##### Index to Financial Statements

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UNITED STATESSECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM
10-KSB/AAmendment No. 1

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xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MARCH 31, 2002

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.1-15445

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DRUGMAX, INC.,formerly known as
DrugMax.com, Inc.

(Name of small business issuer in its charter)

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| | STATE OF NEVADA(State or other jurisdiction of incorporation or organization) |  | 34-1755390(IRS Employer Identification No.) | 
| | ----------------------------------------------------------------------------- |  | ------------------------------------------- | 

| | 12505 Starkey Road, Suite A, Largo, Florida(Address of Principal Executive Officers) |  | 33773(Zip Code) | 
| | ------------------------------------------------------------------------------------ |  | --------------- | 

Issuers telephone number: (727) 533-0431

Securities registered pursuant to Section 12(b) of the Exchange Act:None.

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common stock, Par value $.001 per
share(Title of Class)

Indicate by check mark whether the issuer (1) filed all reports required to be filed by Sections 13
or 15(d) of the Securities Exchange Act of 1934 during the past 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. Yes x No o

Indicate by check mark if no disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB/A or any amendment to this
Form 10-KSB/A. x

Issuers revenues for its most recent fiscal year were $271,287,988.

The number of shares outstanding of the Issuers common stock at $.001 par value as of June 17, 2002, was 7,121,833. The aggregate market value of the common stock held by
non-affiliates of the registrant (approximately 3,451,828 shares) was approximately $10,010,301, as computed by the closing price of such common stock, $2.90, as of June 17, 2002.

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##### Index to Financial Statements

INTRODUCTORY NOTE This Amendment No. 1 on Form 10-KSB/A to the Registrants Form 10-KSB for the year ended March 31,
2002 originally filed on July 1, 2002 (the Original Filing) is being filed for the purposes of giving effect to the restatement of the Companys consolidated financial statements for the years ended March 31, 2002 and 2001. See note
17 to the consolidated financial statements contained herein for a summary of the significant effects of the restatement. Accordingly, the registrant hereby amends the Original Filing by amending and restating items 6, 7 and 13, in their entirety as
follows:

PART II

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

As discussed in Note 17 to the consolidated financial statements included in Item 7, the Company has restated its consolidated financial statements as of and for the years ended
March 31, 2002 and 2001. The following management discussion and analysis takes into account the effects of the restatement and should be read in conjunction with the consolidated financial statements and notes thereto presented in this Form
10-KSB/A.

Overview

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

Critical Accounting Policies
And Estimates

Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contains a discussion of
the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On
an on-going basis, the Company evaluates its estimates and judgments, including those related to customer incentives, product returns, bad debts, inventories, intangible assets, income taxes, and contingencies and litigation. The Company bases its
estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The
Companys significant accounting policies are more fully described in Note 1 to its consolidated financial statements. Management, however, believes the following critical accounting policies, among others, affect the Companys more
significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition.The Company recognizes revenue on its core distribution segment when goods are shipped and title or risk of loss resides with unaffiliated customers, and at which time the appropriate provisions are recorded for estimated contractual
chargeback credits from the manufacturers based on the Companys contract with the manufacturer. Rebates and allowances are recorded as a component of cost of sales in the period they are received from the vendor or manufacturer unless
such

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##### Index to Financial Statements

rebates and allowances are reasonably estimable at the end of a reporting period. The Company records chargeback credits due from its vendors in the period
when the sale is made to the customer which is eligible for contract pricing from the manufacturer.

Inventory Valuation.Inventory is stated at the lower of cost of market. Cost is determined using the first-in, first-out basis of accounting. Inventories consist of brand and generic drugs, over-the-counter products, health and beauty aids, and nutritional
supplements for resale. The inventories of the Companys three distribution centers are constantly monitored for out of date or damaged products, which if exist, are reclassed out of saleable inventory to the morgue inventory for
return to and credit from the manufacturer. However, if market acceptance of the Companys existing products or the successful introduction of new products should significantly decrease, inventory write-downs could be required. As of March 31,
2002 and 2001, no inventory valuation allowances were necessary.

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

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

Allowance for Deferred Income Tax Asset. The Company had a deferred income tax asset and valuation
allowance at March 31, 2001, which primarily represented the potential future tax benefit associated with its operating losses through the fiscal year ended March 31, 2001. In assessing the realizability of deferred income tax assets, management
considers whether it is more likely than not that some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management evaluated the scheduled reversal of deferred income tax liability, the Companys profitability for the year ended March 31, 2002, reviewed the Companys business
model, and future earnings projections, and believes the evidence indicates that the Company will be able to generate sufficient taxable income to utilize the deferred income tax asset. Based upon the evaluations made, management concluded that
realization of the deferred income tax asset was more likely than not; therefore, the valuation allowance was reversed in fiscal 2002.

Results of Operations

Revenues.The Company generated revenues of $271.3 million and $177.7 million for the years ended March 31, 2002 and 2001, respectively, an
increase of $93.6 million or 52.7%. The Pittsburgh distribution center generated $133.3 million and $97.7 million for the years ended March 31, 2002 and 2001, respectively, for an increase of $35.6 million or 36.4%. Valley generated revenues of
$106.6 million and $60.0 million for the years ended March 31, 2002 and 2001, respectively, for an increase of $46.5

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##### Index to Financial Statements

million or 77.5%. Both warehouse locations generated double-digit growth and achieved record sales by expanding sales territories, cross selling to common
customers, and aggressive marketing. In the year ended March 31, 2002, Discount generated revenues of $15.9 million from sales to Penner prior to its acquisition of Penner in October 2001, and generated revenues of $15.1 million from its acquisition
of Penner through the year ended March 31, 2002, for a total annual revenue of $31 million for the year ended March 31, 2002. Discount generated revenues of $19.2 million for the year ended March 31, 2001, of which $16.9 million was generated from
sales to Penner during the period which Discount managed the operations of Penner pursuant to the management agreement entered into in September 2000. Discount realized an increase in gross revenue of $11.8 million in the year ended March 31, 2002
over the year ended March 31, 2001, which is attributable to sales to Penner during the period which Discount managed Penner, as well as from sales to Penners customers subsequent to it acquisition. In addition, approximately $.4 million in
revenue was realized in management fees related to the aforementioned management agreement with Penner.

Gross Profit. The
Company achieved gross profits of $7.5 million and $5.5 million for the years ended March 31, 2002 and 2001, respectively, for an increase of $2.0 million or 36.4%. The Pittsburgh distribution center recorded gross profits of $2.0 million in the
year ended March 31, 2002, an increase of $.6 million, or 41.9% over the year ended March 31, 2001. Valley recorded gross profits of $4.1 million for the year ended March 31, 2002, an increase of $.8 million, or 23% over the year ended March 31,
2001. Discount recorded gross profits of $1.1 million for the year ended March 31, 2002, an increase of $.9 million, or 448.8% over the year ended March 31, 2001. The large increase in the gross profit for Discount between the years ended March 31,
2002 and 2001 is attributable to the relatively low profit margin which Discount applied to the sales made to Penner during the management period, compared to gross profit recorded on revenues from customers after its acquisition of Penner in
October 2001. The Companys margin, as a percentage of revenue, was 2.8% and 3.1% for the fiscal years ended March 31, 2002 and 2001, respectively. The decrease in the gross margin percentage was primarily due to the impact of lower selling
margins, as a result of a highly competitive market and a greater mix of high volume customers where a lower cost of distribution and better asset management enabled the Company to offer lower selling margins to its customers, coupled with a lower
margin on sales to Penner prior to its acquisition by the Company.

Operating Expense.The Company incurred operating expenses
of approximately $5.8 million and $12.5 million for the years ended March 31, 2002 and 2001, respectively. Operating expenses in the year ended March 31, 2002 include approximately $5.4 million in selling, general, administrative, and other direct
operating expenses, $135,000 in amortization of a contractual agreement and financing costs, and $245,000 in depreciation expense. For the year ended March 31, 2001, the selling, general, administrative and other direct operating expenses were
approximately $5.2 million, amortization of financing costs was $64,300, depreciation expense was $248,000, and costs for amortization of goodwill was $2.6 million associated with the acquisitions of Becan, Valley, Desktop and VetMall, and an
impairment of assets charge of approximately $4.4 million. The Company recorded a special charge in the year ended March 31, 2001, for impairment of assets after managements assessment of the acquired goodwill and software arising from the
acquisitions of Desktop and VetMall. Selling, general, administrative and other direct operating expenses increased approximately $294,000 in the year ended March 31, 2002 over the year ended March 31, 2001, net of amortization of goodwill and
impairment of assets charge. The increase is due to the acquisition of Penner in October 2001, which added approximately $183,200 in direct operating expenses each month through the year ended March 31, 2002; however, the percentage of operating
expenses, before amortization and depreciation expense, and asset impairment write-off, decreased from the year ended March 31, 2001 to March 31, 2002, from 3.0% to 2.0%, as compared to revenues, an improvement of 33%. This improvement reflects
increased warehouse efficiencies, economies of scale associated with the Companys growth, cost control efforts, and the elimination of duplicate services resulting from recent mergers.

Interest Expense.Interest expense was approximately $1 million and $2 million for the years ended March 31, 2002 and
2001, respectively. During fiscal year 2001, deferred financing costs associated with the Merrill Lynch line of credit totaling approximately $.9 million were amortized to interest expense. On October 24, 2000, the Company obtained a new revolving
line of credit and term loan with Mellon

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##### Index to Financial Statements

Bank N.A. (Mellon), the proceeds of which were used to satisfy the prior Merrill Lynch and National City credit facilities. In March 2001, the
certificate of deposit with First Community Bank matured and was used to satisfy the associated outstanding line of credit with First Community Bank. On October 29, 2001, the Company executed a loan modification agreement modifying its original line
of credit with Standard Federal Bank National Association (Standard), formerly Michigan National Bank as successor in interest to Mellon. The decrease in interest expense from the prior year also resulted from increased levels of
borrowing offset by lower interest rates under the Companys current revolving line of credit and term loan.

Extraordinary Loss on Extinguishment of
Debt. Upon the early extinguishment of the Merrill Lynch line of credit in October 2000, the Company recognized an extraordinary loss of $572,244, which represented the unamortized balance of deferred financing costs related
to a warrant issued to a director and non-employee consultant as a result of the directors acting as a guarantor of the Merrill Lynch line of credit.

Net Income (Loss) Per Share. The net income per share for the year ended March 31, 2002 amounted to $.29 per basic and $.28 per diluted share. At March 31, 2001, the Company had a deferred income tax asset valuation
allowance of approximately $1.5 million. During the year ended March 31, 2002, the Company reduced the entire valuation allowance, and booked approximately $1.1 million of deferred income tax benefit, net of current year deferred income tax expense
of $354,952, which provided the Company with net income of $.16 per basic and $.15 per diluted share. If amortization expense for goodwill was not included in fiscal 2001 as presented in the current year under SFAS No. 142, it would have had the
effect of decreasing the basic and diluted net loss per share by $.40 for the year ended March 31, 2001.

Income Taxes.The Company
had an estimated gross deferred income tax asset and valuation allowance of approximately $1.5 million at March 31, 2001, which primarily represented the potential future tax benefit associated with its operating losses through the fiscal year ended
March 31, 2001. Management evaluated the Companys profitability for the year ended March 31, 2002, reviewed the Companys business model, current year earnings and future earnings projections, and believes the evidence indicates that the
Company will be able to generate sufficient taxable income to utilize the deferred income tax asset; therefore, the Company recognized the full $1.5 million deferred income tax asset, offset by current year deferred income tax expense, for a net
deferred income tax benefit of $1.1 million for the year ended March 31, 2002.

Inflation; Seasonality.Management believes that
there was no material effect on operations or the financial condition of the Company as a result of inflation for the years ended March 31, 2002 and 2001. Management also believes that its business is not seasonal; however, significant promotional
activities can have a direct impact on sales volume in any given quarter.

Financial Position, Liquidity and Capital Resources

The Companys net income plus non-cash expenses produced positive cash flow for the quarter and year ended March 31, 2002. The Companys continued financial improvement is attributable to
the growth of the Companys core business, control over corporate expenditures and managements ability to maintain acceptable gross margins. The Company has working capital and cash and cash equivalents of $4 million and $.2 million,
respectively, including restricted cash of $2 million, at March 31, 2002.

The Companys principal commitments at March 31, 2002 were leases on its
office and warehouse space. There were no material commitments for capital expenditures at that date.

Net cash used in operating activities was $5,889,785 for
the year ended March 31, 2002. The usage of cash is attributable to an increase in accounts receivable of $385,375 and inventory of $9,270,331, as a result of increased sales and inventory associated with the acquisition of Penner, increases in
prepaid and other current assets of $29,175, net deferred income tax asset of $1,103,548, deposits of $31,072, and a

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##### Index to Financial Statements

decrease in accrued expenses of $3,074, offset by decreases in due from affiliates of $2,363, other assets of $105,662 and accounts payable of
$2,396,293.

Net cash used in investing activities of $603,209 for the year ended March 31, 2002 represents $488,619 cash paid for the acquisition of Penner,
and $68,250 for purchases of property and equipment, and $49,000 for an investment in MorepenMax.

Net cash provided by financing activities was $6,223,980 for
the year ended March 31, 2002, representing the net change in the Companys revolving line of credit agreement of $6,985,078, offset by the decrease in due to affiliates of $46,720, repayments of long-term debt and capital leases of $663,878,
and additional financing costs incurred in connection with the loan modification agreement with Standard of $50,500.

On March 17, 2000, the Company signed a
$1,000,000 line of credit agreement with First Community Bank of America. Terms of the agreement provided for interest to be charged at 1% over the rate of interest paid on the Companys $1,000,000 certificate of deposit held by First Community
Bank of America and used to collateralize the loan facility. The balance on the line of credit became due on October 1, 2000. On November 6, 2000, documents were executed to extend the line of credit agreement for an additional six-month period with
a due date of April 1, 2001. The First Community Bank of America certificate of deposit matured on March 15, 2001, and on March 19, 2001, was used to satisfy the line of credit agreement.

Additionally, in March 2000, the Company entered into a line of credit agreement with Merrill Lynch. The line of credit enabled the Company to borrow a maximum of $5,000,000 with borrowings limited to 80% of eligible
accounts receivable and 50% of inventory (capped at $1,000,000). The Merrill Lynch line of credit was paid in full on October 24, 2000, with proceeds from the new Mellon credit facility discussed below.

As part of the acquisition of Valley, the Company agreed to become an additional guarantor of the National City Bank revolving line of credit and term loan indebtedness of Valley. In October 2000,
National City Bank was paid in full with proceeds from the new Mellon credit facility discussed below.

On October 24, 2000, the Company obtained from Mellon a
$15 million line of credit and a $2 million term loan to refinance its prior bank indebtedness, to provide additional working capital and for other general corporate purposes. On October 29, 2001, the Company executed a loan modification agreement
modifying the original Mellon line of credit with Standard, increasing the line to $23 million. The credit facility imposes financial covenants on the Companys net worth, net income (loss) and working capital ratios on a quarterly basis. On
June 6, 2002, the Company executed a Third Amendment and Modification to Loan and Security Agreement (the Amended Agreement) with Standard modifying the original Mellon line of credit executed October 24, 2000. The Amended Agreement
permits the Company to exceed the calculated line availability, by an amount of up to $2,000,000 (the out-of-formula advance), for the period commencing June 5, 2002 through August 5, 2002, unless cancelled upon request by the Company
prior to August 5, 2002. However, at no time shall the total line of credit be advanced beyond $23,000,000. The Amended Agreement sets forth that if the Company has out-of-formula advances outstanding, then it will incur interest on the entire
principal balance of the line of credit at the rate of one percent over the base rate until the out-of-formula advances are paid in full. The Amended Agreement also provides that the Companys borrowing base include the excess of the restricted
cash account over the outstanding principal balance of the existing term loan. The Amended Agreement modified the financial covenants imposed on the Companys net income, net worth and working capital ratios through March 31, 2004. On June 27,
2002, Standard provided an amendment modifying the covenants in the Loan and Security Agreement to achieve loan compliance at March 31, 2002. The amendment modifies the net income covenant for the fourth quarter ended March 31, 2002, and the net
worth covenant commencing March 31, 2002 through June 29, 2002. All other loan provisions will remain in effect.

On November 1, 2000, the Company filed a
registration statement with the Securities and Exchange Commission for a proposed secondary offering of 2,000,000 shares of the Companys common

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##### Index to Financial Statements

stock. Utendahl Capital Partners, L.P. (Utendahl) was contracted to act as lead managing underwriter of the proposed offering. However, on
December 29, 2000, the Company and Utendahl agreed to terminate their agreement and Utendahl received 50,000 shares of the Companys common stock, valued at $3.9375 per share, for full release of the agreement.

On or about January 15, 2001, the Company entered into a Letter of Intent with Southwest Securities, Inc. (Southwest), pursuant to which Southwest proposed to organize,
lead and manage a group of underwriters to represent the Company for the proposed secondary offering. On October 30, 2001, the Company filed Form RW with the Securities and Exchange Commission requesting consent to withdraw the Companys
Registration Statement on Form SB-2.

Management believes the Company has sufficient capital resources to fund the Companys operations for the next
twelve months.

Item 7.FINANCIAL STATEMENTS

See financial statements commencing on page F-1.

PART
IV

Item 13.EXHIBITS
AND REPORTS ON FORM 8-K

(a) Exhibits.

|    |                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1 | Agreement and Plan of Merger by and between NuMed Surgical, Inc. and Nutriceuticals.com Corporation, dated as of January 15, 1999.
(1)                                              
|    |                                                                                                                                                                                     
|2.2 | Agreement and Plan of Reorganization between the Registrant and Eric Egnet dated March 31, 1999. (1)                                                                                
|    |                                                                                                                                                                                     
|2.3 | Agreement and Plan of Reorganization dated September 8, 1999 by and between Nutriceuticals.com Corporation and Dynamic Health Products, Inc.
(2)                                    
|    |                                                                                                                                                                                     
|2.4 | Agreement and Plan of Reorganization between DrugMax.com, Inc., Jimmy L. Fagala, K. Sterling Miller, and HCT Capital Corp. dated as of March
20, 2000. (3)                          
|    |                                                                                                                                                                                     
|2.5 | Stock Purchase Agreement between DrugMax.com, Inc. and W.A. Butler Company dated as of March 20, 2000. (3)                                                                          
|    |                                                                                                                                                                                     
|2.6 | Merger Purchase Agreement between DrugMax.com, Inc., DrugMax Acquisition Corporation, and Valley Drug Company, Ronald J. Patrick and Ralph A.
Blundo dated as of April 19, 2000. (4)
|    |                                                                                                                                                                                     
|2.7 | Agreement for Purchase and Sale of Assets by and between Discount Rx, Inc., and Penner & Welsch, Inc., dated October 12, 2001.
(11)                                                 
|    |                                                                                                                                                                                     
|3.1 | Articles of Incorporation of NuMed Surgical, Inc., filed October 18, 1993. (1)                                                                                                      
|    |                                                                                                                                                                                     
|3.2 | Articles of Amendment to the Articles of Incorporation of NuMed Surgical, Inc., filed March 18, 1999. (1)                                                                           
|    |                                                                                                                                                                                     
|3.3 | Articles of Merger of NuMed Surgical, Inc. and Nutriceuticals.com Corporation, filed March 18, 1999. (1)                                                                            



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##### Index to Financial Statements

|      |                                                                                                                                                                                                                                                               
|----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.4   | Certificate of Decrease in Number of Authorized Shares of Common Stock of Nutriceuticals.com Corporation, filed October 29, 1999.
(5)                                                                                                                         
|      |                                                                                                                                                                                                                                                               
|3.5   | Articles of Amendment to Articles of Incorporation of Nutriceuticals.com Corporation, filed January 11, 2000. (8)                                                                                                                                             
|      |                                                                                                                                                                                                                                                               
|3.6   | Articles and Plan of Merger of Becan Distributors, Inc. and DrugMax.com, Inc., filed March 29, 2000. (8)                                                                                                                                                      
|      |                                                                                                                                                                                                                                                               
|3.7   | Amended and Restated Bylaws, dated November 11, 1999. (5)                                                                                                                                                                                                     
|      |                                                                                                                                                                                                                                                               
|4.2   | Specimen of Stock Certificate. (8)                                                                                                                                                                                                                            
|      |                                                                                                                                                                                                                                                               
|10.1  | Employment Agreement by and between Nutriceuticals.com Corporation and William L. LaGamba dated January 1, 2000. (7)                                                                                                                                          
|      |                                                                                                                                                                                                                                                               
|10.2  | Employment Agreement by and between Valley Drug Company and Ronald J. Patrick dated April 19, 2000 (8)                                                                                                                                                        
|      |                                                                                                                                                                                                                                                               
|10.3  | Employment Agreement by and between Valley Drug Company and Ralph A. Blundo dated April 19, 2000. (8)                                                                                                                                                         
|      |                                                                                                                                                                                                                                                               
|10.4  | Employment Agreement by and between DrugMax, Inc. and Jugal K. Taneja, dated October 1, 2001. (12)                                                                                                                                                            
|      |                                                                                                                                                                                                                                                               
|10.5  | Consulting Agreement by and between DrugMax.com, Inc. and Stephen M. Watters dated August 10, 2000. (9)                                                                                                                                                       
|      |                                                                                                                                                                                                                                                               
|10.6  | Loan and Security Agreement among DrugMax.com, Inc. and Valley Drug Company and Mellon Bank, N.A., dated October 24, 2000. (9)                                                                                                                                
|      |                                                                                                                                                                                                                                                               
|10.7  | Second Amended Loan and Security Agreement among DrugMax, Inc., Valley Drug Company, Discount Rx, Inc., Valley Drug Company South, and Standard
Federal Bank National Association, as successor in interest to Mellon Bank, N.A., dated October 22, 2001. (12)
|      |                                                                                                                                                                                                                                                               
|10.8  | Employment Agreement by and between DrugMax, Inc. and Gregory M. Johns dated October 19, 2001. (13)                                                                                                                                                           
|      |                                                                                                                                                                                                                                                               
|10.9  | Restrictive Covenants Agreement and Agreement Not to Compete by and between DrugMax, Inc. and Gregory M. Johns dated October 19, 2001.
(13)                                                                                                                   
|      |                                                                                                                                                                                                                                                               
|10.10 | Third Amendment and Modification to Loan and Security Agreement among DrugMax, Inc., Valley Drug Company, Discount Rx, Inc, Valley Drug Company
South and Standar5d Federal Bank National Association, dated June 5, 2002. (14)                               
|      |                                                                                                                                                                                                                                                               
|10.11 | DrugMax.com, Inc.1999 Incentive and Non-Statutory Stock Option Plan. (8)                                                                                                                                                                                      
|      |                                                                                                                                                                                                                                                               
|10.12 | Amendment No. 1 to DrugMax, Inc. 1999 Incentive and Non-Statutory Stock Option Plan, dated June 5, 2002. (14)                                                                                                                                                 
|      |                                                                                                                                                                                                                                                               
|21.0  | Subsidiaries of DrugMax.com, Inc. (9)                                                                                                                                                                                                                         
|      |                                                                                                                                                                                                                                                               
|99.1  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *                                                                                                                                     
|      |                                                                                                                                                                                                                                                               
|99.2  | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the                                                                                                                                                                   

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##### Index to Financial Statements

Sarbanes-Oxley Act of 2002. *

______________

*Filed
herewith.



|(1)  | Incorporated by reference to the Companys Registration Statement on Form SB-2, filed June 29, 1999, File Number 0-24362, as
amended.            
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------
|     |                                                                                                                                                  
|(2)  | Incorporated by reference to Amendment No. 1 to the Companys Registration Statement on Form SB-2, filed on September 13, 1999, File No.
0-24362.
|     |                                                                                                                                                  
|(3)  | Incorporated by reference to the Companys Report on Form 8-K, filed April 6, 2000, File Number 0-24362.                                         
|     |                                                                                                                                                  
|(4)  | Incorporated by reference to the Companys Report on Form 8-K, filed May 3, 2000, File Number 0-24362.                                           
|     |                                                                                                                                                  
|(5)  | Incorporated by reference to Amendment No. 2 to the Companys Registration Statement on Form SB-2, filed on November 12, 1999, File No.
0-24362. 
|     |                                                                                                                                                  
|(6)  | Incorporated by reference to the Companys Report on Form 8-K, filed February 8, 2000, File No. 0-24362.                                         
|     |                                                                                                                                                  
|(7)  | Incorporated by reference to the Companys Form 10-KSB, filed June 29, 2000, File No. 0-24362.                                                   
|     |                                                                                                                                                  
|(8)  | Incorporated by reference to the Companys Form 10-KSB/A, filed July 14, 2000, File No. 0-24362.                                                 
|     |                                                                                                                                                  
|(9)  | Incorporated by reference to the Companys Registration Statement on Form SB-2, filed on November 1, 2000.                                       
|     |                                                                                                                                                  
|(10) | Incorporated by reference to the Companys Form 10-QSB, filed November 14, 2000, File No. 1-15445.                                               
|     |                                                                                                                                                  
|(11) | Incorporated by reference to the Companys Report on Form 8-K, filed November 9, 2001.                                                           
|     |                                                                                                                                                  
|(12) | Incorporated by reference to the Companys Form 10-QSB, filed November 14, 2001.                                                                 
|     |                                                                                                                                                  
|(13) | Incorporated by reference to the Companys Form 10-QSB, filed February 14, 2002.                                                                 
|     |                                                                                                                                                  
|(14) | Incorporated by reference to the Companys Original Filing, as defined above.                                                                    

(b) Reports on Form 8-K.

During the three months ended March 31, 2002, the Company filed two
reports on Form 8-K.

Form 8-K/A dated January 7, 2002, including financial statements, with respect to the Companys acquisition of Penner & Welsch,
Inc.

Form 8-K dated March 14, 2002, with respect to the Companys press release to announce the appointment of a new Director.

9



---

##### Index to Financial Statements

SIGNATURES

Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  | DRUGMAX, INC
|------------------- |  | ------------
|Dated:March 5, 2003 |  | By:         
|                    |  |             
|                    |  |             
|                    |  |             



|                    |  |    
|------------------- |  | ---
|Dated:March 5, 2003 |  | By:
|                    |  |    
|                    |  |    
|                    |  |    



|                    |  |    
|------------------- |  | ---
|Dated:March 5, 2003 |  | By:
|                    |  |    
|                    |  |    
|                    |  |    

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.



|    | Signature                 |  | Title                                                       |  | Date         
|--- | ------------------------- |  | ----------------------------------------------------------- |  | -------------
|    |                           |  |                                                             |  |              
|By: | /s/JUGALK.TANEJA          |  | Chairman of the Board, Chief Executive Officer and Director |  | March 5, 2003
|    |                          
|    | Jugal K. Taneja          
|    |                           |  |                                                             |  |              
|By: | /s/WILLIAML.LAGAMBA       |  | President, Chief Operating Officer and Director             |  | March 5, 2003
|    |                          
|    | William L. LaGamba       
|    |                           |  |                                                             |  |              
|By: | /s/RONALDJ.PATRICK        |  | Chief Financial Officer and Director                        |  | March 5, 2003
|    |                          
|    | Ronald J. Patrick        
|    |                           |  |                                                             |  |              
|By: | /s/Dr.HOWARDL.HOWELL,DDS  |  | Director                                                    |  | March 5, 2003
|    |                          
|    | Dr. Howard L. Howell, DDS
|    |                           |  |                                                             |  |              
|By: | /s/SUSHILSURI             |  | Director                                                    |  | March 5, 2003
|    |                          
|    | Sushil Suri              
|    |                           |  |                                                             |  |              
|By: | /s/MARTINSPERBER          |  | Director                                                    |  | March 7, 2003
|    |                          
|    | Martin Sperber           
|    |                           |  |                                                             |  |              
|By: | /s/ROBERTG.LOUGHREY       |  | Director                                                    |  | March 7, 2003
|    |                          
|    | Robert G. Loughrey       
|    |                           |  |                                                             |  |              



10



---

##### Index to Financial Statements

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002

I, Jugal K. Taneja, certify that:

1.I have reviewed this annual report on Form 10-KSB/A of DrugMax, Inc.;

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

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

|                     |  |    
|-------------------- |  | ---
|Dated: March 5, 2003 |  | By:
|                     |  |    
|                     |  |    

11



---

##### Index to Financial Statements

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO SECTION 302 OF THESARBANES-OXLEY ACT OF 2002

I, Ronald J. Patrick, certify that:

1.I have reviewed this annual report on Form 10-KSB/A of DrugMax, Inc.;

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

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

|                     |  |    
|-------------------- |  | ---
|Dated: March 5, 2003 |  | By:
|                     |  |    
|                     |  |    

12



---

##### Index to Financial Statements



DRUGMAX, INC. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|Independent Auditors Report                                                               | F-2        
|------------------------------------------------------------------------------------------ | -----------
|                                                                                           |            
|Consolidated Balance Sheets as of March 31, 2002 and 2001                                  | F-3        
|                                                                                           |            
|Consolidated Statements of Operations for the years endedMarch 31, 2002 and 2001           | F-4        
|                                                                                           |            
|Consolidated Statements of Stockholders Equity for the years endedMarch 31, 2002 and 2001 | F-5        
|                                                                                           |            
|Consolidated Statements of Cash Flows for the years endedMarch 31, 2002 and 2001           | F-6  F-7  
|                                                                                           |            
|Notes to Consolidated Financial Statements                                                 | F-8  F-2 8



---

##### Index to Financial Statements

INDEPENDENT AUDITORS REPORT

To the Board of Directors and Stockholders of DrugMax, Inc.:

We have audited the accompanying consolidated balance sheets of DrugMax, Inc. and subsidiaries (the Company) as of March 31, 2002 and 2001, and the related consolidated statements of operations,
stockholders equity, and cash flows for the years then ended. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of DrugMax, Inc. and subsidiaries as of March 31, 2002 and 2001, and the
results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

As
discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets with the adoption of Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, in fiscal 2002.

As discussed in Note 17, the consolidated financial statements have been restated.

|                                                             |  |  | 
|------------------------------------------------------------ |  |  | 
|/s/ DELOITTE&TOUCHELLP                                       |  |  | 
|Certified Public Accountants                                 |  |  | 
|                                                             |  |  | 
|Tampa, FloridaJune 27, 2002(November 22, 2002 as to Note 17) |  |  | 







F-2



---

##### Index to Financial Statements

DRUGMAX, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSMARCH 31, 2002 and 2001

|                                                                                                                   |  | 2002                       |            | 2001                       |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ---------- | -------------------------- | -
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  | (As Restated)(See Note 17) |            | (As Restated)(See Note 17) |  
|                                                                                                                   |  |                            |            |                            |  
|ASSETS                                                                                                             |  |                            |            |                            |  
|Current assets:                                                                                                    |  |                            |            |                            |  
|Cash and cash equivalents                                                                                          |  | $                          | 167,373    |                            | $
|Restricted cash                                                                                                    |  | 2,000,000                  |            | 2,000,000                  |  
|Accounts receivable, net of allowance for doubtful accounts of $340,575 and
$381,944                               |  | 14,001,696                 |            | 14,864,396                 |  
|Inventory                                                                                                          |  | 20,682,439                 |            | 10,694,155                 |  
|Due from affiliates                                                                                                |  | 23,498                     |            | 25,861                     |  
|Net deferred income tax asset - current                                                                            |  | 465,630                    |            |                           |  
|Prepaid expenses and other current assets                                                                          |  | 624,207                    |            | 373,928                    |  
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Total current assets                                                                                               |  | 37,964,843                 |            | 28,394,727                 |  
|                                                                                                                   |  |                            |            |                            |  
|Property and equipment, net                                                                                        |  | 989,921                    |            | 504,906                    |  
|Goodwill                                                                                                           |  | 25,314,298                 |            | 25,179,255                 |  
|Intangible assets, net                                                                                             |  | 276,914                    |            | 44                         |  
|Stockholder notes receivable                                                                                       |  | 100,000                    |            | 100,000                    |  
|Notes receivable                                                                                                   |  | 607,417                    |            |                           |  
|Net deferred income tax asset - long term                                                                          |  | 637,918                    |            |                           |  
|Deferred financing costs, net                                                                                      |  | 215,477                    |            | 284,950                    |  
|Other assets                                                                                                       |  | 151,226                    |            | 159,888                    |  
|Deposits                                                                                                           |  | 44,743                     |            | 7,520                      |  
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Total assets                                                                                                       |  | $                          | 66,302,757 |                            | $
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|LIABILITIES AND STOCKHOLDERS
EQUITY                                                                               |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Current liabilities:                                                                                               |  |                            |            |                            |  
|Accounts payable                                                                                                   |  | $                          | 13,844,766 |                            | $
|Accrued expenses and other current liabilities                                                                     |  | 421,318                    |            | 360,911                    |  
|Credit lines payable                                                                                               |  | 18,929,575                 |            | 11,944,497                 |  
|Current portion of long-term debt and capital leases                                                               |  | 676,365                    |            | 666,660                    |  
|Due to affiliates                                                                                                  |  | 4,377                      |            | 51,097                     |  
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Total current liabilities                                                                                          |  | 33,876,401                 |            | 24,471,638                 |  
|                                                                                                                   |  |                            |            |                            |  
|Long-term debt and capital leases                                                                                  |  | 478,200                    |            | 1,111,118                  |  
|Other long-term liabilities                                                                                        |  | 501,561                    |            | 2,470,311                  |  
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Total liabilities                                                                                                  |  | 34,856,162                 |            | 28,053,067                 |  
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Commitments and contingencies (Note 10)                                                                            |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Stockholders equity:                                                                                              |  |                            |            |                            |  
|Preferred stock, $.001 par value; 2,000,000 shares authorized; no preferred shares issued or
outstanding           |  |                           |            |                           |  
|Common stock, $.001 par value; 24,000,000 shares authorized; 7,119,172 and
6,468,754 shares issued and outstanding |  | 7,120                      |            | 6,470                      |  
|Additional paid-in capital                                                                                         |  | 40,967,355                 |            | 38,106,755                 |  
|Accumulated deficit                                                                                                |  | (9,527,880                 | )          | (11,535,002                | )
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Total stockholders equity                                                                                         |  | 31,446,595                 |            | 26,578,223                 |  
|                                                                                                                   |  |                            |            |                            |  
|                                                                                                                   |  |                            |            |                            |  
|Total liabilities and stockholders equity                                                                         |  | $                          | 66,302,757 |                            | $
|                                                                                                                   |  |                            |            |                            |  

See accompanying notes to consolidated financial
statements.

F-3



---

##### Index to Financial Statements

DRUGMAX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFor the Years Ended March 31, 2002 and 2001



|                                              |  | 2002        |             | 2001          |  
|--------------------------------------------- |  | ----------- | ----------- | ------------- | -
|                                              |  |             |             |               |  
|                                              |  |             |             | (As Restated) |  
|                                              |  |             |             | (See Note 17) |  
|                                              |  |             |             |               |  
|Revenues                                      |  | $           | 271,287,988 |               | $
|                                              |  |             |             |               |  
|Cost of goods sold                            |  | 263,775,382 |             | 172,181,663   |  
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Gross profit                                  |  | 7,512,606   |             | 5,531,401     |  
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Selling, general and administrative expenses  |  | 5,388,633   |             | 5,163,124     |  
|Amortization expense                          |  | 135,010     |             | 2,614,514     |  
|Depreciation expense                          |  | 245,280     |             | 247,868       |  
|Impairment of assets                          |  |            |             | 4,439,749     |  
|                                              |  |             |             |               |  
|Total operating expenses                      |  | 5,768,923   |             | 12,465,255    |  
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Operating income (loss)                       |  | 1,743,683   |             | (6,933,854    | )
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Other income (expense):                       |  |             |             |               |  
|Interest income                               |  | 63,553      |             | 255,374       |  
|Other income and expenses, net                |  | 98,612      |             | (13,861       | )
|Interest expense                              |  | (1,002,274  | )           | (2,041,581    | )
|                                              |  |             |             |               |  
|Total other expense                           |  | (840,109    | )           | (1,800,068    | )
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Income (loss) before income tax benefit       |  | 903,574     |             | (8,733,922    | )
|                                              |  |             |             |               |  
|Income tax benefit                            |  | 1,103,548   |             |              |  
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Income (loss) before extraordinary item       |  |             | 2,007,122   |               |  
|                                              |  |             |             |               |  
|Extraordinary loss on extinguishment of debt  |  |            |             | (572,244      | )
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Net income (loss)                             |  | $           | 2,007,122   |               | $
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Basic net income (loss) per common share:     |  |             |             |               |  
|Income (loss) before extraordinary item       |  | $           | 0.29        |               | $
|Extraordinary loss on extinguishment of debt  |  |            |             | (0.09         | )
|                                              |  |             |             |               |  
|Net income (loss) per common share - basic    |  | $           | 0.29        |               | $
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Diluted net income (loss) per common share:   |  |             |             |               |  
|Income (loss) before extraordinary item       |  | $           | 0.28        |               | $
|Extraordinary loss on extinguishment of debt  |  |            |             | (0.09         | )
|                                              |  |             |             |               |  
|Net income (loss) per common share - diluted  |  | $           | 0.28        |               | $
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Weighted average shares outstanding - basic   |  | 7,034,969   |             | 6,419,950     |  
|                                              |  |             |             |               |  
|                                              |  |             |             |               |  
|Weighted average shares outstanding - diluted |  |             | 7,234,024   |               |  
|                                              |  |             |             |               |  

See accompanying notes to consolidated financial
statements.

F-4



---

##### Index to Financial Statements

DRUGMAX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYFor the Years Ended March 31, 2002 and 2001



|                                                                    |  | CommonStock |       | Additional Paid-inCapital |   | Accumulated Deficit |   | Total StockholdersEquity |           
|------------------------------------------------------------------- |  | ----------- | ----- | ------------------------- | - | ------------------- | - | ------------------------- | ----------
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Balances at April 1, 2000 as previously reported                    |  | $           | 6,202 |                           | $ | 34,079,957          |   | $                         | (2,093,419
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Prior period adjustment - see Note 17                               |  |            |       | 1,625,000                 |   | (135,417            | ) | 1,489,583                 |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Balances at April 1, 2000, as restated*                             |  | 6,202       |       | 35,704,957                |   | (2,228,836          | ) | 33,482,323                |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Issuance of 217,255 shares for acquisition of Valley Drug Co.       |  | 217         |       | 2,199,490                 |   |                    |   | 2,199,707                 |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Issuance of 50,000 shares to Utendahl Capital Partners LP           |  | 50          |       | 196,825                   |   |                    |   | 196,875                   |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Issuance of 1,000 shares                                            |  | 1           |       | 5,483                     |   |                    |   | 5,484                     |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Net loss*                                                           |  |            |       |                          |   | (9,306,166          | ) | (9,306,166                | )         
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Balances at March 31, 2001*                                         |  | 6,470       |       | 38,106,755                |   | (11,535,002         | ) | 26,578,223                |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Issuance of 500,000 shares to Dynamic Health Products, Inc.         |  | 500         |       | 1,968,250                 |   |                    |   | 1,968,750                 |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Issuance of 125,418 shares for acquisition of Penner & Welsch, Inc. |  | 125         |       | 749,875                   |   |                    |   | 750,000                   |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Issuance of 25,000 shares for non-compete agreement                 |  | 25          |       | 142,475                   |   |                    |   | 142,500                   |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Net income                                                          |  |            |       |                          |   | 2,007,122           |   | 2,007,122                 |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|                                                                    |  |             |       |                           |   |                     |   |                           |           
|Balances at March 31, 2002*                                         |  | $           | 7,120 |                           | $ | 40,967,355          |   | $                         | (9,527,880
|                                                                    |  |             |       |                           |   |                     |   |                           |           

*As Restated, See Note 17

See
accompanying notes to consolidated financial statements.

F-5



---

##### Index to Financial Statements

DRUGMAX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor the Years Ended March 31, 2002 and 2001



|                                                                                     |  | 2002       |           | 2001          |  
|------------------------------------------------------------------------------------ |  | ---------- | --------- | ------------- | -
|                                                                                     |  |            |           |               |  
|                                                                                     |  |            |           | (As Restated) |  
|                                                                                     |  |            |           | (See Note 17) |  
|                                                                                     |  |            |           |               |  
|Cash flows from operating activities:                                                |  |            |           |               |  
|Net income (loss)                                                                    |  | $          | 2,007,122 |               | $
|                                                                                     |  |            |           |               |  
|Adjustments to reconcile net income (loss) to net cash used in operating
activities: |  |            |           |               |  
|Extraordinary loss on extinguishment of debt                                         |  |           |           | 572,244       |  
|Depreciation and amortization                                                        |  | 380,290    |           | 3,779,721     |  
|Impairment of assets                                                                 |  |           |           | 4,439,749     |  
|Bad debt expense                                                                     |  | 35,757     |           | 99,044        |  
|Loss on disposal of assets                                                           |  | 5,303      |           | 13,861        |  
|Increase in net deferred income tax asset                                            |  | (1,103,548 | )         |              |  
|Expense on issuance of common stock                                                  |  |           |           | 202,359       |  
|Changes in operating assets and liabilities:                                         |  |            |           |               |  
|Increase in accounts receivable                                                      |  | (385,375   | )         | (7,378,704    | )
|Increase in inventory                                                                |  | (9,270,331 | )         | (2,587,278    | )
|Decrease/(increase) in due from affiliates                                           |  | 2,363      |           | (12,297       | )
|Increase in prepaid expenses and other current assets                                |  | (29,175    | )         | (671,211      | )
|Decrease/(increase) in other assets                                                  |  | 105,662    |           | (159,888      | )
|Decrease in shareholder notes receivable                                             |  |           |           | 70,000        |  
|Decrease in notes receivable                                                         |  |           |           | 37,614        |  
|(Increase)/decrease in deposits                                                      |  | (31,072    | )         | 2,222         |  
|Increase in accounts payable                                                         |  | 2,396,293  |           | 4,317,028     |  
|Decrease in accrued expenses and other current liabilities                           |  | (3,074     | )         | (262,579      | )
|                                                                                     |  |            |           |               |  
|Net cash used in operating activities                                                |  | (5,889,785 | )         | (6,844,281    | )
|                                                                                     |  |            |           |               |  
|                                                                                     |  |            |           |               |  
|Cash flows from investing activities:                                                |  |            |           |               |  
|Purchases of property and equipment                                                  |  | (68,250    | )         | (111,576      | )
|Proceeds from sale of property and equipment                                         |  | 2,660      |           |              |  
|Investment in MorepenMax, Inc.                                                       |  | (49,000    | )         |              |  
|Cash paid for acquisitions, net                                                      |  | (488,619   | )         | (1,757,481    | )
|                                                                                     |  |            |           |               |  
|Net cash used in investing activities                                                |  | (603,209   | )         | (1,869,057    | )
|                                                                                     |  |            |           |               |  
|                                                                                     |  |            |           |               |  
|Cash flows from financing activities:                                                |  |            |           |               |  
|Increase in restricted cash                                                          |  |           |           | (2,000,000    | )
|Net change under revolving line of credit agreements                                 |  | 6,985,078  |           | 5,339,402     |  
|Increase in deferred financing costs                                                 |  | (50,500    | )         | (276,466      | )
|Payments of long-term debt and capital leases                                        |  | (663,878   | )         | (1,974,281    | )
|Proceeds from issuance of note payable                                               |  |           |           | 2,000,000     |  
|(Payments to)/ proceeds from affiliates - net                                        |  | (46,720    | )         | 40,941        |  
|                                                                                     |  |            |           |               |  
|Net cash provided by financing activities                                            |  | 6,223,980  |           | 3,129,596     |  
|                                                                                     |  |            |           |               |  
|                                                                                     |  |            |           |               |  
|Net decrease in cash and cash equivalents                                            |  | (269,014   | )         | (5,583,742    | )
|                                                                                     |  |            |           |               |  
|Cash and cash equivalents at beginning of year                                       |  | 436,387    |           | 6,020,129     |  
|                                                                                     |  |            |           |               |  
|                                                                                     |  |            |           |               |  
|Cash and cash equivalents at end of year                                             |  | $          | 167,373   |               | $
|                                                                                     |  |            |           |               |  
|                                                                                     |  |            |           |               |  
|Supplemental disclosures of cash flows information:                                  |  |            |           |               |  
|Cash paid for interest                                                               |  | $          | 996,276   |               | $
|                                                                                     |  |            |           |               |  
|Cash paid for income taxes                                                           |  | $          |          |               | $
|                                                                                     |  |            |           |               |  
|Supplemental schedule of non-cash investing and financing
activities:                |  |            |           |               |  

Continued)

F-6



---

##### Index to Financial Statements

DRUGMAX, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFor
the Years Ended March 31, 2002 and 2001



|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 2002      |           | 2001      |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | --------- | --------- | ----------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|In April 2000, DrugMax, Inc. purchased all of the capital stock of Valley Drug
Company for $1,757,481 in cash and 217,255 shares of Company common stock (fair value of $2,199,707). In conjunction with the acquisition, liabilities were assumed as follows:                                                                                                                                                                                   |  |           |           |           |           
|Fair value of assets acquired                                                                                                                                                                                                                                                                                                                                                                                                                    |  |           |           | $         | 14,059,822
|Cash and stock issued for Valley capital stock                                                                                                                                                                                                                                                                                                                                                                                                   |  |           |           | 3,957,188 |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|Liabilities assumed                                                                                                                                                                                                                                                                                                                                                                                                                              |  |           |           | $         | 10,102,634
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|In December 2000, DrugMax, Inc. issued 50,000 shares of Company common stock to
Utendahl Capital Partners, L.P., in connection with the termination agreement as lead managing underwriter for a proposed offering.                                                                                                                                                                                                                              |  |           |           | $         | 196,875   
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|In January 2001, DrugMax, Inc. issued 1,000 shares of Company common stock                                                                                                                                                                                                                                                                                                                                                                       |  |           |           | $         | 5,484     
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|In July 2001, the Company released from escrow 500,000 shares of common stock
(fair value of $1,968,750) due to Dynamic Health Products, Inc., earned through the contingent consideration clauses in conjunction with the acquisition of Becan Distributors, Inc.                                                                                                                                                                               |  | $         | 1,968,750 |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|In October 2001, the Company purchased substantially all the assets of Penner & Welsch, Inc. for
$488,619 cash, 125,418 shares of the Companys common stock (fair value of $750,000), and $1,604,793 in forgiveness of debt owed to the Company. The Company also issued 25,000 shares of stock (fair value of $142,500) in conjunction with a
non-compete agreement. In conjunction with the acquisition, liabilities were assumed as follows: |  |           |           |           |           
|Fair value of assets acquired                                                                                                                                                                                                                                                                                                                                                                                                                    |  | $         | 3,090,058 |           |           
|Cash and stock issued for acquisition                                                                                                                                                                                                                                                                                                                                                                                                            |  | 1,381,119 |           |           |           
|Forgiveness of debt owed to the Company                                                                                                                                                                                                                                                                                                                                                                                                          |  | 1,604,793 |           |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|Liabilities assumed                                                                                                                                                                                                                                                                                                                                                                                                                              |  | $         | 104,146   |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           
|Conversion of accounts receivable to notes receivable                                                                                                                                                                                                                                                                                                                                                                                            |  | $         | 740,281   |           |           
|                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |           |           |           |           

See accompanying notes to consolidated financial
statements.

(Concluded)

F-7



---

##### Index to Financial Statements

DRUGMAX, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDED MARCH 31, 2002 AND 2001

NOTE 1 - BUSINESS

The Company is primarily a full-line, wholesale distributor of pharmaceuticals, over-the-counter products, health and
beauty care aids, and nutritional supplements. The Company serves the nations independent and small regional chain pharmacies, institutions, and alternate care facilities through its distribution centers in Pennsylvania, Ohio,
and Louisiana, and has licenses to ship to all 50 states and Puerto Rico.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of DrugMax, Inc. (formerly known as
DrugMax.com, Inc., Nutriceuticals and NuMed) and its wholly-owned subsidiaries, Discount Rx, Inc. (Discount), Valley Drug Company (Valley) and its wholly-owned subsidiary Valley Drug Company South (Valley South),
Desktop Ventures, Inc., and Desktop Media Group, Inc. (Desktop); and its 70% owned subsidiary VetMall, Inc. (VetMall), (collectively referred to as the Company). All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fiscal Year

The Companys fiscal year end is March 31. References to years relate to fiscal years rather than calendar years, unless
otherwise stated.

Cash and Cash Equivalents

The Company considers cash on hand and amounts on
deposit with financial institutions which have original maturities of three months or less to be cash and cash equivalents.

Restricted Cash

Restricted cash includes amounts restricted as collateral for the credit facility with Standard Federal Bank National Association (Standard), formerly Michigan National Bank as successor
in interest to Mellon Bank N.A. (Mellon).

Accounts Receivable

Accounts receivable are
due primarily from independent pharmacies from traditional distribution channels and from companies and pharmacies through e-commerce business.

Investments

On August 31, 2001, the Company reached an initial agreement with India-based Morepen Laboratories Ltd. (Morepen), to form a joint venture company, and on September 10, 2001,
MorepenMax, Inc, (MorepenMax), a Florida corporation, was formed. Morepen is the 51% majority shareholder of MorepenMax. On March 22, 2002, the Company funded its investment of $49,000 in MorepenMax, representing its 49% interest.
MorepenMax plans to utilize the Morepen facilities to develop low-cost generic pharmaceuticals in the United States. The Company will be the exclusive distributor throughout the United States of the products developed by MorepenMax. This investment
is accounted for under the equity method and is included in other assets.

F-8



---

##### Index to Financial Statements

Inventory

Inventory is stated at the lower of cost of market. Cost is determined using the first-in, first-out basis of accounting. Inventories at
March 31, 2002 and 2001 consist of legend and generic drugs and nutritional supplements for resale.

Property and Equipment

Property and equipment is stated at depreciated cost. A provision for depreciation is computed using the straight-line method over the estimated useful lives which are as follows:



|Fixed Asset Category              |  | Use Life for Depreciation
|--------------------------------- |  | -------------------------
|                                  |  |                          
|                                  |  |                          
|Furniture and fixtures            |  | 7 or 15 years            
|Computer equipment                |  | 5 years                  
|Computer software                 |  | 3 or 10 years            
|Leasehold improvements            |  | 3 - 31 years             
|Office equipment                  |  | 5 years                  
|Warehouse machinery and equipment |  | 7 years                  
|Vehicles                          |  | 5 years                  

Maintenance and
repairs are charged to operations. Additions and betterments which extend the useful lives of property and equipment are capitalized. Upon retirement or disposal of the operating property and equipment, the cost and accumulated depreciation are
eliminated from the accounts and the resulting gain or loss is reflected in operations.

Goodwill

The excess of cost over the fair value of net assets acquired (goodwill) relates to the acquisitions discussed in Note 3. Prior to April 1, 2001, the excess of cost over net assets acquired was amortized over 15 years for acquisitions of
Becan, Discount, and Valley using the straight-line method. Accumulated amortization totaled approximately $2,225,000 at March 31, 2001. Goodwill relating to the acquisitions of Desktop and VetMall was assigned a life of 5 years and amortized for
eleven months of the fiscal year ended March 31, 2001 on straight-line method. An impairment of goodwill was recorded in March 2001 relative to the remaining goodwill for both Desktop and VetMall (see Note 4).

As of April 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets (SFAS No. 142), which
addresses the financial accounting and reporting standards for the acquisition of intangible assets outside of a business combination and for goodwill and other intangible assets subsequent to their acquisition. This accounting standard requires
that goodwill be separately disclosed from other intangible assets in the statement of financial position and no longer be amortized, but tested for impairment on a periodic basis. The provisions of this accounting standard also require the
completion of a transitional impairment test within six months of adoption, with any impairments identified treated as a cumulative effect of a change in accounting principle. Upon adoption, the Company performed the transitional impairment test and
determined that no impairment of goodwill existed. Management will perform the required annual impairment test during the second quarter in conjunction with its budgeting process, unless indicators of impairment are present and suggest earlier
testing is warranted.

In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill effective April 1, 2001. A reconciliation of previously reported net
income (loss) and earnings (loss) per share to the amounts adjusted for the exclusion of goodwill amortization, net of the related income tax effect, follows:

F-9



---

##### Index to Financial Statements



|                                                                  |  | For the Year EndedMarch 31, 2002 |           | For the Year EndedMarch 31, 2001 |  
|----------------------------------------------------------------- |  | -------------------------------- | --------- | -------------------------------- | -
|                                                                  |  |                                  |           |                                  |  
|                                                                  |  |                                  |           |                                  |  
|Reported income (loss) before extraordinary item                  |  | $                                | 2,007,122 |                                  | $
|Add: Goodwill amortization, net of income tax                     |  |                                 |           | 2,550,166                        |  
|                                                                  |  |                                  |           |                                  |  
|Adjusted income (loss) before extraordinary item                  |  | $                                | 2,007,122 |                                  | $
|                                                                  |  |                                  |           |                                  |  
|                                                                  |  |                                  |           |                                  |  
|Reported net income (loss)                                        |  | $                                | 2,007,122 |                                  | $
|Add: Goodwill amortization, net of income tax                     |  |                                 |           | 2,550,166                        |  
|                                                                  |  |                                  |           |                                  |  
|Adjusted net income (loss)                                        |  | $                                | 2,007,122 |                                  | $
|                                                                  |  |                                  |           |                                  |  
|                                                                  |  |                                  |           |                                  |  
|Basic income (loss) before extraordinary item per common share:   |  |                                  |           |                                  |  
|Reported income (loss) before extraordinary item                  |  | $                                | 0.29      |                                  | $
|Goodwill amortization, net of income tax                          |  |                                 |           | 0.40                             |  
|                                                                  |  |                                  |           |                                  |  
|Adjusted income (loss) before extraordinary item                  |  | $                                | 0.29      |                                  | $
|                                                                  |  |                                  |           |                                  |  
|                                                                  |  |                                  |           |                                  |  
|Diluted income (loss) before extraordinary item per common share: |  |                                  |           |                                  |  
|Reported income (loss) before extraordinary item                  |  | $                                | 0.28      |                                  | $
|Goodwill amortization, net of income tax                          |  |                                 |           | 0.40                             |  
|                                                                  |  |                                  |           |                                  |  
|Adjusted income (loss) before extraordinary item                  |  | $                                | 0.28      |                                  | $
|                                                                  |  |                                  |           |                                  |  
|                                                                  |  |                                  |           |                                  |  
|Basic net income (loss) per common share:                         |  |                                  |           |                                  |  
|Reported net income (loss)                                        |  | $                                | 0.29      |                                  | $
|Goodwill amortization, net of income tax                          |  |                                 |           | 0.40                             |  
|                                                                  |  |                                  |           |                                  |  
|Adjusted net income (loss)                                        |  | $                                | 0.29      |                                  | $
|                                                                  |  |                                  |           |                                  |  
|                                                                  |  |                                  |           |                                  |  
|Diluted net income (loss) per common share:                       |  |                                  |           |                                  |  
|Reported net income (loss)                                        |  | $                                | 0.28      |                                  | $
|Goodwill amortization, net of income tax                          |  |                                 |           | 0.40                             |  
|                                                                  |  |                                  |           |                                  |  
|Adjusted net income (loss)                                        |  | $                                | 0.28      |                                  | $
|                                                                  |  |                                  |           |                                  |  

Deferred Financing Costs

In March 2000, the Company recorded deferred financing costs of $1,625,000 for a warrant issued to a director and non-employee consultant as a result of the directors acting as a guarantor of
the Merrill Lynch line of credit (see Notes 9, 12 and 17). The Merrill Lynch line of credit was paid in full on October 24, 2000, with proceeds from the new Mellon credit facility; therefore, the unamortized balance of deferred financing costs of
$572,244 was written off in October 2000. In conjunction with the closing of the Mellon credit facility in October 2000, and the loan modification agreement executed October 2001 with Standard (see Note 9), the Company capitalized approximately
$390,000 in financing costs incurred in obtaining the loans. These costs are being amortized over three years, the life of the term loans, under the effective interest rate method. Amortization of deferred financing costs was $119,957 and $981,593
for the years ended March 31, 2002 and 2001, respectively. Accumulated amortization of deferred financing costs was $174,948 and $54,991 at March 31, 2002 and 2001, respectively.

Impairment of Long-Lived Assets

Periodically, when indicators of impairment are present, the Company evaluates the recoverability of the net carrying value of its
property and equipment and its amortizable intangible assets by comparing the carrying values to the estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a
write-down due to impairment. The impairment write-down would be the difference between the carrying amounts and the fair value of these assets. Losses on impairment are recognized by a charge to earnings. As a result of managements analysis,
and using the best information available, in the fourth quarter of the fiscal year ended March 31, 2001, the Company recorded an impairment of assets comprised of goodwill and software associated with the acquisitions of Desktop and VetMall in March
2000 (see Note 4.) Additionally, during the fourth quarter of 2001, management determined that approximately $457,000 of costs, incurred and capitalized, relative to the

F-10



---

##### Index to Financial Statements

secondary offering of common stock which was cancelled by the Company, had no future value. As such, a charge related to the write off of these assets is
included in impairment of assets in the consolidated statement of operations for the year ended March 31, 2001.

Income Taxes

The Company has adopted SFAS No. 109, Accounting for Income Taxes (SFAS No. 109). Under the asset and liability method of SFAS No. 109, deferred income tax assets and liabilities are recognized
for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary differences are expected to be recorded or settled. Valuation allowances are established when necessary to reduce deferred income tax assets to amounts expected to be
realized.

Earnings Per Share

Basic earnings per share (EPS) is calculated by dividing
the net income (loss) by the weighted average number of shares of common stock outstanding for the year. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the year,
adjusted for the dilutive effect of options and warrants, using the treasury stock method. Diluted EPS for the year ended March 31, 2002 includes the effect of 199,055 dilutive common stock options. At March 31, 2002 and 2001, the Company had
705,500 and 290,300 options, respectively, to purchase shares of the Companys common stock, in addition to warrants to purchase 350,000 shares of the Companys common stock, which were anti-dilutive and not included in the computation of
diluted EPS for the years ended March 31, 2002 and 2001. These anti-dilutive shares could potentially dilute the basic EPS in the future.

Stock Based
Compensation

In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123), which was effective for fiscal years beginning after December 15, 1995. Under SFAS No. 123, the Company may elect to recognize stock-based compensation expense based on the fair value of the awards or to account for stock-based
compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB Opinion No. 25), and disclose in the consolidated financial statements the effects of SFAS No. 123 as if the
recognition provisions were adopted. The Company has continued to recognize stock-based compensation in accordance with APB Opinion No. 25.

Fair Value of Financial
Instruments

The estimated fair value of amounts reported in the consolidated financial statements has been determined by using available market information and appropriate
valuation methodologies. The carrying value of all current assets and current liabilities approximates fair value because of their short-term nature. The fair value of long-term obligations approximates the carrying value, based on current market
prices.

Advertising and Sales Promotion Costs

Advertising costs are charged to expense as incurred.
Advertising expense totaled approximately $59,000 and $131,000 for fiscal years ended March 31, 2002 and 2001, respectively.

Revenue Recognition

The Company recognizes revenue on its core distribution segment when goods are shipped and title or risk of loss resides with unaffiliated customers or when services are provided. Rebates and
allowances are recorded as a component of cost of goods sold in the period they are received from the vendor or manufacturer unless such rebates and allowances are reasonably estimable at the end of a reporting period. The Company records chargeback
credits due from its vendors in the period when the sale is made to the customer which is eligible for contract pricing from the manufacturer.

Reclassifications

Certain amounts in the 2001 consolidated financial statements have been reclassified to conform to 2002 presentation.

F-11



---

##### Index to Financial Statements

Recent Accounting Pronouncements

SFAS No. 133, Accounting for Derivative
Instrument and Hedging Activities (SFAS No. 133), is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133
effective April 1, 2001. The adoption of SFAS No. 133 did not have an impact on the financial position, results of operations, or cash flows of the Company.

On June 29, 2001,
SFAS No. 141, Business Combinations (SFAS No. 141) was approved by the FASB. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Goodwill and
certain intangible assets with indefinite lives will remain on the balance sheet and not be amortized. On an annual basis, and when there is reason to suspect that their values have been diminished or impaired, these assets must be tested for
impairment, and write-downs may be necessary. The Company implemented SFAS No. 141 on July 1, 2001. The adoption of SFAS No. 141 did not have an impact on the results of operations or financial position of the Company.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), which addresses the financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of and will be effective for the Company on
April 1, 2002. The Company is assessing the impact, if any, SFAS No. 144 will have on the consolidated financial statements.

On April 30, 2002, the FASB issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145). SFAS No. 145 rescinds Statement 4, which required all gains and losses from extinguishments of
debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. The provisions of SFAS No. 145 are effective for fiscal years beginning after May 15, 2002. The Company is assessing the impact, if any,
SFAS No. 145 will have on the consolidated financial statements.

NOTE 3 - ACQUISITIONS

On April 19,
2000, DrugMax Acquisition Corporation (Buyer), a wholly owned subsidiary of the Company, Valley, Ronald J. Patrick (Patrick) and Ralph A. Blundo (Blundo and together with Patrick, the Sellers) signed a
Merger Purchase Agreement (the Agreement). In connection with the merger, the Sellers received an aggregate of 226,666 shares of the Companys common stock and cash in the amount of $1.7 million. In addition, the Sellers deposited
22,666 shares of the Companys common stock with an escrow agent (the Holdback Shares). Based on audited financial statements of Valley as of April 19, 2000, the stockholders equity amounted to $400,667, which was $141,160
less than the threshold amount of $541,827. Therefore, 9,411 of the Holdback Shares have been returned to the Company. After consideration of the return of the Holdback Shares, a total of 217,255 shares at $10.125 per share were issued for the
acquisition. The acquisition was accounted for using the purchase method of accounting and accordingly $3.6 million of goodwill was recorded. Prior to April 1, 2001, goodwill was being amortized over fifteen (15) years.

On April 18, 2000, Valley loaned the Sellers $170,000, of which $100,000 is outstanding at March 31, 2002, to pay for a portion of the flow through effects of their S Corporation taxable income
resulting from the sale of Valley. These interest-free notes receivable are to be repaid upon the Sellers sale of Company common stock, which is restricted stock subject to a holding period that ended on April 19, 2001.

On October 25, 2001, Discount purchased substantially all of the net assets of Penner & Welsch, Inc. (Penner), a wholesale distributor of pharmaceuticals based in Louisiana, pursuant
to an Agreement for the Purchase and Sale of Assets dated October 12, 2001 (the Agreement). Penner was a Chapter 11 debtor which had voluntarily filed for Chapter 11 protection in the US Bankruptcy Court Eastern Division of Louisiana.
Prior to this acquisition, commencing in September 2000, the Company managed the day-to-day operations of Penner, in exchange for a management fee equal to a percentage of the gross revenues of Penner each month. The Company recorded management fees
of approximately $364,000 and $550,000 from Penner for the years ended March 31, 2002 and 2001, respectively. During the management period, the Company provided Penner with a collateralized revolving line of credit for the

F-12



---

##### Index to Financial Statements

sole purpose of purchasing inventory from the Company. Pursuant to the Agreement, Penner received an aggregate of 125,418 shares of restricted common stock
of the Company, valued at $5.98 per share, cash in the amount of $488,619, and forgiveness of $1,604,793 in trade accounts payable and management fees owed to Discount. The Agreement, including the nature and amount of the consideration paid to
Penner, was negotiated between the parties and, on October 15, 2001, was approved by the US Bankruptcy Court, Eastern Division of Louisiana.

On October 19, 2001, the Company
entered into an Employment Agreement with Gregory M. Johns (Johns), former owner of Penner, for an annual salary of $125,000, payable bi-weekly for an initial term of three years, through October 18, 2004, renewable for subsequent terms
of one year thereafter. In accordance with the Employment Agreement, the Company agreed to issue a total of 100,000 employee non-qualified stock options (the Options) to Johns at a price of $8.00 per share contingent upon the attainment
of gross profit goals by Discount over the three year term of the Employment Agreement. The Options, provided the goals are attained, would be issued one third of the total 100,000 each year for three years, and would be issued within sixty days of
each anniversary date of the Employment Agreement. In conjunction with the Employment Agreement, on October 19, 2001, Johns executed a Restrictive Covenants Agreement and Agreement Not to Compete (Non Compete Agreement) with the Company.
The Non Compete Agreement constrains Johns during the minimum three year term of the Employment Agreement in addition to a period of one year following his termination. In consideration for Johns execution of the Non Compete Agreement, the
Company issued to Johns 25,000 shares of common stock of the Company, with a fair market value of $142,500. The cost of the Non Compete Agreement was recorded as an intangible asset and is being amortized over a four year period.

The business combinations of Valley and Penner were accounted for by the purchase method of accounting. The results of operations of the above named businesses are included in the consolidated
financial statements from their respective purchase dates. The Company acquired the following assets and liabilities (net of cash received from Valley of $53,207 for fiscal year ended March 31, 2001) in the above business combinations:



|                                                  |  | For the YearEnded March31,
2002 |           | For the YearEnded March31,
2001 |  
|------------------------------------------------- |  | ------------------------------- | --------- | ------------------------------- | -
|                                                  |  |                                 |           |                                 |  
|                                                  |  |                                 |           |                                 |  
|Accounts receivable                               |  | $                               | 1,180,756 |                                 | $
|Inventory                                         |  | 717,954                         |           | 6,690,636                       |  
|Property and equipment                            |  | 670,000                         |           | 67,146                          |  
|Other assets                                      |  | 94,391                          |           | 266,380                         |  
|Intangible assets                                 |  | 291,914                         |           |                                |  
|Goodwill                                          |  | 135,043                         |           | 3,557,023                       |  
|Assumption of liabilities                         |  | (104,146                        | )         | (10,102,634                     | )
|                                                  |  |                                 |           |                                 |  
|Net value of purchased assets                     |  | 2,985,912                       |           | 3,957,188                       |  
|Forgiveness of trade payables and management fees |  | (1,604,793                      | )         |                                |  
|Value of common stock issued                      |  | (892,500                        | )         | (2,199,707                      | )
|                                                  |  |                                 |           |                                 |  
|Cash paid for acquisitions                        |  | $                               | 488,619   |                                 | $
|                                                  |  |                                 |           |                                 |  

The unaudited pro forma effect of the acquisitions of Valley and Penner
on the Companys revenues, net income (loss) and net income (loss) per basic and diluted share, had the acquisitions occurred on April 1, 2000 is as follows:



|                                                           |  | For the YearEnded March 31, 2002 |             | For the YearEnded March 31, 2001 |  
|---------------------------------------------------------- |  | -------------------------------- | ----------- | -------------------------------- | -
|                                                           |  |                                  |             |                                  |  
|Revenues                                                   |  | $                                | 273,944,559 |                                  | $
|Loss before extraordinary item                             |  | ($22,483                         | )           | ($12,528,111                     | )
|Net loss                                                   |  | ($22,483                         | )           | ($13,100,355                     | )
|Basic and diluted loss before extraordinary item per share |  | ($0.00                           | )           | ($1.91                           | )
|Basic and diluted net loss per share                       |  |                                  | (0.00       | )                                |  

The proforma information for the fiscal years ended
March 31, 2002 and 2001 has been presented after the elimination of revenues and net income derived from the sales to Penner by Discount prior to the acquisition. In addition, the proforma information for the fiscal

F-13



---

##### Index to Financial Statements

years ended March 31, 2002 and 2001 has been presented after the elimination of non-recurring charges from the Penner operations as follows:



|                |  | For the Year EndedMarch 31, 2002 |         | For the Year EndedMarch 31, 2001 |  
|--------------- |  | -------------------------------- | ------- | -------------------------------- | -
|                |  |                                  |         |                                  |  
|                |  |                                  |         |                                  |  
|Management fees |  | $                                | 547,220 |                                  | $
|Trustee fees    |  | 25,000                           |         | 25,000                           |  
|Legal fees      |  |                                  | 160,577 |                                  |  

NOTE 4 - IMPAIRMENT OF ASSETS

Since the acquisitions of Desktop and VetMall, management has been faced with substantial changes to the original business plans. The offices of Desktop and VetMall were relocated from
Dallas, Texas to the Companys corporate office facilities in Largo, Florida during August 2000. The primary function of Desktop is to design and develop customized Internet solutions for businesses and to a greater extent to continue to
design, develop and maintain the VetMall web site. The amount of transition expense, loss of customer base, and problems with the web site and the delay of its startup, are all factors which contributed to a negative cash flow for the twelve months
ending March 31, 2001. Although management has made improvements to the VetMall web site, there are no current plans for operations which would generate a positive cash flow.

During the fourth quarter of the fiscal year ended March 31, 2001, the Company reassessed the value of the goodwill and property, equipment and software recorded by the Company as a result of the acquisitions of Desktop and VetMall. Prior to
that reassessment, the unamortized balances of the goodwill and real assets consisted of $4,748,100 of goodwill, and $462,300 of acquired property, equipment and software. Management assessed the value of the related goodwill and property, equipment
and software and concluded that the carrying value exceeded the fair value of the assets. In determining the fair value of the impaired assets, management assumed that there would be no future cash flows from the acquired Desktop and VetMall
businesses. Based on the lack of future cash flows and an estimated fair value of zero, management concluded that an impairment of goodwill and certain software existed. Management determined that the remaining acquired property, equipment and
software would be deployed within the Company; therefore, no impairment of these assets existed. The economic factors indicated above caused management to revise downward its estimates of future cash flows from current and future revenues associated
with the Desktop and VetMall businesses. As a result of managements analysis, and using the best information available, management recorded impairment of asset charges of $3,877,580 in goodwill and $105,424 for software, during the fourth
quarter of fiscal 2001. Additionally, the Company determined that approximately $456,700 capitalized in fiscal year 2001, which related to a delayed secondary offering of securities, had no future value and because market conditions were not
conducive to a successful secondary offering of securities (see Note 12), the Company wrote off these costs in the fourth quarter of fiscal 2001.

The Companys analysis of
the information available has not identified any impairment losses with respect to long-lived assets for the fiscal year ended March 31, 2002.

NOTE 5 - PROPERTY AND
EQUIPMENT

At March 31, 2002 and 2001 property and equipment consist of the following:



|                                          |  | 2002      |         | 2001     |  
|----------------------------------------- |  | --------- | ------- | -------- | -
|                                          |  |           |         |          |  
|                                          |  |           |         |          |  
|Furniture, equipment and vehicles         |  | $         | 733,690 |          | $
|Computer software                         |  | 646,561   |         | 411,906  |  
|Leasehold improvements                    |  | 67,928    |         | 68,301   |  
|                                          |  |           |         |          |  
|Total                                     |  | 1,448,179 |         | 727,055  |  
|Accumulated depreciation and amortization |  | (458,258  | )       | (222,149 | )
|                                          |  |           |         |          |  
|Property and equipment, net               |  | $         | 989,921 |          | $
|                                          |  |           |         |          |  

Depreciation expense for the years ended March 31,
2002 and 2001 was $245,280 and $247,868, respectively.

F-14



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##### Index to Financial Statements

NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount
of goodwill for the fiscal year ended March 31, 2002, are as follows:



|Balance as of March 31, 2001 |  | $       | 25,179,255 | 
|---------------------------- |  | ------- | ---------- | 
|Goodwill acquired            |  | 135,043 |           
|                             |  |         |           
|Balance as of March 31, 2002 |  | $       | 25,314,298 | 
|                             |  |         |            | 

The Company has determined that it has one reporting unit in the
distribution business. Management further has determined that the distribution reporting unit should be reported in the aggregate based upon similar economic characteristics within each company within that segment.

The following table reflects the components of other intangible assets:



|                                   |  | March 31, 2002       |         | March 31, 2001          |  
|---------------------------------- |  | -------------------- | ------- | ----------------------- | -
|                                   |  |                      |         |                         |  
|                                   |  | Gross CarryingAmount |         | AccumulatedAmortization |  
|                                   |  |                      |         |                         |  
|Amortizable intangible assets:     |  |                      |         |                         |  
|Non compete agreement              |  | $                    | 142,500 |                         | $
|Domain name                        |  | 200                  |         | 200                     |  
|                                   |  |                      |         |                         |  
|Total                              |  | $                    | 142,700 |                         | $
|                                   |  |                      |         |                         |  
|                                   |  |                      |         |                         |  
|Non-amortizable intangible assets: |  |                      |         |                         |  
|Domain name                        |  | $                    | 149,414 |                         | $
|                                   |  |                      |         |                         |  

Amortization expense for the fiscal years ended March 31, 2002 and 2001
was $15,044 and $2,550,260, respectively.

Estimated amortization expense for each of the five succeeding fiscal years is as follows:



|Fiscal year ended March 31 |  | Amount |       
|-------------------------- |  | ------ | ------
|                           |  |        |       
|2003                       |  | $      | 36,000
|2004                       |  | 36,000 |       
|2005                       |  | 36,000 |       
|2006                       |  | 19,500 |       
|2007                       |  |        |      

NOTE 7 - NOTES RECEIVABLE

On March 28, 2002, the Company negotiated a note maturing on March 31, 2007 with one of its customers for an account receivable. The note bears interest at 6%, is collateralized by the
customers accounts receivable and inventory, and requires any subsequent charges after the date of the note to be paid currently in addition to the repayment of the note balance. The outstanding balance on the note at March 31, 2002 was
$329,012, of which $65,520, representing the portion due within one year, is included in other current assets.

On March 28, 2002, the Company negotiated a note maturing on March
31, 2007 with one of its customers for an account receivable. The note bears interest at 6%, is unsecured, and requires any subsequent charges after the date of the note to be paid currently in addition to the repayment of the note balance. The
outstanding balance on the note at March 31, 2002 was $411,269, of which $67,344, representing the portion due within one year, is included in other current assets.

NOTE 8 -
INCOME TAXES

The provision for income taxes (benefit) consists of the following for the year ended March 31, 2002:

F-15



---

##### Index to Financial Statements



|         |  | Federal  |          | State    |   | Total      |  
|-------- |  | -------- | -------- | -------- | - | ---------- | -
|         |  |          |          |          |   |            |  
|Current  |  | $        |         |          | $ |           |  
|Deferred |  | (950,084 | )        | (153,464 | ) | (1,103,548 | )
|         |  |          |          |          |   |            |  
|Total    |  | $        | (950,084 | )        | $ | (153,464   | )
|         |  |          |          |          |   |            |  

The provision for income taxes (benefit) differs from the amount
computed by applying the U.S. federal income tax rate of 34% to income (loss) before income taxes for 2002 as follows:



|Rate Reconciliation           |  | Amount     |            | Effective Rate |      
|----------------------------- |  | ---------- | ---------- | -------------- | -----
|                              |  |            |            |                |      
|Statutory federal rate        |  | $          | 307,215    |                | 34.00
|State income taxes            |  | 33,656     |            | 3.72           | %    
|Other                         |  | 14,081     |            | 1.56           | %    
|Change in valuation allowance |  | (1,458,500 | )          | (161.41        | %)   
|                              |  |            |            |                |      
|                              |  | $          | (1,103,548 | )              |      
|                              |  |            |            |                |      

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of deferred income tax assets and liabilities, net of valuation allowance, as of March
31, 2002 and 2001 are as follows:



|                                                               |  | 2002      |           | 2001       |  
|-------------------------------------------------------------- |  | --------- | --------- | ---------- | -
|                                                               |  |           |           |            |  
|                                                               |  |           |           |            |  
|Net operating losses                                           |  | $         | 607,258   |            | $
|Net operating losses - acquired                                |  | 190,384   |           | 416,000    |  
|Use of cash basis method of accounting for income tax purposes |  | (128,500  | )         | (193,500   | )
|Uniform capitalization of inventory cost                       |  | 244,306   |           |           |  
|Basis difference in property and equipment                     |  | (32,627   | )         |           |  
|Bad debt and other accruals                                    |  | 222,726   |           | 310,000    |  
|                                                               |  |           |           |            |  
|Net deferred income tax assets                                 |  | 1,103,548 |           | 1,458,500  |  
|Valuation allowance                                            |  |          |           | (1,458,500 | )
|                                                               |  |           |           |            |  
|                                                               |  |           |           |            |  
|Net deferred income tax asset after valuation allowance        |  | $         | 1,103,548 |            | $
|                                                               |  |           |           |            |  

The net operating loss and acquired tax loss carry forward benefits
expire in various years beginning 2020. Due to the Companys acquisition of Desktop, the Companys ability to utilize the acquired net operating loss carry forward of $500,000 will be limited by IRS Section 382 to $113,000 per
year.

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

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

NOTE 9 - DEBT

On March 17, 2000, the Company signed a $1,000,000 line of credit agreement with First Community Bank of
America. Terms of the agreement provided for interest to be charged at 1% over the rate of interest paid on the Companys $1,000,000 certificate of deposit held by First Community Bank of America and used to collateralize the loan facility. The
balance on the line of credit became due on October 1, 2000. On November 6, 2000, documents were executed to extend the line of credit agreement for an additional six-month

F-16



---

##### Index to Financial Statements

period with a due date of April 1, 2001. The First Community Bank of America certificate of deposit matured on March 15, 2001, and on March 19, 2001, was
used to satisfy the line of credit agreement.

In March 2000, the Company entered into a line of credit agreement with Merrill Lynch. The line of credit enabled the Company to
borrow a maximum of $5,000,000 with borrowings limited to 80% of eligible accounts receivable and 50% of inventory (capped at $1,000,000). The Merrill Lynch line of credit was paid in full on October 24, 2000, with proceeds from the new Mellon
credit facility. In conjunction with this repayment, the unamortized deferred loan costs associated with the line of credit were written off as an extraordinary loss on early extinguishment of debt (see Note 17).

On October 24, 2000, the Company obtained from Mellon a $15 million line of credit and a $2 million term loan to refinance its prior bank indebtedness, to provide additional working capital and for
other general corporate purposes. The line of credit enabled the Company to borrow a maximum of $15 million, with borrowings limited to 85% of eligible accounts receivable and 65% of eligible inventory. On October 29, 2001, the Company executed a
loan modification agreement modifying the original Mellon line of credit with Standard, increasing the line to $23 million. The term loan is payable at $55,556 principal per month over a 36-month period with interest at 0.75% per annum over the base
rate, which is the higher of Mellons prime rate or the effective federal funds rate plus 0.50% per annum. The interest rate on the term loan at March 31, 2002 was 6.0%. The revolving credit facility bears interest at the floating rate of 0.25%
per annum above the base rate. The interest rate on the revolving credit facility at March 31, 2001 was 4.75%. Loan costs of approximately $390,000 were capitalized and are being amortized over the life of the term loan. The outstanding balances on
the revolving line of credit and term loan were $18,929,575 and $1,117,866, respectively, as of March 31, 2002. The availability on the line of credit at March 31, 2002 was approximately $.6 million. In conjunction with the closing of the credit
facility, the Company deposited $2 million in a restricted account with Mellon. The credit facility prohibits the payment of dividends.

On June 6, 2002, the Company executed a
Third Amendment and Modification to Loan and Security Agreement (the Amended Agreement) with Standard modifying the original Mellon line of credit. The Amended Agreement permits the Company to exceed the calculated line availability, by
an amount of up to $2,000,000 (the out-of-formula advance), for the period commencing June 5, 2002 through August 5, 2002, unless cancelled upon request by the Company prior to August 5, 2002. However, at no time shall the total line of
credit be advanced beyond $23,000,000. Loan modification costs of approximately $40,000 will be capitalized and amortized over the remaining life of the note. The Amended Agreement sets forth that if the Company has out-of-formula advances
outstanding, then it will incur interest on the entire principal balance of the line of credit at the rate of one percent over the base rate until the out-of-formula advances are paid in full. The Amended Agreement also provides that the
Companys borrowing base include the excess of the restricted cash account over the outstanding principal balance of the existing term loan. The Amended Agreement modified the financial covenants imposed on the Companys net income, net
worth and working capital ratios through March 31, 2004. After the Amended Agreement, the Company was in compliance with the fiscal year net income and ratio covenants; however, the Company was not in compliance with the net income for the fourth
quarter and net worth covenants at March 31, 2002. On June 27, 2002, Standard provided an amendment modifying the covenants in the Loan and Security Agreement to achieve loan compliance at March 31, 2002. The amendment modifies the net income
covenant for the fourth quarter ended March 31, 2002, and the net worth covenant commencing March 31, 2002 through June 29, 2002. All other loan provisions will remain in effect.

On June 12, 2002, Jugal K. Taneja (Taneja), Chairman of the Board, CEO and a Director of the Company, executed an Amended and Restated Continuing Unconditional Guaranty (the guaranty) in favor of Standard, which
replaced a Continuing Unconditional Guaranty dated May 30, 2002. The guaranty provides Standard with Tanejas unconditional guaranty for any out-of-formula advances against the line of credit.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

On February 15, 2000, the Company entered into an Agreement with Purchasepro.com, Inc.
(PPRO) wherein PPRO was to design and develop a sell-side private e-marketplace, powered by PPRO, labeled to include the marks and logos of the Company. PPROs development and unlimited buyer license fee for private
e-marketplace was to be issued in the form of 200,000 of the Companys warrants. The sell-side private e-marketplace project with PPRO is inactive; a termination agreement has been drafted and no warrants will be issued.

Leases

The Company has operating leases for facilities that expire at various dates through 2007. Certain
leases provide an option to extend the lease term. Certain leases provide for payment by the Company of any increases in property taxes, insurance, and common area maintenance over a base amount and others provide for payment of all property taxes
and insurance by the Company.

F-17



---

##### Index to Financial Statements

The Company leases computer and office equipment with original lease terms ranging from three to five years. These leases expire at various dates through
fiscal 2007.

The Company leases vehicles for delivery and sales purposes with original lease terms ranging from one to five years. These leases expire at various dates through
fiscal 2006.

The Company has capital leases on office and warehouse equipment each with original lease terms of five years. These capital leases expire at various dates
during fiscal 2006.

Future minimum lease payments, by year and in aggregate under non-cancelable leases that have initial or remaining terms in excess of one year, are as
follows:



|Year Ending March 31                          |  | Operating Leases |           | Capital Leases |       
|--------------------------------------------- |  | ---------------- | --------- | -------------- | ------
|                                              |  |                  |           |                |       
|2003                                          |  | $                | 314,027   |                | $     
|2004                                          |  | 287,393          |           | 14,163         |       
|2005                                          |  | 202,142          |           | 14,163         |       
|2006                                          |  | 184,729          |           | 3,835          |       
|2007                                          |  | 97,995           |           |               |       
|Thereafter                                    |  |                 |           |               |       
|                                              |  |                  |           |                |       
|Total payments                                |  | $                | 1,086,286 |                | 46,324
|                                              |  |                  |           |                |       
|Less amount representing interest             |  |                  |           | (9,306         | )     
|                                              |  |                  |           |                |       
|Total present value of minimum lease payments |  |                  |           | $              | 37,018
|                                              |  |                  |           |                |       

Total rent expense for the years ended March 31, 2002 and 2001 was
approximately $226,000 and $177,700, respectively.

Litigation

The Company previously executed an
engagement letter with GunnAllen Financial (GAF) with an effective date of August 20, 2001, for consulting services over a three month period from the effective date, and renewable month to month thereafter until terminated by either
party with a thirty day notice. The GAF agreement required that the Company pay to GAF, for consulting services performed, $5,000 per month plus expenses capped at $2,000 per month, and further required the Company to issue a warrant to GAF
exercisable for a period of five years to purchase 100,000 shares of the Companys common stock at an exercise price of $5.80 per share. However, on October 12, 2001, the Company terminated the agreement with GAF and informed GAF that GAF was
in breach of contract under the Agreement and that, accordingly, no warrants would be issued to GAF and no further fees would be paid to GAF. The Company also demanded the return of all fees previously paid to GAF. At March 31, 2002, no warrants had
been issued to GAF. As of June 27, 2002, GAF had not instituted any legal proceedings against the Company, and the Company cannot reasonably estimate any future possible loss as a result of this matter. The Company has made no provision in the
accompanying consolidated financial statements for resolution of this matter.

In March 2000, the Company acquired all of the issued and outstanding shares of common stock of
Desktop Corporation, a Texas corporation located in Dallas, Texas, pursuant to an Agreement and Plan of Reorganization by and among the Company, K. Sterling Miller, Jimmy L. Fagala and HCT Capital Corp. (the Reorganization Agreement). On
February 7, 2002, Messrs. Miller and Fagala filed a complaint against the Company in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida, alleging, among other things, that the Company had breached the
Reorganization Agreement by failing to pay 38,809 shares of the Companys common stock to plaintiffs. The complaint also includes a count of conversion and further alleges that the Company breached its employment agreements with
Messrs. Miller and Fagala, for which the plaintiffs seek monetary damages. On March 11, 2002, the Company filed its answer, affirmative defenses and counterclaim against plaintiffs and HCT Capital Corp., in which it alleged, among other things,
that plaintiffs had breached the Reorganization Agreement by misrepresenting the state of the acquired business, that the Company was entitled to set off its damages against the shares which the plaintiffs are seeking and further seeking contractual
indemnity against the plaintiffs. On April 16, 2002, HCT Capital Corp. filed its answer, counterclaim against the Company and cross-claim against the plaintiffs. The Company intends to vigorously defend the actions filed against it and to pursue its
counterclaim. The Company cannot reasonably estimate any future possible loss as a result of this matter. The Company has made no provision in the accompanying consolidated financial statements for resolution of this matter.

F-18



---

##### Index to Financial Statements

The Company is, from time to time, involved in litigation relating to claims arising out of its operations in the ordinary course of business. The Company
believes that none of the claims that were outstanding as of March 31, 2002 should have a material adverse impact on its financial position, results of operations, or cash flows.

NOTE 11 - EMPLOYEE BENEFIT PLAN

In January 2002, the Company adopted the DrugMax, Inc. 401(k) Plan (the 401(k) Plan). Full time employees are eligible to
participate in the 401(k) Plan beginning the next quarterly enrollment date after completion of one year of employment with the Company. Eligible employees may contribute up to $11,000 of their annual compensation on a pre-tax basis for the 2002
401(k) Plan year. Participant contributions are immediately vested. In addition, under the terms of the 401(k) Plan, for each plan year, the Company may contribute an amount of matching contributions determined by the Company at its discretion.
Participants become vested in the Company matching contributions over a six-year period. The Company made no contributions to the 401(k) Plan in the fiscal year ended March 31, 2002.

NOTE 12 - STOCK AND BENEFIT PLANS

Offering

On November 1,
2000, the Company filed a registration statement with the Securities and Exchange Commission for a proposed secondary offering of 2,000,000 shares of the Companys common stock. Utendahl Capital Partners, L.P. (Utendahl) was
contracted to act as lead managing underwriter of the proposed offering. However, on December 29, 2000, the Company and Utendahl agreed to terminate their agreement and Utendahl received 50,000 shares of the Companys common stock, valued at
$3.9375 per share, for full release of the agreement.

The total costs incurred by the Company were approximately $456,700, and were capitalized during the third quarter of 2001.
During the fourth quarter of 2001, management determined that market conditions were not conducive to a successful secondary offering of securities and cancelled the registration. As such, all costs incurred and capitalized relative to this
offering, were expensed as an impairment of assets during 2001. On October 30, 2001, the Company filed Form RW with the Securities and Exchange Commission requesting consent to withdraw the Companys Registration Statement on Form
SB-2.

Warrants

In connection with an offering on November 22, 1999, and as additional compensation
to the underwriters, the Company issued warrants for the purchase of 150,000 shares of common stock. The warrants are exercisable, in whole or in part, between the first and fifth years, at an exercise price of $16.50. The underwriters shall have
the option to require the Company to register the warrants and/or the common stock underlying the warrants. The warrants had an estimated fair market value of approximately $839,000 on the date of issuance, determined under the Black-Scholes Model,
assuming an expected life of 5 years, a risk-free interest rate of 6.56%, expected volatility of 75%, and no dividends. This amount is included in additional paid in capital along with other issuance costs of the offering.

On January 23, 2000, the Company granted a director and a non-employee consultant to the Company, a three-year warrant to purchase 200,000 shares of common stock at an exercise price of $15.98, which
approximates the 30-day weighted average of the stock price from January 23, 2000 to February 22, 2000. The warrants were immediately vested on January 23, 2000. The grant was made as a result of the directors acting as a guarantor of the
$5,000,000 Merrill Lynch line of credit (see Note 9). The warrants had an estimated fair value of approximately $1,625,000, which was determined using the Black-Scholes Model, assuming an expected life of 3 years, a risk-free interest rate of 6.63%,
expected volatility of 75%, and no dividends. The fair value of the warrant was amortized over the term of the line of credit (see Note 17).

Stock Options

In August 1999, the Companys Board of Directors adopted a stock option plan (the Plan), which was approved by the Companys shareholders at its annual meeting in August
2000. The Plan provides for the grant of incentive and nonqualified stock options to key employees, including officers, directors and consultants of the Company. Under the provisions of the Plan, all options, except for incentive options granted to
greater-than-10%-stockholders, have an exercise price equal to the fair market value on the date of the grant and expire no more than ten years after the grant date. The exercise price of incentive options issued to
greater-than-10%-stockholders shall not be less than 110% of the fair market value of the common stock on the date of the grant, and such options shall

F-19



---

##### Index to Financial Statements

expire five years after the date of the grant. During the years ended March 31, 2002 and 2001, no stock options were issued to consultants. At March 31,
2002, options to acquire up to 1,400,000 shares of common stock may be granted pursuant to the Plan.

Stock option activity is summarized as
follows:



|Incentive and Non-Qualified Stock Options |  | Number ofShares |           | WeightedAverageExercisePrice |      
|----------------------------------------- |  | --------------- | --------- | ---------------------------- | -----
|                                          |  |                 |           |                              |      
|                                          |  |                 |           |                              |      
|Outstanding March 31, 2000                |  | 261,800         |           | $                            | 13.08
|                                          |  |                 |           |                              |      
|Granted                                   |  | 75,000          |           | 11.69                        |      
|Forfeited                                 |  | (46,500         | )         | 13.53                        |      
|                                          |  |                 |           |                              |      
|Outstanding March 31, 2001                |  | 290,300         |           | 12.65                        |      
|                                          |  |                 |           |                              |      
|Granted                                   |  | 950,700         |           | 4.13                         |      
|Forfeited                                 |  | (21,900         | )         | 6.05                         |      
|                                          |  |                 |           |                              |      
|Outstanding March 31, 2002                |  |                 | 1,219,100 |                              |      
|                                          |  |                 |           |                              |      

Outstanding options under the Plan vest over a one-
to three-year period. As of March 31, 2002 and 2001, 636,533 and 106,432 options, respectively, with a weighted average exercise price of $7.13 and $12.78, respectively, were exercisable. The following is a summary of stock options outstanding and
exercisable as of March 31, 2002.



|ExercisePrice |  | OptionsOutstanding |  | Weighted AverageRemaining ContractualLife
(years) |  | OptionsExercisable | 
|------------- |  | ------------------ |  | ------------------------------------------------- |  | ------------------ | 
|              |  |                    |  |                                                   |  |                    | 
|              |  |                    |  |                                                   |  |                    | 
|$ 10.00       |  | 10,000             |  | 7.59                                              |  | 10,000             | 
|13.00         |  | 178,800            |  | 7.76                                              |  | 126,533            | 
|14.30         |  | 50,000             |  | 2.76                                              |  | 50,000             | 
|11.38         |  | 7,500              |  | 8.09                                              |  | 2,500              | 
|10.88         |  | 30,000             |  | 8.18                                              |  | 10,000             | 
|7.00          |  | 7,500              |  | 8.43                                              |  | 2,500              | 
|3.50          |  | 613,600            |  | 9.01                                              |  | 187,500            | 
|5.70          |  | 900                |  | 9.29                                              |  |                   | 
|5.00          |  | 207,500            |  | 9.44                                              |  | 207,500            | 
|5.75          |  | 40,000             |  | 4.55                                              |  | 40,000             | 
|6.05          |  | 73,300             |  | 9.67                                              |  |                   | 
|              |  |                    |  |                                                   |  |                    | 
|              |  |                    |  |                                                   |  |                    | 
|              |  | 1,219,100          |  |                                                   |  | 636,533            | 
|              |  |                    |  |                                                   |  |                    | 

Remaining non-exercisable options as of March 31,
2002 become exercisable as follows:



|2003 |  | 234,040 | 
|---- |  | ------- | 
|2004 |  | 181,764 | 
|2005 |  | 166,763 | 
|     |  |         | 
|     |  | 582,567 | 
|     |  |         | 

In January 2000, the Company granted 50,000 options to Stephen M.
Watters, a greater-than-10%-stockholder and director of the Company, at an exercise price of $14.30, which was 110% of the fair market value of the stock on the date of the grant. Such options expire 5 years from the date of the grant.

The Company applies APB Opinion No. 25 in accounting for its stock options. Accordingly, no compensation cost has been recognized for the options granted to employees and directors
because the exercise price equaled or exceeded the fair market value on the date of the grant. Had compensation cost been determined on the basis of fair value pursuant to SFAS No. 123, net income (loss) and net income (loss) per share would
have been as follows for the years ended March 31, 2002 and 2001:

F-20



---

##### Index to Financial Statements



|                                                        |  | 2002 |           | 2001 |  
|------------------------------------------------------- |  | ---- | --------- | ---- | -
|                                                        |  |      |           |      |  
|Net income (loss), as reported                          |  | $    | 2,007,122 |      | $
|Net loss, pro forma                                     |  | $    | (573,497  | )    | $
|Net income (loss) per common share-basic, as reported   |  | $    | 0.29      |      | $
|Net loss per common share-basic, pro forma              |  | $    | (0.08     | )    | $
|Net income (loss) per common share-diluted, as reported |  | $    | 0.28      |      | $
|Net loss per common share-diluted, pro forma            |  | $    | (0.08     | )    | $

The weighted-average fair value of options granted for the years ending
March 31, 2002 and 2001 was $2.77 and $10.11, respectively. The estimated fair value for the above options was determined using the Black-Scholes method with the following weighted-average assumptions used for grants in 2002 and 2001:



|                        |  | 2002          |  | 2001     | 
|----------------------- |  | ------------- |  | -------- | 
|                        |  |               |  |          | 
|                        |  |               |  |          | 
|Dividend yield          |  | 0.00%         |  | 0.00%    | 
|Option term             |  | 5  10 years  |  | 10 years | 
|Expected volatility     |  | 67%           |  | 85%      | 
|Risk-free interest rate |  | 3.94% - 5.31% |  | 5.38%    | 

NOTE 13 - RELATED PARTY TRANSACTIONS

On September 13, 2000, the Company entered into a management agreement with Penner, pursuant to which it agreed to manage the day-to-day operations of Penner during the bankruptcy proceeding in
exchange for a management fee equal to a percentage of the gross revenues of Penner each month. In turn, the Company entered into a management agreement with Dynamic Health Products, Inc. (Dynamic) pursuant to which Dynamic provided
accounting support services to the Company in connection with the Companys management responsibilities relating to Penner. Pursuant to this agreement, Dynamic was entitled to receive one-third of all fees collected by the Company from Penner.
In fiscal 2002 and fiscal 2001, the total fees paid to Dynamic by the Company were $225,226 and $229,417, respectively. Both agreements were terminated in October, 2001, in connection with the closing of the acquisition of certain assets from Penner
by the Company.

GO2 Pharmacy, Inc., a publicly traded company, formerly Innovative Health Products, Inc. (GO2), is a supplier of manufactured dietary supplements and
health and beauty care products. Taneja is a Director and Chairman of the Board of GO2 and of the Company. In the fiscal years ended March 31, 2002 and 2001, the Company purchased approximately $5,200 and $220,000, respectively, of products for
resale from GO2.

In April 2000, in connection with the acquisition of Valley, the Company loaned the sellers of Valley a total of $170,000 to pay for a portion of the flow
through effects of their S Corporation taxable income resulting from the sale of Valley. These are interest-free notes receivable and are to be repaid by Patrick, Chief Financial Officer of the Company, and Blundo, the President of Valley, upon
their sale of the Company stock, which is restricted stock subject to a holding period which ended on April 19, 2001. At March 31, 2002 and 2001, the outstanding balance on the notes was $100,000.

Blundo, the President of Valley, and Patrick, the Chief Financial Officer of the Company, together are 2/3 owners of Professional Pharmacy Solutions, LLC
(PPS), a pharmacy management company. Valley sells products to PPS under normal terms and conditions. During the fiscal years ended March 31, 2002 and 2001, the Company generated revenues of approximately $1.1 million for each year from
PPS. The receivable balance due from PPS at March 31, 2002 and 2001 was approximately $590,000 and $200,000, respectively.

In October 2001, the Company executed a Commercial
Lease Agreement (the Lease) with River Road Real Estate, LLC (River Road), a Florida limited liability company, to house the operations of Discount in St. Rose, Louisiana. The officers of River Road are Taneja, a Director,
Chief Executive Officer, Chairman of the Board and a majority shareholder of the Company; William L. LaGamba, a Director, Chief Operating Officer, and the President of the Company; Stephen M. Watters, a Director of the Company; and Johns, an
employee of the Company and the former owner of Penner. The Lease is for an initial period of five years with a base monthly lease payment of $15,000, and an initial deposit of $15,000 made to River Road by the Company. In the fiscal year ended
March 31, 2002, the Company paid $90,000 to River Road, which was a charge to rent expense, in addition to the $15,000 security deposit.

F-21



---

##### Index to Financial Statements

NOTE 14 - SEGMENT INFORMATION

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

During the fiscal year ended March 31,2001, the Company operated two industry segments: wholesale distribution and computer software development. During the fiscal year
ended March 31, 2002, the Company did not operate the software development segment and has made the determination to concentrate on the Companys core wholesale distribution businesses. The Company has determined that is has one reportable
segment because all distribution subsidiaries have similar economic characteristics, such as margins, products, customers, distribution networks and regulatory oversight. The distribution line of business represents 100% of consolidated revenues in
fiscal year 2002, and substantially all of consolidated revenues in fiscal year 2001. The accounting policies of the operating segment are those discussed in Note 2, Summary of Significant Accounting Policies.

The Company distributes product both within and outside the United States. Revenues from distribution within the United States represented approximately 99.8% and 100.0% of gross revenues for the
years ended March 31, 2002 and 2001, respectively. Foreign revenues were generated primarily from distribution to customers in Puerto Rico.

The following table presents
distribution revenues from the Companys only segment for each of the Companys three primary product lines for the fiscal years ended March 31:

|                             |  | 2002       |             | 2001      |  
|---------------------------- |  | ---------- | ----------- | --------- | -
|                             |  |            |             |           |  
|Revenue from:                |  |            |             |           |  
|Branded pharmaceuticals      |  | $          | 252,526,812 |           | $
|Generic pharmaceuticals      |  | 12,525,736 |             | 6,470,828 |  
|Over the counter and general |  | 6,235,440  |             | 5,057,017 |  
|                             |  |            |             |           |  
|                             |  |            |             |           |  
|Total revenues               |  | $          | 271,287,988 |           | $
|                             |  |            |             |           |  

NOTE 15 - MAJOR CUSTOMER CONCENTRATION

During the years ended March 31, 2002 and 2001, the Companys 10 largest customers accounted for approximately 37% and 39%, respectively, of the Companys net sales. The Companys
largest customer during fiscal 2002 accounted for approximately 13% of the Companys net sales, and the Companys largest customer in fiscal 2001, which was a different customer, accounted for approximately 16% of net sales. . At March 31,
2002 the Company did not have any one customer with an outstanding account receivable balance which accounted for 10% or greater of the total accounts receivable of the Company. At March 31, 2001, the Company had an account receivable from Penner
which represented approximately 17% of the total accounts receivable of the Company. The high concentration of receivables from Penner occurred during the period that the Company was managing Penner prior to its acquisition by the Company (see Note
3).

NOTE 16 - SUBSEQUENT EVENTS

On May 1, 2002, the Company filed suit against an established
customer of the Companys Pittsburgh distribution center for collection of past due accounts receivable. The customer accounted for approximately $4.1 million, or 1.5%, of the gross revenue of the Company in the fiscal year ended March 31,
2002. The Company has an unconditional personal guaranty signed by the customers owner. On March 31, 2002, the outstanding accounts receivable balance from the customer was approximately $1 million, of which approximately $806,000 has
subsequently been paid by the customer. Sales subsequent to March 31, 2002, and prior to the voluntary filing, created an accounts receivable balance of approximately $.9 million. On May 23, 2002, the customer filed a voluntary petition in
bankruptcy in the U.S. Bankruptcy Court, under Chapter Eleven of the United States Bankruptcy Act, subsequent to which the customer failed to file the proper financial data with the court, causing the voluntary bankruptcy filing to be withdrawn.
Management believes the customer has adequate assets for the Company to recover the net outstanding debt of approximately $200,000 as of March 31, 2002. Management has made no provision in fiscal year 2002 for possible write down of the remaining
accounts receivable.

F-22



---

##### Index to Financial Statements

NOTE 17 - RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Subsequent to the
issuance of the Companys consolidated financial statements as of and for the year ended March 31, 2002, the Company determined that the accounting treatment for a warrant issued to a director and non-employee consultant on January 23, 2000 as
a result of the directors acting as a guarantor of the Companys $5,000,000 Merrill Lynch line of credit (see Note 12) was not in accordance with guidance established under APB Opinion No. 25 and FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. Because the warrants were issued to a non-employee director for services outside his role as a director, the warrants should have
been accounted for under SFAS No. 123. Accordingly, the fair value of the warrants of $1,625,000 should have been recognized as deferred financing costs in January 2000 and amortized to interest expense over the one-year term of the line of credit,
beginning in March 2000. The Merrill Lynch line of credit was paid in full on October 24, 2000, with proceeds from the new Mellon credit facility (see Note 9); therefore, the unamortized balance of the financing costs of $572,244 should have been
recognized as an extraordinary loss on the early extinguishment of debt in October 2000. The Company has not treated the warrant expense as a deductible item in its tax returns, and has concluded that the warrant expense will be treated as a
permanent difference, which does not create tax benefits for the Company. As a result, the consolidated financial statements as of and for the years ended March 31, 2002 and 2001 have been restated from the amounts previously reported. In addition,
the consolidated financial statements as of and for the quarterly periods ended June 30, 2000, September 30, 2000, December 31, 2000, June 30, 2001, September 30, 2001, and December 31, 2001 have been restated from the amounts previously reported.

A summary of the significant effects of the restatement on the Companys consolidated statement of operations for the year ended March 31, 2001 is as follows:



|                                               |  | Year Ended March 31, 2001 |          
|---------------------------------------------- |  | ------------------------- | ---------
|                                               |  |                           |          
|                                               |  | As PreviouslyReported     |          
|                                               |  |                           |          
|Interest expense                               |  | $                         | 1,124,242
|Loss before extraordinary item                 |  | 7,816,583                 |          
|Extraordinary loss on extinguishment of debt   |  |                          |          
|Net loss                                       |  | 7,816,583                 |          
|Net loss per common share  basic and diluted: |  |                           |          
|Loss before extraordinary item                 |  | $                         | 1.22     
|Extraordinary loss on extinguishment of debt   |  |                          |          
|                                               |  |                           |          
|Net loss per common share  basic and diluted  |  | $                         | 1.22     
|                                               |  |                           |          

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



|                                           |  | As of March 31, 2002  |            | As of March 31, 2001 |  
|------------------------------------------ |  | --------------------- | ---------- | -------------------- | -
|                                           |  |                       |            |                      |  
|                                           |  | As PreviouslyReported |            | Adjustments          |  
|                                           |  |                       |            |                      |  
|Additional paid-in capital                 |  | $                     | 39,342,355 |                      | $
|Accumulated deficit                        |  | (7,902,880            | )          | (1,625,000           | )
|Total stockholders equity                 |  | 31,446,595            |            |                     |  
|Total liabilities and stockholders equity |  |                       | 66,302,757 |                      |  

F-23



---

##### Index to Financial Statements

A summary of the significant effects of the restatement on the Companys quarterly consolidated statements of operations is as follows:



|                                                                                   |  | Three MonthsEndedJune 30,2000 |           | Three MonthsEndedSeptember 30,2000 |   | Six MonthsEndedSeptember 30,2000 |  | Three MonthsEndedDecember 31,2000 |           | Nine MonthsEndedDecember 31,2000 |  
|---------------------------------------------------------------------------------- |  | ----------------------------- | --------- | ---------------------------------- | - | -------------------------------- |  | --------------------------------- | --------- | -------------------------------- | -
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|Interest expense:                                                                  |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As previously reported                                                             |  | $                             | 223,956   |                                    | $ | 247,655                          |  | $                                 | 471,611   |                                  | $
|Adjustments                                                                        |  | 406,250                       |           | 406,250                            |   | 812,500                          |  | 104,839                           |           | 917,339                          |  
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As restated                                                                        |  | $                             | 630,206   |                                    | $ | 653,905                          |  | $                                 | 1,284,111 |                                  | $
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|Loss before extraordinary item:                                                    |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As previously reported                                                             |  |                               |           |                                    |   |                                  |  | $                                 | 606,204   |                                  | $
|Adjustments                                                                        |  |                               |           |                                    |   |                                  |  | 104,839                           |           | 917,339                          |  
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As restated                                                                        |  |                               |           |                                    |   |                                  |  | $                                 | 711,043   |                                  | $
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|Extraordinary loss on extinguishment of debt:                                      |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As previously reported                                                             |  |                               |           |                                    |   |                                  |  | $                                 |          |                                  | $
|Adjustments                                                                        |  |                               |           |                                    |   |                                  |  | 572,244                           |           | 572,244                          |  
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As restated                                                                        |  |                               |           |                                    |   |                                  |  | $                                 | 572,244   |                                  | $
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|Net loss:                                                                          |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As previously reported                                                             |  | $                             | 1,519,829 |                                    | $ | 627,610                          |  | $                                 | 2,147,439 |                                  | $
|Adjustments                                                                        |  | 406,250                       |           | 406,250                            |   | 812,500                          |  | 677,083                           |           | 1,489,583                        |  
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As restated                                                                        |  | $                             | 1,926,079 |                                    | $ | 1,033,860                        |  | $                                 | 2,959,939 |                                  | $
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|Loss before extraordinary item per common share - basic and diluted:               |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As previously reported                                                             |  |                               |           |                                    |   |                                  |  | $                                 | 0.09      |                                  | $
|Adjustments                                                                        |  |                               |           |                                    |   |                                  |  | 0.02                              |           | 0.14                             |  
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As restated                                                                        |  |                               |           |                                    |   |                                  |  | $                                 | 0.11      |                                  | $
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|Extraordinary loss on extinguishment of debt per common share - basic and
diluted: |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As previously reported                                                             |  |                               |           |                                    |   |                                  |  | $                                 |          |                                  | $
|Adjustments                                                                        |  |                               |           |                                    |   |                                  |  | 0.09                              |           | 0.09                             |  
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As restated                                                                        |  |                               |           |                                    |   |                                  |  | $                                 | 0.09      |                                  | $
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|Net loss per common share - basic and diluted:                                     |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As previously reported                                                             |  | $                             | 0.24      |                                    | $ | 0.10                             |  | $                                 | 0.34      |                                  | $
|Adjustments                                                                        |  | 0.06                          |           | 0.06                               |   | 0.13                             |  | 0.11                              |           | 0.23                             |  
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  
|As restated                                                                        |  | $                             | 0.30      |                                    | $ | 0.16                             |  | $                                 | 0.47      |                                  | $
|                                                                                   |  |                               |           |                                    |   |                                  |  |                                   |           |                                  |  

F-24



---

##### Index to Financial Statements

A summary of the significant effects of the restatement on the Companys quarterly consolidated balance sheets is as follows:

|                                            |  | As ofJune 30,2000 |            | As ofSeptember 30,2000 |   | As ofDecember 31,2000 |   | As ofJune 30,2001 |            | As ofSeptember 30,2001 |   | As ofDecember 31,2001 |  
|------------------------------------------- |  | ----------------- | ---------- | ---------------------- | - | --------------------- | - | ----------------- | ---------- | ---------------------- | - | --------------------- | -
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|Deferred financing costs:                   |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As previously reported                      |  | $                 |           |                        | $ |                      |   |                   |            |                        |   |                       |  
|Adjustments                                 |  | 1,083,333         |            | 677,083                |   |                       |   |                   |            |                        |   |                       |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As restated                                 |  | $                 | 1,083,333  |                        | $ | 677,083               |   |                   |            |                        |   |                       |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|Total current assets:                       |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As previously reported                      |  | $                 | 20,160,581 |                        | $ | 25,596,557            |   |                   |            |                        |   |                       |  
|Adjustments                                 |  | 1,083,333         |            | 677,083                |   |                       |   |                   |            |                        |   |                       |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As restated                                 |  | $                 | 21,243,914 |                        | $ | 26,273,640            |   |                   |            |                        |   |                       |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|Total assets:                               |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As previously reported                      |  | $                 | 50,133,906 |                        | $ | 54,857,181            |   |                   |            |                        |   |                       |  
|Adjustments                                 |  | 1,083,333         |            | 677,083                |   |                       |   |                   |            |                        |   |                       |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As restated                                 |  | $                 | 51,217,239 |                        | $ | 55,534,264            |   |                   |            |                        |   |                       |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|Additional paid-in capital:                 |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As previously reported                      |  | $                 | 36,279,447 |                        | $ | 36,279,447            |   | $                 | 36,476,272 |                        | $ | 36,481,755            |  
|Adjustments                                 |  | 1,625,000         |            | 1,625,000              |   | 1,625,000             |   | 1,625,000         |            | 1,625,000              |   | 1,625,000             |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As restated                                 |  | $                 | 37,904,447 |                        | $ | 37,904,447            |   | $                 | 38,101,272 |                        | $ | 38,106,755            |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|Accumulated deficit:                        |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As previously reported                      |  | ($3,613,248       | )          | ($4,240,858            | ) | ($4,847,067           | ) | ($9,026,353       | )          | ($8,290,888            | ) | ($7,913,875           | )
|Adjustments                                 |  | (541,667          | )          | (947,917               | ) | (1,625,000            | ) | (1,625,000        | )          | (1,625,000             | ) | (1,625,000            | )
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As restated                                 |  | ($4,154,915       | )          | ($5,188,775            | ) | ($6,472,067           | ) | ($10,651,353      | )          | ($9,915,888            | ) | ($9,538,875           | )
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|Total stockholders equity:                 |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As previously reported                      |  | $                 | 32,672,618 |                        | $ | 32,045,008            |   | $                 | 31,635,674 |                        | $ | 27,461,872            |  
|Adjustments                                 |  | 1,083,333         |            | 677,083                |   |                      |   |                  |            |                       |   |                      |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As restated                                 |  | $                 | 33,755,951 |                        | $ | 32,722,091            |   | $                 | 31,635,674 |                        | $ | 27,461,872            |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|Total liabilities and stockholders equity: |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As previously reported                      |  | $                 | 50,133,906 |                        | $ | 54,857,181            |   | $                 | 61,111,853 |                        | $ | 58,552,810            |  
|Adjustments                                 |  | 1,083,333         |            | 677,083                |   |                      |   |                  |            |                       |   |                      |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  
|As restated                                 |  | $                 | 51,217,239 |                        | $ | 55,534,264            |   | $                 | 61,111,853 |                        | $ | 58,552,810            |  
|                                            |  |                   |            |                        |   |                       |   |                   |            |                        |   |                       |  

F-25