in
      thousands)**


**(Unaudited)**





**Three
                Months Ended****April
                1, 2006**
            
            **April
                2, 2005**CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (4,056
            )
            $
            (4,996
            )Adjustments
                to reconcile net loss to net cash provided by (used in) operating
                activities:Depreciation
                and amortization
            
            
            838
            
            
            1,252Stock
                compensation expense
            
            
            125
            
            
            1,940Noncash
                interest expense
            
            
            314
            
            
            53Amortization
                of deferred financing costs
            
            
            75
            
            
            80Provision
                for doubtful accounts
            
            
            27
            
            
            12Effect
                of changes in operating assets and liabilities:Trade
                receivables
            
            
            1,541
            
            
            (1,682
            )Inventories
            
            
            1,069
            
            
            (11,190
            )Prepaid
                expenses and other current assets
            
            
            306
            
            
            147Accounts
                payable
            
            
            716
            
            
            (1,730
            )Accrued
                expenses
            
            
            229
            
            
            1,423Other
            
            
            (156
            )
            
            (50
            )Net
                cash provided by (used in) operating activities
            
            
            1,028
            
            
            (14,740
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of property and equipment
            
            
            (845
            )
            
            (823
            )Purchase
                of pharmacy assets
            
            
            (244
            )
            
            –Net
                cash used in investing activities
            
            
            (1,089
            )
            
            (823
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Proceeds
                from revolving credit facility, net
            
            
            192
            
            
            15,110Repayment
                of promissory notes payable
            
            
            (358
            )
            
            (347
            )Repayment
                of obligations under capital leases
            
            
            –
            
            
            (11
            )Proceeds
                from exercise of stock options
            
            
            3
            
            
            449Net
                cash provided by (used in) financing activities
            
            
            (163
            )
            
            15,201NET
                DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (224
            )
            
            (362
            )CASH
                AND CASH EQUIVALENTS—Beginning of period
            
            
            6,681
            
            
            2,332CASH
                AND CASH EQUIVALENTS—End of period
            
            $
            6,457
            
            $
            1,970SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATION:Cash
                paid for interest
            
            $
            1,008
            
            $
            641Noncash
                transactions—Subordinated
                Convertible Debenture interest payments made in common
                stock
            
            $
            900
            
            $
            –Payment
                of DrugMax Series A preferred stock dividends in common stock
            
            $
            –
            
            $
            294Conversion
                of accounts payable to subordinated notes payable
            
            $
            –
            
            $
            23,000





See
      notes
      to condensed consolidated financial statements.





3




D **RUGMAX,
      INC. AND SUBSIDIARIES**


**Notes
      to Condensed Consolidated Financial Statements (Unaudited)**


**For
      the Three Months Ended April 1, 2006 and April 2, 2005**




**NOTE
      A - BASIS OF PRESENTATION**




The
      accompanying unaudited condensed consolidated financial statements include
      the
      accounts of DrugMax, Inc. and its wholly-owned subsidiaries (collectively
      referred to as the “Company”). All 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 Article 10
      of
      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 audited consolidated
      financial statements and notes thereto included in our Annual Report on Form
      10-K, as amended, for the fiscal year ended December 31, 2005 filed with the
      United States Securities and Exchange Commission.




The
      Company’s fiscal year 2006 begins on January 1, 2006 and ends on December 30,
      2006. The Company’s fiscal quarters end on the Saturday closest to March 31,
      June 30 and September 30. Each fiscal quarter is 13 weeks in length. The
      Company’s first quarter for fiscal year 2006 ended on April 1,
      2006.




**NOTE
      B - BUSINESS AND GOING CONCERN**




On
      March
      19, 2004, Familymeds Group, Inc. (“FMG”) entered into an Agreement and Plan of
      Merger, which was amended on July 1, 2004 and on October 11, 2004 (as amended,
      the “Merger Agreement”), with DrugMax, Inc. (“DrugMax”). Under the terms of the
      Merger Agreement, on November 12, 2004, FMG merged into DrugMax, and DrugMax
      became the surviving corporation in the merger (the “Merger”). The Merger was
      treated as a purchase of DrugMax by FMG for accounting purposes.





***Business*** —
As
      of
      April 1, 2006, the Company operated 78 locations including 76 pharmacies, one
      home health center and one non-pharmacy mail order center, and franchised 7
      pharmacies in 14 states under the Familymeds Pharmacy, Arrow Pharmacy &
Nutrition Center, and Worksite Pharmacy SM brand
      names.





The
      Company also operated a wholesale drug distribution business primarily related
      to the direct distribution to physicians, medical clinics and other health
      care
      providers from its warehouse located in St. Rose, Louisiana known as Valley
      Medical Supply.





***Going
      Concern*** —
The
      accompanying condensed consolidated financial statements have been prepared
      assuming that the Company will continue as a going concern. The report of
      independent registered public accounting firm for the Company’s December 31,
      2005 consolidated financial statements was modified with respect to
      uncertainties regarding the Company’s ability to continue as a going concern. As
      of December 31, 2005, the Company had a net stockholders' deficit of $11.3
      million and has incurred net losses of $54.9 million, $39.8 million and $12.2
      million for the years ended December 31, 2005, January 1, 2005 and December
      27,
      2003. As of April 1, 2006, the Company had a net stockholders deficit of $14.3
      million and had incurred a net loss of $4.1 million for the three months ended
      April 1, 2006. These matters raise substantial doubt about the Company's ability
      to continue as a going concern. During the fourth quarter of 2005, the Company
      completed certain transactions considered to be critical to achieving future
      growth and profitability. These include the sale of common stock for net
      proceeds of $47.4 million, the refinancing of the senior credit facility with
      a
      new $65.0 million facility, which allows for additional borrowing availability,
      and the sale and discontinuation of substantially all of the Company’s full-line
      wholesale drug distribution operations, which had incurred significant losses.
      Although no assurances may be made, management believes that these transactions
      as well as other organizational and operational changes will allow the Company
      to continue as a going concern.


4





**NOTE
      C - PER SHARE INFORMATION**





The
      computations of basic and diluted loss per common share are based upon the
      weighted average number of common shares outstanding and potentially dilutive
      securities. Potentially dilutive securities include stock options and unvested
      shares of restricted stock. Options to purchase 4,200,264 and 3,083,901 shares
      of common stock were not included in the April 1, 2006 and April 2, 2005
      computations of diluted net loss per common share, respectively, because
      inclusion of such shares would have been anti-dilutive.




**NOTE
      D - STOCK BASED COMPENSATION**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
      123(R), “Share-Based Payment (as amended).” SFAS No. 123(R) eliminates the
      alternative to use the intrinsic value method of accounting that was provided
      in
      SFAS No. 123, which generally resulted in no compensation expense recorded
      in
      the financial statements related to the issuance of equity awards to employees.
      SFAS No. 123(R) requires that the cost resulting from all share-based payment
      transactions be recognized in the financial statements. SFAS No. 123(R)
      establishes fair value as the measurement objective in accounting for
      share-based payment arrangements and requires all companies to apply a
      fair-value-based measurement method in accounting generally for all share-based
      payment transactions with employees.




On
      January 1, 2006, we adopted SFAS No. 123(R) using a modified prospective method
      resulting in the recognition of share-based compensation expense of $0.002
      million, net of zero related tax expense. Prior period amounts have not been
      restated. Under this application, we are required to record compensation expense
      for all awards granted after the date of adoption and for the unvested portion
      of previously granted awards that remain outstanding at the date of
      adoption.




Prior
      to
      the adoption of SFAS No. 123(R), we applied Accounting Principles Board (“APB”)
      Opinion No. 25, “Accounting for Stock Issued to Employees,” and related
      interpretations in accounting for our plans.




5




The
      following table details the effect on net earnings and earnings per share had
      compensation expense for the employee share-based awards been recorded in the
      three months ended April 2, 2005 based on the fair value method under SFAS
      No.
      123 (in thousands, except per share data):




**April
                2,**
              ******2005**Net
                loss available to common shareholders, as reported
            
            $
            (5,627
            )Effect
                of stock-based employee compensation expense determined under fair
                method
                valuation for all awards
            
            
            588Pro
                forma net loss available to common shareholders
            
            $
            (5,039
            )Basic
                and diluted net loss per common share:Net
                loss available to common shareholders, as reported
            
            $
            (0.29
            )Pro
                forma net loss available to common shareholders
            
            $
            (0.26
            )Shares
                used in basic and diluted net loss per common share
            
            
            19,653




*Share
      Based Compensation Plans*




As
      of
      April 1, 2006, we have two share-based compensation plans, which are described
      below.




The
      DrugMax, Inc. 1999 Incentive and Non-Statutory Stock Option Plan permits the
      granting of stock options to purchase shares of common stock up to a total
      of
      6.0 million shares. The exercise price per share of common stock covered by
      an
      option may not be less than the par value per share on the date of grant, and
      in
      the case of an incentive stock option, the exercise price may not be less than
      the market value per share on the date of grant. The terms of any option grants
      are established by the Board of Directors and / or compensation committee,
      subject to the requirements of the plan, but, generally, these options vest
      over
      a three year period at a rate of 33% each year. The Plan will expire on August
      13, 2009. Options are issued to non-employee directors under this plan.




Each
      outside Director shall be issued an option to purchase 10,000 shares of common
      stock annually each year following his or her election to the Board of
      Directors. Each outside Director who serves as a member of a committee shall
      be
      issued an option to purchase 5,000 shares of the Company’s common stock
      annually. The chairperson of each committee, other than the Audit Committee,
      shall be issued an option to purchase an additional 5,000 shares of common
      stock
      annually. The chairperson of the Audit Committee and the Chairman of the Board
      shall receive an option to purchase 10,000 shares of the Company’s common stock
      annually. The foregoing options are granted under the Company’s 1999 Incentive
      and Non-Statutory Stock Option Plan.




The
      DrugMax, Inc. 2003 Restricted Stock Plan permits the granting of shares of
      restricted common stock up to a total of 3.5 million shares. The Board of
      Directors shall determine the price, if any, on the date of grant. The Plan
      will
      expire on August 27, 2013. Restricted shares are issued to non-employee
      directors under this plan.




6




Upon
      election to the Board of Directors, each outside Director, receives an award
      of
      restricted stock in the amount of $50,000. Such shares vest 1/3 upon the date
      of
      grant and 1/3 on the first and second anniversary thereafter. Further, on each
      year following his or her election to the Board, each outside Director shall
      receive an award of restricted stock in the amount of $25,000. The foregoing
      shares are granted under the Company’s 2003 Restricted Stock Plan.




We
      use
      the Black-Scholes option-pricing model to calculate the fair value of options.
      The key assumptions for this valuation method include the expected term of
      the
      option, stock price volatility, risk-free interest rate, dividend yield,
      exercise price, and forfeiture rate. Many of these assumptions are judgmental
      and highly sensitive in the determination of compensation expense. Under the
      assumptions indicated below, the weighted-average fair value of the three
      months ended April 1, 200 6
      stock
      option grants was $0.83 and the weighted-average fair value of the three months
      ended April 2, 2005 stock option grants was $3.11. The table below indicates
      the
      key assumptions used in the option valuation calculations for options granted
      in
      the three months ended April 1, 2006 and April 2, 2005 and a discussion of
      our
      methodology for developing each of the assumptions used in the valuation
      model:




**Three Months Ended**
              **April
                1,**
              **2006**
            
            **Three Months Ended**
              **April
                2,**
              **2005**Risk-free
                interest rate
            
            
            4.62
            %
            
            3.42
            %Expected
                life
            
            
            3
                years
            
            
            3
                yearsVolatility
            
            
            77
            %
            
            35
            %Dividend
                yield
            
            
            —
            %
            
            —
            %Forfeitures
            
            
            —
            %
            
            —
            %




*Term* -
      This is the period of time over which the options granted are expected to remain
      outstanding. Options granted have a maximum term of ten years. An increase
      in
      the expected term will increase compensation expense.




*Volatility* -
      This is
      a measure of the amount by which a price has fluctuated or is expected to
      fluctuate. Volatilities are based on implied volatilities from traded options
      of
      the Company’s shares, historical volatility of the Company’s shares, and other
      factors, such as expected changes in volatility arising from planned changes
      in
      the Company’s business operations. An increase in the expected volatility will
      increase compensation expense.




*Risk-Free
      Interest Rate* -
      This is the U.S. Treasury rate for the week of the grant having a term equal
      to
      the expected term of the option. An increase in the risk-free interest rate
      will
      increase compensation expense.




*Dividend
      Yield* -
      We have never made any dividend payments and we have no plans to pay dividends
      in the foreseeable future. An increase in the dividend yield will decrease
      compensation expense.




*Forfeiture
      Rate* -
      This is the estimated percentage of options granted that are expected to be
      forfeited or canceled before becoming fully vested. An increase in the
      forfeiture rate will decrease compensation expense.




7


The
      following table summarizes information about our stock option plans for the
      three months ended April 1, 2006.




**Number
                  of Options**
              
              **Weighted**
                **Average**
                **Exercise
                  Price**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual
                  life**
              
              **Aggregate**
                **Intrinsic
                  Value**
                **(in
                  thousands)**Balance,
                  December 31, 2005
              
              
              3,770,760
              
              $
              1.80Granted
              
              
              7,500
              
              $
              0.83Exercised
              
              
              (5,551
              )
              $
              0.58Forfeited
              
              
              (16,475
              )
              $
              2.17Options
                  outstanding, end of quarter
              
              
              3,756,234
              
              $
              1.80
              
              
              5.3
                  years
              
              $
              316Options
                  exercisable, end of quarter
              
              
              2,663,168
              
              $
              3.36
              
              
              4.3
                  years
              
              $
              18





As
      of
      April 1, 2006, there was $0.1 million of total unrecognized compensation cost
      related to stock options. These costs are expected to be recognized over a
      weighted average period of 2.5 years.




The
      total
      intrinsic value of stock options exercised was $0.0 million and the total fair
      value of stock awards vested was $0.1 million during the three months ended
      April 1, 2006.




Cash
      received from stock option exercises for the three months ended April 1, 2006
      was $0.003 million. The income tax benefits from share based arrangements
      totaled zero.




The
      following table summarizes information about restricted stock awards for the
      three months ended April 1, 2006:




**Shares**
            
            **Weighted**
              **Average
                Grant-**
              **Date
                Fair Value**Non
                Vested Balance at December 31, 2005
            
            
            444,030
            
            $
            1.56Granted
            
            
            –
            
            $
            –Vested
            
            
            –
            
            $
            –Forfeited
            
            
            –
            
            $
            –Non
                Vested Balance at April 1, 2006
            
            
            444,030
            
            $
            1.56




8




These
      restricted stock awards were issued under the 2003 Restricted Stock
      Plan.




As
      of
      April 1, 2006 there was $0.5 million of total unrecognized compensation costs
      related to restricted stock awards. These costs are expected to be recognized
      over a weighted average period of 2.4 years.




At
      April
      1, 2006 an aggregate of 3,906,887 shares remained available for future grants
      under our stock plans, which cover stock awards and stock options. We issue
      shares to satisfy stock option exercises and restricted stock awards.




**NOTE
      E -GOODWILL AND INTANGIBLE ASSETS**




The
      carrying value of goodwill and intangible assets is as follows (in thousands):




**April
                  1,**
                **2006**
              
              **December
                  31,**
                **2005****Gross**
                **Carrying**
                **Amount**
              
              **Accumulated**
                **Amortization**
              
              **Gross**
                **Carrying**
                **Amount**
              
              **Accumulated**
                **Amortization**Intangible
                  assets
              
              $
              22,526
              
              $
              (18,233
              )
              $
              22,526
              
              $
              (17,675
              )Goodwill
              
              
              1,355
              
              
              —
              
              
              1,355
              
              
              —




The
      weighted average amortization period for intangible assets is approximately
      6.11
      years. Amortization expense related to intangible assets was approximately
      $0.5
      million and $0.7 million for the three months ended April 1, 2006 and April
      2,,
      2005, respectively.




Estimated
      future amortization expense for the succeeding five years is as follows (in
      thousands):




**Fiscal
                year ending**
            
            **Amount**2006
            
            $
            1,8672007
            
            
            8252008
            
            
            5392009
            
            
            2452010
            
            
            169




**NOTE
      F —DEBT**




Debt
      at
      April 1, 2006 and December 31, 2005 consisted of the following (in thousands):




**April
                1, 2006**
            
            **December 31, 2005**Revolving
                credit facility
            
            $
            36,384
            
            $
            36,251Promissory
                notes payable
            
            
            496
            
            
            915Subordinated
                notes payable
            
            
            22,390
            
            
            22,905Total
            
            $
            59,270
            
            $
            60,071




9


**NOTE
      G - INCOME TAXES**




The
      Company incurred net losses for the three months ended April 1, 2006 and April
      2, 2005. No income tax benefit had been recorded in these periods due to
      uncertainty of realization of deferred tax assets and limitations on net
      operating losses due to changes in ownership which limit the amount of
      pre-change losses that can be used in a tax year.




**NOTE
      H - DISCONTINUED OPERATIONS**




During
      fiscal year ended December 31, 2005, the Company operated two drug distribution
      facilities: Valley Drug Company and Valley Drug Company South. During the third
      quarter of 2005, the Company determined that it would sell certain assets of
      the
      drug distribution business and eliminate operations conducted out of the New
      Castle, Pennsylvania facility and the St. Rose, Louisiana facility related
      to
      the distribution to independent pharmacies. Accordingly, as of October 1, 2005,
      the Company considered substantially all of the full-line wholesale drug
      distribution as discontinued operations for financial statement presentation
      purposes. In December 2005, Rochester Drug Cooperative (“RDC”) acquired certain
      assets from the Company’s wholly-owned subsidiary, Valley Drug Company,
      including a customer list, furniture, fixtures and equipment located at the
      Company’s New Castle, Pennsylvania facility. In connection with the sale, RDC
      assumed certain property leases, customer and other miscellaneous contracts.
      The
      total purchase price for these select assets was $0.7 million, of which $0.4
      million was received upon closing and $0.3 million is required to be paid if
      and
      when the Pennsylvania Industrial Development Authority (“PIDA”) consents to a
      lease assignment of the New Castle facility to RDC. The Company expects payment
      of the $0.3 million during the second quarter of 2006.





In
      connection with the sale of these assets, the Company transferred a portion
      of
      the New Castle, Pennsylvania pharmaceutical inventory to the Company’s retail
      pharmacies as well as a portion to its St. Rose, Louisiana facility for
      continued distribution to the Company’s retail pharmacies and for use in the
      Valley Medical Supply operations.




Net
      revenues related to the discontinued operations were $0.0 million and $30.1
      million for the three months ended April 1, 2006 and April 2, 2005,
      respectively.  The income (loss) from discontinued operations was $0.2
      million and $(1.2) million for the three months ended April 1, 2006 and April
      2,
      2005, respectively.





**NOTE
      I- CONTINGENCIES**




There
      have been no significant changes in the status of the legal matters described
      in
      the Company’s fiscal 2005 Annual Report on Form 10-K, as amended.




10


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




The
      following Management’s Discussion and Analysis of Financial Condition and
      Results of Operations should be read in conjunction with our condensed
      consolidated financial statements and the related notes found elsewhere in
      this
      Form 10-Q. This discussion, as well as the notes to our condensed consolidated
      financial statements, contain forward-looking statements based upon our current
      expectations that involve risks and uncertainties, such as our plans,
      objectives, expectations and intentions, as set forth under “Cautionary
      Statement Regarding Forward-Looking Statements.” Our actual results and the
      timing of events could differ materially from those anticipated in these
      forward-looking statements as a result of many factors.




***Cautionary
      Statement Concerning Forward-Looking Statements***




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, are
      statements regarding the intent, belief or current expectations, estimates
      or
      projections of the Company, its directors or its officers about the Company
      and
      the industry in which it operates, and include among other items, statements
      regarding (a) the Company’s strategies regarding growth and business expansion,
      including its strategy of building an integrated specialty drug distribution
      platform with multiple sales channels through both organic growth and
      acquisitions, (b) its financing needs and plans, including its need for
      additional capital related to its growth plans, and (c) trends affecting its
      financial condition or results of operations. 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) management’s
      ability to execute its strategy of growth and business expansion, (ii)
      management’s ability to identify and integrate new acquisitions, (iii) 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, (iv)
      conditions in the capital markets, including the interest rate environment
      and
      the availability of capital, (v) changes in the competitive marketplace that
      could affect the Company’s revenue and/or cost bases, such as increased
      competition, lack of qualified marketing, management or other personnel, and
      increased labor and inventory costs, and (vi) 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.





Further
      information relating to factors that could cause actual results to differ from
      those anticipated is included under the heading “Risk Factors” contained in the
      company’s Annual Report on Form 10-K, as amended, for the year ended December
      31, 2005. 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. (“DrugMax,” the “Company,” or “we” and other similar pronouns) is a
      pharmacy and drug distribution provider formed by the merger on November 12,
      2004 of DrugMax, Inc. and Familymeds Group, Inc. (“FMG”). The Company is
      currently considering changing its name from DrugMax, Inc. to Familymeds Group,
      Inc. to better reflect the Company’s core business. The Board of Directors
      approved this change and the Company intends to seek shareholder approval at
      its
      next annual meeting. The Company has reserved the stock symbol “FMRX” in
      anticipation of this change.


11





As
      of
      April 1, 2006, we operated 78 locations including 76 pharmacies, one home health
      center and one non-pharmacy mail order center, and 7 franchised pharmacies
      in 14
      states under the Familymeds Pharmacy, Arrow Pharmacy & Nutrition Center, and
      Worksite Pharmacy SM brand
      names. We also operated a wholesale drug distribution business primarily related
      to the direct distribution to physicians, medical clinics and other health
      care
      providers from our warehouse located in St. Rose, Louisiana known as Valley
      Medical Supply.


**Review
      of three months ended April 1, 2006**





The
      Company’s strategy since the sale of substantially all of its full-line
      wholesale drug distribution business in December of 2005 has been to focus
      on
      its core business which includes pharmacy operations, specialty sales,
      institutional sales, and direct distribution to physicians, medical clinics
      and
      other health care providers. During the three months ended April 1, 2006, we
      have taken the following steps to improve our operations:





·
            Enhanced
                our specialty pharmacy operations by acquiring on January 26, 2006,
                a
                leading medical office based oncology pharmacy located in central
                Florida.
                Revenues from this location for the three months ended April 1, 2006
                were
                $0.9 million;





·
            Expanded
                our offering for employers through a partnership with Clarity Pharmacy
                Services in January 2006 which we believe will enhance our Worksite
                PharmacySMinitiative
                and provide organic growth opportunities for our existing locations.





·
            Improved
                our supply chain management including our ability to manage our inventory
                and improve our ability to supply products to our customers by returning
                to 5 day per week delivery of pharmaceuticals and related products
                directly to our locations effective February 2006;





·
            Reopened
                our St. Rose, Louisiana facility known as Valley Medical Supply to
                operate
                our wholesale drug distribution business primarily related to the
                direct
                distribution to physicians, medical clinics and other health care
                providers in February 2006;





·
            Initiated
                the implementation of an improved pharmacy management system including
                a
                home health care billing software which we believe will result in
                improved
                pharmacy operations;





·
            To
                increase efforts to improve our supply chain management, pharmacy
                operations, and financial operations, in March 2006, we hired sales
                executives to lead our specialty pharmacy and institutional and assisted
                living sales. Additionally, we hired a new Chief Financial Officer
                and
                named our former Chief Financial Officer, James E. Searson, Chief
                Operations Officer.





·
            Installed
                5 kiosks in medical office buildings located in Connecticut and
                implemented electronic prescribing capabilities in our pharmacy locations
                which we believe will increase patient access to our pharmacies during
                the
                three months ended April 1, 2006;





·
            Completed
                opening of Scotts Worksite PharmacySMduring the three months ended April 1,
                2006.


***Strategy***




Our
      primary strategy is to build an integrated specialty drug pharmacy platform
      with
      multiple sales channels including: clinic and apothecary pharmacies, Worksite
      Pharmacies SM ,
      institutional “closed door” type pharmacies, a central fill mail order based
      pharmacy and a pharmaceutical distribution center focused on medical specialty
      sales. We believe this can be accomplished through the present base of
      operations, through additional organic opening of new pharmacies and by
      acquiring pharmacies. We believe the integration of these types of locations
      will uniquely enable us to supply specialty drugs and other pharmaceuticals
      to
      patients, physicians and other healthcare providers.




12





Our
      strategy is to locate specialty clinic and apothecary pharmacy operations near
      or in medical facilities. The strategy is driven by the location concept whereby
      situating a clinical or specialty type pharmacy near the point of acute or
      chronic care provides us with a “first capture” opportunity to service patients
      when they visit their physicians. This also enables us to collaborate with
      the
      physician in the therapeutic regimen and may provide opportunities for generic
      drug sales or alternative pharmaceutical therapy, which generally provide us
      with higher profit margins. Many of these patients or special patient groups
      require central fill and or mail order follow-up care that can be provided
      through our “closed door” pharmacy or mail order center located in Connecticut.
      We also supply online web based access to all or most of our services and
      products through our nationally known website, www.familymeds.com.





We
      offer
      a comprehensive selection of branded and generic prescription and
      non-prescription pharmaceuticals, specialty injectables, generic biologics,
      compounded medicines, healthcare-related products and diagnostic products.
      These
      products are used for the treatment of acute or chronic medical conditions
      and
      may be purchased through our platforms. Also, we have recently placed
      significant emphasis on the injectable and orally administered specialty
      pharmaceuticals. We intend to increase pharmacy revenues through these
“Specialty Pharmaceuticals,” which generally are more expensive and provide a
      higher gross profit.





The
      Company’s strategy also includes selling specialty pharmaceuticals and
      healthcare products to physicians, home care providers and related healthcare
      providers including respiratory therapists and nurse practitioners that often
      re-administer these products to their patient immediately. We are executing
      this
      strategy by combining selling access through our existing physician
      relationships and medically based pharmacies with a sales force who actively
      pursues these practitioners as well as new potential practitioner customers.
      Our
      unique selling proposition to these practitioners is ease of obtaining product
      through same day delivery through our onsite pharmacies as well as our ability
      to supply the pharmaceutical to the physician already prepared and “ready to
      use.” As part of our service, we bill the physicians/patients payor/insurance
      carrier or Medicare under part B depending on the type of coverage each patient
      has. This strategy for distribution of pharmaceuticals will be ongoing and
      utilizes our wholesale authorized distribution agreements to obtain the drugs
      through the proper channel pricing and together with central and decentralized
      distribution to the practitioner customer depending on the customer
      needs.




***Pharmacy
      Operations*** ****





As
      of
      April 1, 2006, we operated 78 locations including 76 pharmacies, one home health
      center and one non-pharmacy mail order center, in 14 states under the Familymeds
      Pharmacy, Arrow Pharmacy & Nutrition Center, and Worksite
      Pharmacy SM brand
      names. We have 44 pharmacies which are located at the point of care between
      physicians and patients, oftentimes inside medical office buildings or on a
      medical campus. The balance of our locations are usually nearby medical
      facilities though more retail accessible. The majority of our revenues from
      pharmacy operations come from the sale of prescription pharmaceuticals, which
      represented approximately 93% of our net revenues for the three months ended
      April 1, 2006. Our corporate pharmacies provide services to approximately
      400,000 acute or chronically ill patients each year, many with complex specialty
      and medical product needs.




We
      operate our pharmacies under the trade names Familymeds Pharmacy (“Familymeds”),
      Arrow Pharmacy and Nutrition Centers (“Arrow”) and Worksite Pharmacy SM .
      Familymeds is primarily used for pharmacies outside of New England. The
      Familymeds locations were primarily originated by acquiring the base pharmacy
      business from HMO’s, hospitals and regional independent operators. The locations
      are primarily clinic size with a small footprint, usually less than 1,500 sq.
      ft. The Arrow trade name is used in New England where most of the pharmacies
      were opened as a start-up or re-acquired from former Arrow franchise operators
      who opened these legacy pharmacy operations as start-ups. These locations are
      primarily apothecary size, approximately 2,000 sq. ft. and may be more visible
      as retail type locations, though primarily nearby hospitals or medical campus
      locations. Our locations in Michigan and certain locations elsewhere throughout
      our trading area may have a larger footprint to accommodate a comprehensive
      inventory of nutritional and home medical supplies.


13




By
      our
      estimates, we believe there are more than 5,000 locations nationwide at or
      near
      the point of care which may be available to open additional pharmacies. Because
      of our experience with operating pharmacies in similar locations, we believe
      we
      are uniquely positioned to target these sites and increase our core pharmacy
      market presence. We also believe that we can grow our pharmacy operations
      through selective acquisitions. By increasing our location count, through
      selective acquisitions or the opening of new pharmacies at or near the point
      of
      medical care, we believe we can increase our customer base, expand our
      geographic reach and improve profitability by leveraging our existing
      infrastructure.





Our
      strategy also includes offering our customers or patients multiple sales
      channels by which they can purchase our products. We offer them the opportunity
      to purchase a broad array of health-related products online including a
      comprehensive selection of prescription medications, vitamins and nutritional
      supplements, home medical equipment, and health and beauty aids directly from
      our pharmacies, by mail order, and via the Internet. Familymeds.com is the
      foundation of our Internet offering. This website is one of the few sites
      certified as a Verified Internet Pharmacy Provider Site (VIPPS) by the National
      Association of Boards of Pharmacy (NABP). The VIPPS program is a voluntary
      certification program designed to approve and identify online pharmacies that
      are appropriately licensed and prepared to practice Internet pharmacy.
      Familymeds.com is the non-prescription Internet commerce partner for select
      prescription benefit managers (PBMs) including Medco Health. We will continue
      to
      pursue opportunities to partner with managed care and others providers to
      increase our sales through our Internet sales channel.





***Specialty
      Pharmacy and Institutional Sales***




During
      the three months ended April 1, 2006, we hired two senior sales associates
      focused on the increase in specialty sales and institutional sales. Our
      specialty sales force is primarily focused on the sale of products used for
      the
      treatment of diabetes, cancer and blood disorders. While our institutional
      sales
      force is focused on capturing prescription sales to institutional patients
      and
      assisted living customers. We expect incremental increases to revenues related
      to this business during subsequent quarters in fiscal 2006.





***Worksite
      Pharmacy*** ***SM***





We
      operate and locate Worksite Pharmacies SM (pharmacies
      that service a single, defined population) for large employers who are seeking
      to control overall employee prescription drug benefit expenditures while
      maintaining high employee satisfaction through improved accessibility. Our
      Worksite Pharmacies SM offer
      prescription services exclusively to the employer’s covered population. We can
      deliver these services at or near the employer’s work site by opening, staffing
      and managing a pharmacy. Our initial results have proven that this strategy
      reduces healthcare costs for the employer. Our research has shown that many
      employers, especially large Fortune 500 companies are seeking more aggressive
      methods to control healthcare expenditures, especially the pharmacy component
      of
      benefits. We have identified key large employers, those with over 2,000
      employees in a single location, to be target opportunities for this type of
      Employer Sponsored Worksite Pharmacy SM .
      Currently, we have a Worksite Pharmacy SM in
      the
      employee center of the Mohegan Sun Casino in Connecticut and Scotts Company
      L.L.C headquarters in Merryville, Ohio. Combined, these employers have more
      than
      14,000 employees and dependents as potential patients.





Net
      revenues from Worksite Pharmacies SM increased by $1.2 million or 150% from $0.8 million for the three months ended
      April 2, 2005 to $2.0 million for the three months ended April 1, 2006.
      Approximately $0.3 million, or 37.3% on a comparable same location basis, of
      the
      $1.2 million increase related to growth within our existing Worksite pharmacy.
      The remaining $0.9 million of the $1.2 million increase related to the opening
      of a new Worksite Pharmacy effective at the beginning of the first quarter
      of
      2006.




14




***Valley
      Medical Supply***





In
      February 2006, we reopened and began providing distribution services from our
      St. Rose, Louisiana facility which had previously been closed due to Hurricane
      Katrina. We reconfigured and replenished the warehouse to facilitate the direct
      distribution of pharmaceuticals to physicians, medical clinics and other health
      care providers. These operations are known as Valley Medical
      Supply.





Revenues
      from these operations for the three months ended April 1, 2006 were $0.9 million
      compared to $0.7 million for the three months ended April 2, 2005, an increase
      of $0.2 million or 28.6%. We expect the revenues attributable to this business
      to increase during the subsequent quarters in 2006.








***Patient
      Compliance***





We
      have
      developed programs designed to improve patient compliance and to reduce costs.
      We have three major programs, a prescription compliance program called Reliable
      Refill, a discount plan called Senior Save15 and a telephony system designed
      to
      notify patients of recalls, provide refill reminders and notify our customers
      of
      other important information. Reliable Refill is a compliance program that
      identifies prescriptions that are due to be filled and schedules them for
      filling before the patient has run out of the previous prescriptions. Our Senior
      Save15 program, introduced prior to the Medicare Modernization Act, is our
      own
      discount program that gives senior customers access to all of our prescription
      and over-the-counter products at discounted prices. Our programs are designed
      to
      improve medication therapy management among patients with chronic therapeutic
      needs especially the elderly population. Our data warehouse allows us to
      identify and target patients with special needs.




***Technology
      Improvements and Electronic Prescription Solutions***





During
      the three months ended April 1, 2006, we began installing and upgrading our
      pharmacy management system and our home medical billing software. Upgrades
      include management of dispensing workflow, electronic signature capture, and
      improved data management. We believe the improvements to the pharmacy management
      system will provide value added services to our customers, increased billing
      capacity and better data management capabilities.





Additionally,
      we are implementing electronic prescription solutions to include the ability
      to
      accept delivery of prescriptions through electronic prescribing software and
      kiosk technologies. Our pharmacies are able to accept receipt of electronic
      prescription orders and refill authorizations with secure, reliable transmission
      directly from physician practices. In certain locations such as medical clinics
      and medical office buildings where we do not have a full-service pharmacy,
      we
      are also installing kiosks that allow customers to transmit their prescriptions
      directly to us for pick up at one of our nearby pharmacies or direct delivery.
      As of April 1, 2006, we had installed 5 kiosks in medical office buildings
      located near our pharmacy locations. **





***Medicare
      Part D***




Pharmacy
      sales trends are expected to continue to grow due, in part, to the Medicare
      Part
      D prescription drug benefit. As of January 1, 2006, Medicare beneficiaries
      have
      the opportunity to receive subsidized prescription drug coverage through the
      Medicare Part D program. The new drug benefit is delivered by competing plans,
      and our pharmacies have contracted with each of the major providers to ensure
      our customers can continue purchasing their prescriptions from our pharmacies
      While, the new Medicare drug benefit is entirely voluntary, we believe a
      significant portion of the Medicare population will enjoy this new benefit.
      During the three months ended April 1, 2006, net revenues from prescriptions
      filled under Medicare D plans were $7.7 million. While it is difficult to fully
      predict the impact on our business, we believe we are well positioned to capture
      additional prescription sales. However, we expect the gross margin from this
      business to be less than what the traditional prescription drug plans provide
      and expect the accounts receivable days outstanding to increase.


15




***Supply
      Chain Management***





During
      the three months ended April 2, 2005, the Company’s primary supplier,
      AmerisourceBergen Drug Corporation, supplied pharmaceuticals and related
      products directly to our pharmacy and non-pharmacy locations on a 5 day per
      week
      basis. Beginning in the second quarter of 2005, the Company began purchasing
      its
      products from D&K Healthcare Resources. Under the terms of this agreement,
      D&K delivered products directly to our distribution center in St. Rose,
      Louisiana. The products were then distributed to our locations from our
      full-line wholesale drug distribution facility located in St. Rose, Louisiana
      based upon the specific needs of the location twice per week.





Because
      of higher purchasing costs due to our inability to buy on a more credit worthy
      basis during fiscal year ended December 31, 2005, the
      Company began to experience a decrease in its ability to supply products to
      its
      customers and a decline in our gross margin, resulting in the Company amending
      its agreement with D&K (which was assumed by McKesson Corporation in August
      of 2005). Pursuant to the amended agreement, in February 2006, McKesson began
      supplying products directly to our locations on a 5 day per week basis. As
      a
      result, we believe our ability to manage our supply chain has improved.





The
      agreement requires us to purchase primarily all of our products for sale in
      our
      pharmacies from McKesson. It contains certain volume requirements and has an
      initial term of two years, through December 2006, and renews automatically
      for
      successive one-year periods unless either party provides the other party a
      written non-renewal notice. We believe that if we were unable to purchase
      products directly from McKesson we could secure the same products through other
      sources, including other distributors or directly from the manufacturers, there
      is a risk that our costs would increase and our supply could be interrupted
      affecting our net revenues if our primary supplier agreement were to be
      terminated.




***Hurricane
      Katrina***




In
      September 2005, Hurricane Katrina resulted in the temporary closure of the
      warehouse facility located in St. Rose, Louisiana. The Company maintains
      insurance coverage, which provides for reimbursement from losses resulting
      from
      property damage, loss of product and losses from business interruption. The
      Company estimates approximately $0.2 million of inventory was damaged during
      the
      hurricane and that it incurred approximately $0.8 million of incremental costs
      related to closing the facility and relocating the inventory and operations
      to
      our New Castle facility. The Company has evaluated the extent of the loss from
      business interruption and is attempting to recover these costs through insurance
      claims. No amounts have been recorded related to amounts that may be received
      from insurance.




16


***Discontinued
      Operations***





During
      fiscal year ended December 31, 2005, the Company operated two drug distribution
      facilities: Valley Drug Company and Valley Drug Company South. During the third
      quarter of 2005, the Company determined that it would sell certain assets of
      the
      drug distribution business and eliminate operations conducted out of the New
      Castle, Pennsylvania facility and the St. Rose, Louisiana facility related
      to
      the distribution to independent pharmacies. Accordingly, as of October 1, 2005,
      the Company considered substantially all of the wholesale distribution business
      as discontinued operations for financial statement presentation purposes. In
      December 2005, Rochester Drug Cooperative (“RDC”) acquired certain assets from
      the Company’s wholly-owned subsidiary, Valley Drug Company, including a customer
      list, furniture, fixtures and equipment located at the Company’s New Castle,
      Pennsylvania facility. In connection with the sale, RDC assumed certain property
      leases, customer and other miscellaneous contracts. The total purchase price
      for
      these select assets was $0.7 million, of which $0.4 million was received upon
      closing and $0.3 million is required to be paid if and when the Pennsylvania
      Industrial Development Authority (“PIDA”) consents to a lease assignment of the
      New Castle facility to RDC. The Company expects payment of the $0.3 million
      during the second quarter of 2006.





In
      connection with the sale of these assets, the Company transferred a portion
      of
      the New Castle, Pennsylvania pharmaceutical inventory to the Company’s retail
      pharmacies as well as a portion to its St. Rose, Louisiana facility for
      continued distribution to the Company’s retail pharmacies and for use in the
      Valley Medical Supply operations.




Net
      revenues related to the discontinued operations were $0.0 million and $30.1
      million for the three months ended April 1, 2006 and April 2, 2005,
      respectively.  The income (loss) from discontinued operations was $0.2
      million and $(1.2) million for the three months ended April 1, 2006 and April
      2,
      2005, respectively.




**Comparison
      of Operating Results for the Periods ended April 1, 2006 and April 2,
      2005.**





We
      refer
      to prescription products as Rx products and to the remaining products, such
      as
      over-the-counter medications, home medical equipment and home health appliances,
      as non-Rx products. While non-Rx reflects a smaller percentage of our overall
      revenues, the gross margin for non-Rx products is higher. The Rx portion of
      the
      pharmacy business is dependent upon a number of third party customers that
      pay a
      portion or all of the Rx cost on behalf of the customers, “Third Party
      Customers.” Prescriptions generated by Third Party Customers represented
      approximately 93% of specialty pharmacy’s Rx sales for the three months ended
      April 1, 2006 and April 2, 2005, respectively.





For
      financial statement presentation purposes, the Company has
      reported substantially all of the full-line wholesale drug distribution as
      discontinued operations.




***Net
      Revenues***




Net
      revenue performance is detailed below:





**Three
                months ended April 1, 2006**
              **Versus
                three months ended April 2, 2005****April
                1,**
              **2006**
            
            **April
                2,**
              **2005**Net
                revenues (in millions)
            
            $
            56.0
            
            $
            57.2Rx%
                of location net revenues (1)
            
            
            94.4
            %
            
            94.0
            %Third
                party % of Rx net revenues
            
            
            93.0
            %
            
            94.0
            %Number
                of locations
            
            
            78
            
            
            77Average
                same location net revenue per location
            
            $
            0.7
            
            $
            0.7





*(1)**Location
                of net revenues are net of contractual
                allowances.*




17




**Three
                  months ended**
                **April
                  1, 2006**
                **versus
                  three months**
                **ended
                  April 2, 2005**Net
                  revenues increases (decreases) are as follows (in
                  millions):Net
                  effect of store openings/closings (1)
              
              $
              0.5Prescription
                  sales (2)
              
              
              (1.2
              )Non-Rx
                  sales
              
              
              (0.7
              )Valley
                  Medical Supply (3)
              
              
              0.2Net
                  increase/(decrease)
              
              $
              (1.2
              )




*(1)*
            *The
                net effect of location openings/closing represents the difference
                in
                revenues by eliminating locations that were not open during the full
                periods compared.**(2)*
            *Represents
                the net impact of price increases for brand name prescription products
                offset by an increase in the number of prescriptions filled for lower
                priced generic prescription products.**(3)*
            *Represents
                direct distribution to physicians, medical clinics and other health
                care
                providers revenue of Valley Medical
                Supply.*





***Gross
      Margin***





Gross
      margin was $10.9 million or 19.5 % for the three months ended April 1, 2006.
      This compares to $11.9 million or 20.9% for the three months ended April 1,
      2005. Our gross margins are lower quarter over quarter due to the disruption
      we
      experienced in our supply chain beginning in the second quarter of 2005 which
      continued until February 2006 when we returned to a 5 day per week supply
      arrangement with McKesson. The decrease reflects the adverse effect of the
      efforts of managed care organizations, pharmacy benefit managers and other
      third
      party payors to reduce their prescription costs. In recent years, our industry
      has undergone significant changes driven by various efforts to reduce costs.
      As
      employers and managed care organizations continue to focus on the costs of
      branded and specialty pharmaceuticals, we expect there will continue to be
      negative pressure on gross margins. In addition, gross margin percentage is
      expected to be negatively impacted because of the recent addition of Medicare
      Part D and other efforts by third party payors to reduce reimbursement rates.
      Information that helps explain our gross margin trend is detailed
      below:





**Three Months Ended**
                **April
                  1, 2006 versus three months ended April 2, 2005**Gross
                  margin increases (decreases) are as follows (in millions):Net
                  effect of location openings/closings (1)
              
              $
              0.2Prescription
                  gross margin (2)
              
              
              (1.2
              )Non-Rx
                  gross margin
              
              
              (0.1
              )Valley
                  Medical Supply(3)
              
              
              0.1Net
                  decrease
              
              $
              (1.0
              )




18


***Operating
      Expenses***




Operating
      expenses include selling, general and administrative (“SG&A”) expenses,
      depreciation and amortization expense. Total operating expenses were $13.8
      million or 24.7% of net revenues for the three months ended April 1, 2006.
      This
      compares to $15.1 million or 26.5% of net revenues for the three months ended
      April 2, 2005. Information that helps explain our operating expense trend is
      detailed below:




**Three Months Ended**
              **April
                1, 2006 versus three months ended April 2, 2005**Operating
                expenses increases (decreases) are as follows (in
                millions):Selling,
                general and administrative expenses(1)
            
            $
            (0.9
            )Depreciation
                & amortization (2)
            
            
            (0.4
            )Net
                decrease
            
            $
            (1.3
            )





*(1)*
            *The
                decrease in selling, general and administrative expenses during the
                three
                months ended April 1, 2006 is primarily due to a reduction in employee
                stock option expense of approximately $1.8 million offset by expenses
                that
                increased including marketing of approximately $0.5 million, recruiting
                of
                approximately $0.3 million, and professional fees of $0.3 million.**(2)*
            *The
                decrease in depreciation and amortization is primarily due to fully
                amortized prescription files.*




***Interest
      Expense, Net***




Interest
      expense was $1.4 million for the three months ended April 1, 2006 versus $0.8
      million for the three months ended April 2, 2005. The increase for the three
      months ended April 1, 2006 was due to higher interest rates on our
      outstanding indebtedness with variable rates and $0.6 million was due to ABDC
      note interest.





***Income
      Taxes***




No
      income
      tax benefit has been recorded in any period presented due to the uncertainty
      of
      realization of any related deferred tax asset.




***Net
      Loss***




We
      incurred a net loss of $4.1 million for the three months ended April 1, 2006
      versus a net loss of $5.0 million for the three months ended April 2, 2005.
      Factors impacting these losses are discussed above.




***Inflation
      and Seasonality***




Management
      believes that inflation had no material effect on the operations or our
      financial condition for the three months ended April 1, 2006 and April 2, 2005.
      Management does not believe that our business is materially impacted by
      seasonality; however, significant promotional activities can have a direct
      impact on net revenues for our distribution operations in any given quarter.




**LIQUIDITY
      AND CAPITAL RESOURCES**




At
      April
      1, 2006, we had a working capital deficit of $7.5 million. Our working capital
      deficit is affected by our classification of our revolving credit facility
      as a
      current liability as required under EITF
      issue No. 95-22, “Balance Sheet Classification of Borrowings Outstanding under
      Revolving Credit Agreements That Include both a Subjective Acceleration Clause
      and a Lock-Box Arrangement”. Our revolving credit facility has a contractual
      life until October 12, 2010. If this liability was classified as a long term
      liability our working capital deficit would be improved by approximately $36.4
      million resulting in working capital of $28.9 million.




19





We
      have
      financed our operations and have met our capital requirements primarily through
      private issuances of equity securities, convertible notes, bank borrowings,
      trade creditors and cash generated from operations. Our principal sources of
      liquidity as of April 1, 2006, consisted of cash and cash equivalents of
      approximately $6.5 million along with approximately $3.8 million in availability
      under our $65 million revolving credit facility.





We
      believe that our existing cash and cash equivalents and revolving credit
      facility will be sufficient to fund operating losses, capital expenditures,
      debt
      service and provide adequate working capital for at least the next twelve
      months. However, there can be no assurance that events in the future will not
      require us to seek additional capital and, if so required, that capital will
      be
      available on terms favorable or acceptable to us, if at all.





**Credit
      Facility**





On
      October 12, 2005, the Company entered into a Loan and Security Agreement with
      Wells Fargo Retail Finance, LLC (“WFRF”), pursuant to which WFRF will provide
      the Company with a senior secured revolving credit facility up to $65.0 million
      (the “New Credit Facility”). On that same date the Company terminated its $65
      million Amended and Restated Credit Agreement with General Electric Capital
      Corporation (“GECC”) and in connection therewith repaid all outstanding amounts
      due under the credit facility to GECC along with a $0.5 million termination
      fee.
      The $65.0 million of maximum availability under the New Credit Facility is
      reduced by a $7.0 million reserve. While the credit facility currently does
      not
      require compliance with financial covenants, the Company has the ability to
      reduce this reserve by $3.5 million by agreeing to implement one or more
      financial covenants. Available credit is based on eligible receivables,
      inventory and prescription files, as defined in and determined pursuant to
      the
      agreement, and may be subject to reserves as determined by the lender from
      time
      to time. Interest on the revolving line of credit is calculated at the prime
      index rate plus an applicable prime margin (as defined in the agreement), unless
      the Company or the lender chooses to convert the loan to a LIBOR-based loan.
      In
      each case, interest is adjusted quarterly. The applicable prime index margin
      as
      of April 1, 2006 was 7.75%. As of April 1, 2006, the interest rate,
      including applicable margin, used to calculate accrued interest was 8.0%.
      Interest is payable monthly.





The
      New
      Credit Facility includes usual and customary events of default (subject to
      applicable grace periods) for facilities of this nature and provides that,
      upon
      the occurrence of an event of default, payment of all amounts payable under
      the
      New Credit Facility may be accelerated and/or the lenders’ commitments may be
      terminated. In addition, upon the occurrence of certain insolvency or bankruptcy
      related events of default, all amounts payable under the New Credit Facility
      shall automatically become immediately due and payable, and the lenders’
commitments shall automatically terminate.





The
      New
      Credit Facility includes an early termination fee of $0.7 million if paid in
      full before October 12, 2008. The New Credit Facility is secured by
      substantially all assets of the Company. As of April 1, 2006, $36.4 million
      was
      outstanding on the line and $3.8 million was available for additional
      borrowings, based on eligible receivables, inventory and prescription
      files.




**Subordinated
      Note and Convertible Debenture**




On
      March
      22, 2005, we converted $23.0 million in accounts payable owed to
      AmerisourceBergen Drug Corporation (“ABDC”) (after having repaid $6.0 million on
      March 23, 2005 in connection with the closing of the new vendor supply
      agreement) into (a) a subordinated convertible debenture in the original
      principal amount of $11.5 million (the “Subordinated Convertible Debenture”) and
      (b) a subordinated promissory note in the original principal amount of $11.5
      million (the “Subordinated Note”).


20


The
      Subordinated Convertible Debenture and Subordinated Note are guaranteed by
      DrugMax and certain of DrugMax’s subsidiaries, including Valley Drug Company,
      Valley Drug Company South, Familymeds, Inc. and Familymeds Holdings, Inc.
      pursuant to Continuing Guaranty Agreements dated as of March 21, 2005. We also
      entered into a subordinated security agreement dated as of March 21, 2005,
      pursuant to which we agreed that upon the occurrence of certain defaults and
      the
      passage of applicable cure periods we shall be deemed at that point to have
      granted to ABDC a springing lien upon and a security interest in substantially
      all of our assets to secure the Subordinated Convertible Debenture and the
      Subordinated Note. Should this occur, we shall be deemed in default of our
      Senior Credit Facility. However, pursuant to a subordination agreement dated
      March 21, 2005, ABDC has agreed to subordinate the Subordinated Convertible
      Debenture, the Subordinated Note, the Guarantees and the Security Agreement
      to
      all “Senior Debt.” Senior Debt consists of all senior indebtedness now or
      hereafter owing, including indebtedness under the Senior Credit Facility and
      any
      debt incurred by us to replace or refinance such debt. On October 12, 2005,
      in
      connection with the New Credit Facility, ABDC executed an Assignment and
      Subordination Agreement with WFRF whereby the Subordination Agreement was
      assigned to WFRF and ABDC acknowledged the assignment.





Pursuant
      to the Subordinated Note, principal is due and payable in 20 successive
      quarterly installments each in the amount of $0.6 million through September
      1,
      2010, on which date all outstanding amounts are required to be paid. The
      Subordinated Note bears interest at a variable rate equal to the prime rate
      plus
      2.0% per annum. The interest rate adjusts on each quarterly payment date based
      upon the prime rate in effect on each such quarterly payment date; provided
      that
      in no event shall the interest rate in effect be less than 5.0% per annum or
      greater than 10% per annum. Interest accrued on the unpaid principal balance
      of
      the Subordinated Note is due and payable on each quarterly payment date and
      interest payments commenced on June 1, 2005. Interest of $0.3 million was
      expensed during the three months ended April 1, 2006.





Pursuant
      to the Subordinated Convertible Debenture, principal is due and payable in
      19
      successive quarterly installments each in the amount of $0.6 million commencing
      on March 1, 2006 and continuing until August 15, 2010, on which date all
      outstanding amounts are required to be paid. Quarterly principal payments are
      payable in cash or in shares of common stock in an amount equal to $0.6 million
      divided by $3.4416 (the “Issue Price”). The Subordinated Convertible Debenture
      bears interest at a rate which adjust on each quarterly payment date and which
      is equal to (a) 10%, if the quarterly interest payment is made in common stock
      or (b) the prime rate on the date the quarterly interest payment is due plus
      1%
      per annum, if the quarterly interest payment is made in cash; provided that
      in
      no event shall the interest rate in effect be less than 5.0% per annum or
      greater than 10% per annum. Quarterly interest payments are required to be
      paid
      in common stock through February 28, 2006. Commencing March 1, 2006, quarterly
      interest payments may be paid in cash or common stock in an amount equal to
      the
      interest then due and owing divided by the Issue Price, or a combination
      thereof. If common stock is used to make principal and interest payments on
      the
      Subordinated Convertible Debenture, and the proceeds ABDC receives upon any
      sale
      of our common stock (or the proceeds ABDC would have received upon a sale in
      the
      event no shares are sold by ABDC) are less than the principal and interest
      due,
      we are required to pay such difference to ABDC in cash on the date of maturity
      of the Subordinated Convertible Debenture. Through December 31, 2005, ABDC
      could
      not sell any shares of the Company’s common stock received that, in the
      aggregate, exceed 25% of the average trading volume of our common stock for
      the
      preceding 10 trading days.





During
      the three months ended April 1, 2006, were issued 261,419 shares of common
      stock
      valued at $0.1 million for interest expense through March 1, 2006. The sale
      of
      these shares of stock by ABDC may have a negative impact on the price of our
      common stock. As of April 1, 2006, we received notice from ABDC that a shortfall
      in the value received from the sale of securities received as payment of
      interest was $0.2 million. This amount is considered a “Deemed Payment” under
      the terms of the Subordinated Convertible Debenture and the amount is reflected
      as a liability in the condensed consolidated balance sheet as of April 1, 2006.
      The Company has accrued another “Deemed Payment” amount of $0.2 million relating
      to the March 1, 2006 interest payment.


21


**Operating,
      Investing and Financing Activities** ****




Following
      are the components of our operating, investing and financing activities for
      the
      three months ended April 1, 2006 and April 2, 2005, respectively, using the
      direct cash flow method (in thousands):




**For the Three Months**
              **Ended
                April 1, 2006**
            
            **For the Three Months**
              **Ended April
                2, 2005**Cash
                receipts
            
            $
            40,366
            
            $
            40,593Cash
                paid to suppliers and employees
            
            
            (38,333
            )
            
            (54,692
            )Interest
                expense paid
            
            
            (1,008
            )
            
            (641
            )Net
                cash provided by (used in) operating activities
            
            
            1,028
            
            
            (14,740
            )Cash
                paid to acquire property and equipment, net
            
            
            (845
            )
            
            (823
            )Cash
              paid to acquire pharmacy assets
            
            
            (244
            )
            
            (–
            )Net
                cash used in investing activities
            
            
            (1,089
            )
            
            (823
            )Proceeds
                from revolving credit facility, net
            
            
            191
            
            
            15,110Proceeds
                from the exercise of stock options
            
            
            3
            
            
            449Repayment
                of promissory notes payable
            
            
            (358
            )
            
            (347
            )Repayment
                of obligation under capital leases
            
            
            –
            
            
            (11
            )Net
                cash (used in) provided by financing activities
            
            
            (164
            )
            
            15,201Net
                decrease in cash and cash equivalents
            
            
            (223
            )
            
            (362
            )Cash
                and cash equivalents, beginning of period
            
            
            6,681
            
            
            2,332Cash
                and cash equivalents, end of period
            
            $
            6,458
            
            $
            1,970





**Operating
      Cash Flows**




Our
      cash
      flows from operating activities increased by $15.8 million as we generated
      $1.0
      million for the three months ended April 1, 2006 compared to using ($14.7)
      million for the three months ended April 2, 2005. The improvement in operating
      cash flows relates primarily due to the elimination of our full-line wholesale
      drug distribution.




**Investing
      Cash Flows**




Net
      cash
      used in investing activities was ($1.1) million for the three months ended
      April
      1, 2006 and April 2, 2005 to purchase fixed assets and pharmacy assets.




**Financing
      Cash Flows**




Net
      cash
      provided by financing activities was ($0.2) million and $15.2 million for the
      three months ended April 1, 2006 and April 2, 2005, respectively. The reduction
      of $15.4 million in cash flows from financing activities was due to the
      discontinuance of our full-line wholesale drug distribution business and the
      related cash flows.


22


***Off-Balance
      Sheet Arrangements***




We
      do not
      make use of any off-balance sheet arrangements that currently have or that
      we
      expect are reasonably likely to have a material effect on our financial
      condition, results of operations or cash flows. We utilize operating leases
      for
      many of our locations. We do not use special-purpose entities in any of our
      leasing arrangements.





***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, that have been prepared in accordance with accounting
      principles generally accepted in the United States. The preparation of these
      financial statements requires us 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 periods. On an on-going
      basis, we evaluate estimates and judgments, including the most significant
      judgments and estimate. We based our estimates and judgments on historical
      experience and on various other facts 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. Our critical accounting policies
      include: assessing merger goodwill and identifiable intangible assets for
      impairment, assessing other long-lived assets for impairment, evaluating the
      adequacy of the allowance for doubtful accounts, and estimating for inventory
      loss reserves.





**Goodwill
      and Identifiable Intangible Assets**




Useful
      lives for identifiable intangibles 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. After goodwill
      is
      initially recorded, annual impairment tests are required, or more frequently
      if
      impairment indicators are present. The amount of goodwill cannot exceed the
      excess of the fair value of the related reportable unit (which is based on
      the
      Company’s stock price) over the fair value of reporting units identifiable
      assets and liabilities. Downward movement in the Company’s common stock price
      has a material effect on the fair value of goodwill in future measurement
      periods. As of April 1, 2006, goodwill was $1.4 million.




**Impairment
      of Other Long-lived Assets**





The
      Company reviews other long-lived assets, including property, equipment and
      prescription file intangible assets, to be held and used for impairment whenever
      events or changes in circumstances indicate that the carrying amount of an
      asset
      may not be recoverable. If the sum of the undiscounted expected future cash
      flows is less than the carrying amount of the related assets, the Company
      recognizes an impairment loss. Impairment losses are measured as the amount
      by
      which the carrying amount of the assets, including prescription file intangible
      assets, exceeds the future cash flows for the assets. For purposes of
      recognizing and measuring impairment of other long-lived assets, the Company
      evaluates assets at the location level for pharmacy operations.





Our
      impairment loss calculations contain uncertainty since we must use judgment
      to
      estimate future revenues, profitability and cash flows. When preparing these
      estimates, we consider historical results and current operating trends and
      our
      consolidated revenues, profitability and cash flow results and forecasts. These
      estimates can be affected by a number of factors including, but not limited
      to,
      general economic conditions, the cost of real estate, the continued efforts
      of
      third party customers to reduce their prescription drug costs, regulatory
      changes the continued efforts of competitors to gain market share and consumer
      spending patterns. If these projections change in the future, we may be required
      to write-down our long-lived assets. Long-lived assets evaluated for impairment
      include property and equipment as well as intangible assets, which as of April
      1, 2006 and April 2, 2005 were approximately $9.7 million and $9.8 million,
      respectively.


23


**Trade
      Receivables**





At
      April
      1, 2006 and December 31, 2005, trade receivables reflected approximately $13.7
      million and $15.7 million, respectively, of amounts due from various insurance
      companies, governmental agencies and individual customers. Of these amounts,
      there was approximately $2.4 million and $2.8 million reserved as of April
      1,
      2006 and December 31, 2005, respectively, for a balance of net trade receivables
      of $11.3 million and $12.9 million, respectively. We use historical experience,
      market trends and other analytical data to estimate our allowance for doubtful
      accounts. Based upon these factors, the reserve at April 1, 2006 is considered
      adequate. Although we believe that the reserve estimate is reasonable, actual
      results could differ from our estimate, and such differences could be material.
      If the estimate is too low, we may incur higher bad debt expenses in the future
      resulting in lower net income or higher net losses. If the estimate is too
      high,
      we may experience lower bad debt expense in the future resulting in higher
      net
      income or lower net losses.





**Inventories**





Inventories
      consist of pharmaceuticals and other retail merchandise owned by us. Inventories
      are stated at the lower of cost (first-in, first-out method for pharmaceutical
      inventory and retail method for retail merchandise inventory) or market.
      Physical inventory counts are taken on a regular basis in each location to
      ensure that the amounts reflected in the consolidated condensed financial
      statements are properly stated. We use historical data to estimate our inventory
      loss reserves and we have not made any material changes in the accounting
      methodology used to establish our inventory loss reserves during the past three
      years. If the estimate of inventory losses is too low we may incur higher cost
      of sales in the future resulting in lower net income or higher net losses.
      If
      the estimate of inventory losses incurred is too high, we may experience lower
      cost of sales in the future resulting in higher net income or lower net losses.
      Inventories as of April 1, 2006 and December 31, 2005 were approximately $29.8
      million and $30.6 million, respectively, net of approximately $2.2 million
      and
      $2.1 million of inventory loss reserves, respectively.





**Item
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.**




As
      of
      April 1, 2006, $36.4 million and $22.9 million were outstanding on our revolving
      credit facility and Subordinated Notes due to ABDC, respectively. These
      borrowings are at a variable rate of interest. Assuming $59.3 million was
      outstanding for a full year, a 1% change in interest rates would change our
      interest expense by $0.6 million annually.





We
      do not
      currently utilize derivative financial instruments to address market risk.





**Item
      4. CONTROLS AND PROCEDURES.**





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Exchange Act reports 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 our management, including our Chief Executive Officer and Chief Financial
      Officer, as appropriate, to allow timely decisions regarding required
      disclosure.




**Conclusion
      Regarding the Effectiveness of Disclosure Controls and
      Procedures.** We
      carried out an evaluation, under the supervision and with the participation
      of
      our Chief Executive Officer and Chief Financial Officer, of the effectiveness
      of
      the design and operation of our disclosure controls and procedures as of the
      end
      of the period covered by this report pursuant to Exchange Act Rule 13a-15.
      Our
      disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      us in
      reports that we file or submit pursuant to the Securities Exchange Act of 1934,
      as amended, are accumulated and communicated to our management, including our
      Chief Executive Officer and Chief Financial Officer, as appropriate to allow
      timely decisions regarding required disclosure.  Based on this evaluation,
      our Chief Executive Officer and Chief Financial Officer concluded that our
      disclosure controls and procedures were effective as of the end of the period
      covered by this report.  In designing and evaluating the disclosure
      controls and procedures, management recognized that any controls and procedures,
      no matter how well designed and operated, can provide only reasonable assurance
      of achieving the desired control objectives, and in reaching a reasonable level
      of assurance, management necessarily was required to apply its judgment in
      evaluating the cost-benefit relationship of possible controls and procedures.


24


**Changes
      in Internal Control Over Financial Reporting.** There
      has been no change in our internal control over financial reporting during
      the
      first quarter of 2006 that has materially affected, or is reasonably likely
      to
      materially affect, our internal control over financial reporting.





**PART
      II - OTHER INFORMATION**




**Item
      1. LEGAL PROCEEDINGS.**




There
      has
      been no significant change in the status of the legal matters described in
      the
      Company’s fiscal 2005 Form 10-K, as amended.




**Item
      1A. RISK FACTORS.**





There
      have been no material changes to the Risk Factors described in the Company’s
      fiscal 2005 Form 10-K, as amended.





**Item
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.**


During
        the three months ended April 1, 2006, 261,419 shares of common stock of the
        Company, valued at $0.1 million, were issued to cover interest expense pursuant
        to ABDC's Subordinated Debenture. See "Management's Discussion and
        Analysis--Liquidity. The Company claims an exemption from registration under
        the
        Securities Act of 1933 for the issuance of such shares under Section 4(2)
        of the
        Securities Act and Regulation D promulgated thereunder as
        transactions not involving any public offering, since,
        among other things, ABDC is an accredited investor and it received adequate
        information about the Company or had access to such information prior to
        such
        issuance .




**Item
      3. DEFAULT UPON SENIOR SECURITIES.**




None.





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




None.




**Item
      5. OTHER INFORMATION.**




None.




**Item
      6. EXHIBITS**




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.




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**SIGNATURES**




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




**DrugMax,
                Inc.**Date: May
              15,
              2006
            By:
            */s/
                Edgardo A. Mercadante*Edgardo
                A. Mercadante
              President,
                Chief Executive Officer and Chairman of the Board(Principal
                Executive Officer)






Date: May
              15,
              2006
            By:
            */s/
                James A. Bologa*James
                A. Bologa
              Senior
                  Vice President, Chief Financial Officer and
                  Treasurer(Principal
              Financial and Accounting Officer)




26