8-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): March 21, 2005

DrugMax, Inc.

(Exact name of registrant as specified in its charter)

STATE OF NEVADA	1-15445	06-1283776
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)

312 Farmington Avenue

Farmington, CT 06032-1968

(Address of principal executive offices)

Registrant’s telephone number, including area code: (860) 676-1222

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c)) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement.

DrugMax, Inc. has entered into new strategic relationships with two of its suppliers. Previously, the former DrugMax wholesale operations and Familymeds specialty pharmacies separately purchased products from AmerisourceBergen Drug Corporation (“ABDC”) and other wholesale pharmaceutical vendors. As part of its merger integration, DrugMax has consolidated its relationship with vendors and replaced the ABDC primary vendor agreement with two new supply agreements. DrugMax believes the new agreements will further its strategy of increasing its gross margins by improving its discount on branded pharmaceuticals and enabling it to purchase generic and specialty pharmaceuticals directly from manufacturers.

Pursuant to this strategy, DrugMax has entered into a new prime warehouse supplier agreement with D&K Healthcare Resources, Inc. (“D&K”), pursuant to which D&K will be DrugMax’s primary warehouse supplier of prescription drugs and other healthcare merchandise generally available from D&K. The D&K agreement has an initial term of two years. Further, pursuant to a new supply agreement with ABDC, ABDC will supply DrugMax with certain prescription products, thus providing DrugMax with a secondary source for its prescription product needs directly to its New England-based locations. The ABDC agreement has a term of 5 years with no minimum purchasing requirements and replaces the parties prior prime vendor agreement, which has been terminated.

In September of 2004, prior to the merger with Familymeds, ABDC ceased supplying products on credit to DrugMax’s wholesale drug distribution operations. At that time, the DrugMax past due amount owed to ABDC was $10.7 million. On October 22, 2004, ABDC filed a lien in Louisiana against the assets of Valley Drug Company South, one of DrugMax’s subsidiaries. In response, DrugMax filed a lawsuit against ABDC seeking to remove the lien. In connection with the new strategic supply agreement with ABDC, the forgoing lien was removed, the lawsuit was dismissed and the parties agreed to release all remaining claims. Further, on March 21, 2005, DrugMax and ABDC agreed to convert all unpaid existing accounts payable due to ABDC, including DrugMax’s $10.7 million account payable, the total amount of which was $23 million, into (a) a subordinated convertible debenture in the original principal amount of $11.5 million (the “Subordinated Debenture”) and (b) a subordinated promissory note in the original principal amount of $11.5 million (the “Subordinated Note”).

Pursuant to the Subordinated Note, principal is due and payable in 20 successive quarterly installments each in the amount of $575,000 beginning on December 1, 2005 and on each March 1, June 1, September 1, and December 1 thereafter and continuing until September 1, 2010, on which date all outstanding amounts are required to be paid. The Subordinated Note bears interest at a variable rate equal to the prime rate plus two percent (2.0%) per annum (subject to certain minimum and maximum interest requirements as provided in the Subordinated Note). The interest rate adjusts on each quarterly payment date based upon the prime rate in effect on each such quarterly payment date. Interest accrued on the unpaid principal balance of the Subordinated Note is due and payable on each quarterly payment date commencing on June 1, 2005.

Pursuant to the Subordinated Debenture, principal is due and payable in 19 successive quarterly installments each in the amount of $605,263 commencing on March 1, 2006 and on each March 1, June 1, September 1 and December 1 thereafter and continuing until September 1, 2010,

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on which date all outstanding amounts are required to be paid. Quarterly principal payments are payable at DrugMax’s option (subject to certain contractual limitations) in cash or in shares of common stock of DrugMax in an amount equal to $605,263 divided by $3.4416 (the “Issue Price”), which is the daily volume weighted average price of the common stock during the ten days preceding March 22, 2005. The Subordinated Debenture bears interest at a rate which adjust on each quarterly payment date and which is equal to (a) 10%, if the quarterly interest payment is made in common stock and (b) the prime rate on the date the quarterly interest payment is due plus 1% per annum, if the quarterly interest payment is made in cash (subject to certain minimum and maximum interest requirements as provided in the Subordinated Debenture). Quarterly interest payments due and payable on June 1, 2005, September 1, 2005, and December 1, 2005 are required to be paid in common stock. Commencing March 1, 2006, quarterly interest payments may be paid, at the option of DrugMax (subject to certain contractual limitations), in cash or common stock in an amount equal to the interest then due and owing divided by the Issue Price, or a combination thereof.

Pursuant to the Subordinated Debenture, from time-to-time ABDC may convert all or a portion of the Subordinated Debenture into common stock of DrugMax, provided, however, that ABDC shall not have the right to convert any portion of the Subordinated Debenture to the extent that after giving effect to such conversion it would beneficially own in excess of 9.99% of the number of shares of the common stock outstanding immediately after giving effect to such conversion. The number of shares of common stock to be issued upon any conversion is calculated by dividing the amount to be converted by the Issue Price. In connection with the Subordinated Debenture, DrugMax entered into a registration rights agreement, dated as of March 21, 2005, with ABDC pursuant to which it agreed to register the resale of all common stock issuable to ABDC in connection with the Subordinated Debenture.

After each quarterly payment date, ABDC is required to provide written notice to DrugMax of the net proceeds its receives from sale of the shares issued in payment of such quarterly principal and interest payment (the “Deemed Payment Amount”). In the event that the actual amount of principal and/or interest due on such quarterly payment date exceeds the Deemed Payment Amount for any quarterly payment date, the amount of principal deemed repaid by DrugMax for that quarter is limited to the Deemed Payment Amount less the amount of interest then due and owing (such event shall hereinafter referred to as a “Deemed Principal Payment Shortfall”). In the event that the actual amount due exceeds the Deemed Payment Amount with respect to any quarterly interest payments due on May 15, 2005, August 15, 2005 and November 15, 2005 (such event hereinafter referred to as a “Deemed Interest Payment Shortfall”), the amount of the Deemed Interest of Principal Payment shortfall is added to the final principal payment due under the Subordinated Debenture. In the event that the Deemed Payment Amount exceeds the actual amount due on any quarterly payment date, the amount of principal deemed repaid on such quarterly payment date shall be increased by the amount of such excess. Through December 31, 2005, ABDC may in no event sell in any trading day shares issued in payment of principal and/or interest that, in the aggregate, exceed 25% of the average trading volume of common stock for the preceding 10 trading days.

The Subordinated Debenture and Subordinated Note are guaranteed by DrugMax and certain of DrugMax subsidiaries, including Valley Drug Company, Valley Drug Company South, Familymeds, and Familymeds Holdings, Inc. (the “Debtors”) pursuant to Continuing Guaranty

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Agreements dated as of March 21, 2005. The Debtors also entered into a subordinated security agreement dated as of March 21, 2005, pursuant to which each of the Debtors agreed that upon the occurrence of certain defaults and the passage of applicable cure periods each Debtor shall be deemed at that point to have granted to ABDC a springing lien upon and a security interest in substantially all of its assets to secure the Subordinated Debenture and the Subordinated Note. However, pursuant to a subordination agreement dated March 21, 2005, ABDC has agreed to subordinate the Subordinated Debenture, the Subordinated Note, the Guarantees and the Security Agreement to all “Senior Debt” of DrugMax and its subsidiaries. Senior Debt consists of all senior indebtedness now or hereafter owing, including indebtedness under that certain Second Amended and Restated Credit Agreement, dated as of December 9, 2004, among Familymeds, the other borrowers signatory thereto, General Electric Capital Corporation, as agent for the lenders signatory thereto, and any debt incurred by DrugMax and its subsidiaries to replace or refinance the such debt.

DrugMax claims an exemption from the registration requirements of the Act for the private placement of the Subordinated Note, the Subordinated Debenture and the common stock to be issued upon the conversion of the Subordinated Debenture and the payment of principal and interest under the Subordinated Debenture pursuant to Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among other things, the transaction did not involve a public offering, the investor is accredited, the investor had access to information about DrugMax and its investment, the investor took the securities for investment and not resale, and DrugMax took appropriate measures to restrict the transfer of the securities.

The foregoing summaries are qualified in their entirety by reference to the D&K supply agreement, the Subordinated Debenture, the Subordinated Note, the ABDC registration rights agreement, the security agreement, and the subordination agreement, all of which are attached hereto and incorporated herein by reference.

Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

See Item 1.01.

Item 3.02 Unregistered Sales of Equity Securities.

See Item 1.01.

Item 9.01 Financial Statements and Exhibits.

Exhibit Number	Exhibit Description
10.1	Prime Warehouse Supplier Agreement among Familymeds, Inc. and D&K Healthcare Resources, Inc. dated December 28, 2004 (*)
10.2	Subordinated Convertible Debenture in the original principal amount of $11,500,000 dated March 21, 2005

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10.3	Subordinated Promissory Note in the original principal amount of $11,500,000 dated March 21, 2005
10.4	Registration Rights Agreement among DrugMax, Inc. and AmerisourceBergen Drug Corporation dated March 21, 2005
10.5	Subordination Agreement among DrugMax, Inc., Valley Drug Company, Valley Drug Company South, Familymeds, Inc. General Electric Capital Corporation and AmerisourceBergen Drug Corporation dated March 21, 2005
10.6	Security Agreement among DrugMax, Inc., Valley Drug Company, Valley Drug Company South, Familymeds, Inc. and AmerisourceBergen Drug Corporation dated March 21, 2005

* Confidential Treatment Requested by DrugMax, Inc

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

DRUGMAX, INC.
By:	/s/ Edgardo Mercadante
	Edgardo Mercadante, Chief Executive Officer

Dated: March 25, 2005

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EXHIBIT INDEX

Exhibit Number	Exhibit Description
10.1	Prime Warehouse Supplier Agreement among Familymeds, Inc. and D&K Healthcare Resources, Inc. dated December 28, 2004 (*)
10.2	Subordinated Convertible Debenture in the original principal amount of $11,500,000 dated March 21, 2005
10.3	Subordinated Promissory Note in the original principal amount of $11,500,000 dated March 21, 2005
10.4	Registration Rights Agreement among DrugMax, Inc. and AmerisourceBergen Drug Corporation dated March 21, 2005
10.5	Subordination Agreement among DrugMax, Inc., Valley Drug Company, Valley Drug Company South, Familymeds, Inc. General Electric Capital Corporation and AmerisourceBergen Drug Corporation dated March 21, 2005
10.6	Security Agreement among DrugMax, Inc., Valley Drug Company, Valley Drug Company South, Familymeds, Inc. and AmerisourceBergen Drug Corporation dated March 21, 2005

* Confidential Treatment Requested by DrugMax, Inc

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EX-10.1

Exhibit 10.1

[CONFIDENTIAL TREATMENT HAS BEEN REQUESTED BY DRUGMAX, INC.

CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED AND

HAVE BEEN SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.]

PRIME WAREHOUSE SUPPLIER

AGREEMENT

This Agreement is made as of the 28th day of December, 2004, is by and between Familymeds, Inc., a Connecticut corporation, and Valley Drug Company South, a Louisiana corporation hereinafter collectively known as “Customer” and D&K Healthcare Resources, Inc. hereinafter known as “D&K”.

1. Prime Warehouse Supplier. Subject to the terms and conditions hereof, D&K shall be the primary supplier of Products to Customer and Customer shall purchase Products primarily from D&K for all of Customer’s present and future locations, including, without limitation, the locations listed on Schedule A. As used herein, the term “Products” means prescription drugs, OTC, and other merchandise generally available from D&K. As used herein the terms “primary” and “primarily” when applied with respect to Customer means that Customer shall purchase from D & K (i) a minimum of ****************** each year calculated on a rolling twelve month basis of non-Customer warehoused Products from the stores described on Schedule A and (ii) at least *****% of its Products through D & K’s ***** generic program during every calendar quarter during the term hereof. D&K shall endeavor to supply all Products ordered by Customer hereunder.

2. Stocking Requests. D&K agrees to stock all routinely ordered source contract items for the Locations. D&K will respond to all stocking requests on a timely basis. Upon receipt of a written request from Customer that includes NDC number, monthly usage, and an order to cover the first shipment, D&K will immediately initiate the stocking and ordering process. Products are usually in stock and available for shipment within one to three weeks of the original request date.

3. Contract Administration. To accelerate the contract loading and manufacturer confirmation process, Customer shall provide D&K with the following contract information: NDC number, product description, negotiated price, effective dates, and vendor contract or reference number.

4. Chargeback Denials by Manufacturers. D&K will make reasonable efforts to accurately maintain contract pricing agreements in its system including confirming both pricing and customer eligibility. If manufacturers deny chargeback claims to D&K, Customer shall upon receipt of invoice from D&K, pay to D&K the amount of the denied chargeback. Prior to such invoicing, D&K will make reasonable efforts to recover the denied chargeback from the manufacturer and D&K shall provide notice no later than the end of each calendar quarter to Customer of such denials.

5. Orders and Deliveries. Orders may be placed weekdays until 6:00 P.M. local time for next business day delivery before 12:00 PM. Telephone and fax orders may be placed with the Customer Service Department weekdays until 5:00 P.M. local time for next business day delivery. Orders will be delivered in a sealed, returnable plastic tote individually labeled by store to the Customer’s warehouse facility. A signature may be required by the individual accepting the shipment to verify the number of cartons received.

6. Freight Terms. Freight will be F.O.B. destination ***** on all regularly scheduled deliveries to Customer. D&K agrees to waive all daily minimum order requirements to qualify for prepaid freight. For special requests such as airfreight, express courier service, or bus shipments, D&K will ship prepaid and bill the freight charges on a separate invoice.

7. Prime Warehouse supplier Services. D&K shall provide the following services to Customer.

A. Customer Service Department: D&K’s customer service department is professionally staffed from 8:00 A.M. to 6:00 P.M. excluding weekends and holidays.

B. Emergency Orders: D&K provides 24 hour, 7 day-a-week emergency delivery service in life-threatening situations. Customer will be provided with emergency telephone and pager numbers.

C. Drop-Ship Service: D&K shall provide drop-ship service to Customer upon request. Manufacturers will typically call for authorization to bill through D&K and approval will be promptly given. Manufacturer drop-ship invoices will be promptly processed by D&K within two business days of receipt.

D. Price Stickers: D&K offers multiple encoded price sticker formats for both Rx and OTC products. Information provided on the sticker is AWP, net landed price, quantity purchased, date purchased and the D&K item number.

E. Shelf Labels. D&K will provide scannable shelf labels upon request.

F. Material Safety Data Sheets: D&K will provide Material Safety Data Sheets (MSDS) upon request.

8. Pricing and Payment Terms. The purchase prices and payment terms for Products supplied hereunder are set forth in the attached Schedule B. All prices quoted in this Agreement and all other obligations of D&K described herein are based on the agreement that Customer has designated, and will utilize, D&K as its Primary Warehouse supplier.

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9. Definitions of Cost. For this Agreement, the following definitions of costs will apply:

Individual Contracts: For Products purchased under a Customer negotiated contract, cost is defined to be ***********.

Net-Priced Items: *************.

Other Items: For the purpose of this Agreement, items not covered under buying group, individual contracts, or net-priced, cost is defined to be ********.

10. Credits. Credit for returned goods will be processed within five days of receipt of the merchandise. Credit for billing errors or mispicks is processed immediately. A copy of the credit memo will be sent with Customer’s next order. Returns authorization requests may be transmitted electronically via Telxon at the Customer’s convenience.

11. Return Goods Policy. D&K’s Return Goods Policy is attached hereto as Schedule C. D&K reserves the right to change such policy upon 30 days prior writeen notice to Customer.

12. Medicare/Medicaid. Customer acknowledges that any discounts, rebates, or other payments to it hereunder on items reimbursable by Medicare or a state healthcare program such as Medicaid, may be reportable under applicable law by Customer to federal or state healthcare authorities respectively. Customer shall comply with all obligations to properly disclose and appropriately reflect discounts, rebates, and other payments in accordance with any applicable law and shall also comply with Section 1128(B) (b) of the Social Security Act and applicable regulations.

13. Warranty. D&K makes no representation or warranty of merchantability, fitness for a particular purpose, or otherwise, expressed or implied, with respect to any products; and Customer acknowledges and agrees that any representations or warranties that relate to any products are made only by the manufacturer of such products. Customer acknowledges and agrees that its sole recourse for the breach of any such manufacturer’s representation and warranty is against the manufacturer.

14. No Liability. Notwithstanding anything in this Agreement to the contrary, D&K shall have no liability for any special incidental, indirect or consequential damages, including, without limitation, loss of opportunity, revenue or profit, in connection with or arising out of this Agreement or D&K’s performance hereunder, even if such damages were foreseeable.

15. Extension of Credit. D&K shall extend credit in an amount determined by D&K in its reasonable discretion subject to Customer furnishing evidence of financial responsibility, posting of security, and execution of a security agreement and other documents as D&K may require from time to time. Notwithstanding the foregoing, if at anytime, or from time to time, D&K believes that Customer’s ability to make payments hereunder is impaired

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or Customer’s financial condition has materially deteriorated, D&K may require additional security and may withhold deliveries until such security is received and may amend the payment terms hereunder. Customer agrees to abide by D&K’s standard credit terms and conditions. D&K shall provide advance notice to Customer of any change in its requirements as far in advance as commercially reasonable.

16. Term and Termination.

16.1 The term of this Agreement will be for a period of two years, commencing as of the date first set forth above. This Agreement shall renew automatically thereafter for successive one year terms unless written non-renewal notice is provided by either party 30 days prior to the end of the initial term or any renewal term.

16.2 Notwithstanding the provisions of Section 16.1 hereof, either party may terminate this Agreement if the other party is in material breach of any of its obligations hereunder and fails to cure such breach within 90 days (15 days for failure to make payments when due) after receipt of notice of such breach; and D&K may terminate this Agreement at any time if Customer or its assets (whether voluntarily or involuntarily) become the subject of any bankruptcy or insolvency proceeding or if Customer makes an assignment for the benefit of its creditors.

16.3 If this Agreement is terminated by Customer pursuant to Section 16.2 hereof, Customer shall have no right to recover damages (whether characterized as consequential damages, punitive damages or otherwise) other than its actual damages.

17. Delays. Notwithstanding any provision of this Agreement to the contrary, each party’s obligations under this Agreement (other than Customer’s payment obligations) will be excused if and to the extent that any delay or failure to perform such obligation is due to acts of nature, governmental actions, strikes or labor disputes or other causes or situations beyond the reasonable control of that party.

18. Confidentiality. Each party agrees to maintain in confidence the terms and conditions herein, and disclose the contents of this agreement only to those of its employees who have a reasonable need to know of such information, except as otherwise agreed by the other party or as required by law.

19. Taxes. Customer will pay, when due, any sales, use, excise, gross receipts or other federal, state or local taxes or other assessments (other than any tax based solely on the net income of D&K) and related interest and penalties that D&K is at any time obligated to pay or collect in connection with or arising out of the transactions, contemplated by this Agreement. If D&K pays any such amounts, which Customer is obligated to pay under this section, then Customer will promptly reimburse D&K in an amount equal to the amount so paid by D&K.

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20. Insurance. D&K will at all times during the term of this Agreement maintain product liability insurance at levels not less than $2 million, and will provide Customer with a certificate confirming such insurance coverage promptly following request for same. Such policies will include Customer as an additional named insured.

21. Severability. The unenforceability or invalidity of any term or provision herein, or of any portion thereof, will not affect the validity of enforceability of any other term or provision, or portion thereof, herein contained.

22. Assignment. Customer may not assign its interest in, or delegate its performance of its obligations under, this Agreement to any other person or party without D&K’s prior written consent except to a wholly owned subsidiary, parent or affiliate company, or in the event of a merger of Customer, but in any event the assignee must have comparable ability to pay and financial condition. D&K may delegate its performance and assign this Agreement in whole or in part except that Customer must consent to any assignment to ***************, which consent shall not be unreasonably withheld.

23. Governing Law. This Agreement shall be construed and enforced under the law of the State of Delaware without regard to its conflict of laws principles.

24. Notices. All notices under this Agreement shall be in writing and shall be deemed duly given on the date received, if personally delivered, sent by facsimile transmission, or by overnight courier, and addresses to the parties at the following addresses:

If to Customer to:	If to D&K to:
Familymeds, Inc.	D&K Healthcare Resources, Inc.
312 Farmington Avenue	8235 Forsyth Boulevard
Farmington, CT 06032	St. Louis, MO. 63105
FAX: (860) 676-2677	FAX: (314) 727-1943
Attention: Ed Mercadante President and CEO	Attention: Vice President and General Counsel

25. Headings. The headings of this Agreement are used only as a matter of convenience, and in no way define limit, construe or describe the scope or intent of any section of this Agreement.

26. Entire Agreement/Modification. This Agreement together with all Exhibits and attachments, as executed and accepted by the parties hereto, constitutes the entire understanding and agreement of the parties relating to the subject matter hereof, and all prior or contemporaneous negotiations between the parties with respect to the subject matter hereof are hereby deemed merged into and replaced by this Agreement. The terms hereof may not be waived, modified or amended in any way by conduct, custom or course of dealing, but solely by an instrument in writing duly signed by the party to be charged therewith.

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In Witness whereof, the parties have caused this Agreement to be executed by their authorized representatives on the day and year first written above.

D&K Healthcare Resources, Inc.	Familymeds, Inc.
By:	By:
Name:	Name:	Edgardo A. Mercadante
Its:	Its:	President & Chief Executive Officer
	Valley Drug Company South
	By:
	Name:	Edgardo A. Mercadante
	Its:	President & Chief Executive Officer

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EX-10.2

Exhibit 10.2

The security represented hereby has not been registered under the Securities Act of 1933, as amended (the “Act”). This security cannot be sold or otherwise transferred unless this security is registered under the Act or the Company is furnished with an acceptable opinion of counsel that an exemption from registration is available.

This Subordinated Unsecured Convertible Debenture and the indebtedness evidenced hereby are subordinated in the manner and to the extent set forth herein; and each holder of this Subordinated Unsecured Convertible Debenture, by its acceptance hereof, shall be bound by the subordination provisions hereof.

THIS INSTRUMENT OR CERTIFICATE AND THE RIGHT EVIDENCED HEREBY ARE SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION AGREEMENT, DATED MARCH 21, 2005 AMONG FAMILYMEDS, INC., DRUGMAX, INC. VALLEY DRUG COMPANY SOUTH AND VALLEY DRUG COMPANY AS THE COMPANIES, AMERISOURCEBERGEN DRUG CORPORATION AS SUBORDINATED CREDITOR, AND GENERAL ELECTRIC CAPITAL CORPORATION AS AGENT, AND ANY FUTURE SENIOR LENDERS, AS SENIOR LENDERS (THE “SUBORDINATION AGREEMENT”). ANY TRANSFEREE BY ACCEPTANCE OF SUCH TRANSFER AGREES TO BE BOUND BY THE TERMS THEREOF.

SUBORDINATED UNSECURED CONVERTIBLE DEBENTURE

$11,500,000 March 21, 2005    

DRUGMAX, INC., a Nevada corporation (the “Company”), the principal office of which is located at 312 Farmington Avenue, Farmington, CT 06032, for value received hereby promises to pay as set forth below to AmerisourceBergen Drug Corporation (the “Holder”), with offices at 1300 Morris Drive, Chesterbrook, PA, the sum of eleven million five hundred thousand dollars ($11,500,000.00), together with interest at the rate set forth below, and any other charges which may accrue pursuant to the terms of this Subordinated Unsecured Convertible Debenture (this “Debenture”), or such other amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest hereon and other charges accrued.

The following is a statement of the rights of the Holder of this Debenture and the conditions to which this Debenture is subject, and to which the Holder hereof, by the acceptance of this Debenture, agrees:

1. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Debenture, the following terms shall have the following meanings:

“Actual Amount Due” means (a) the number of shares of Common Stock to be issued in payment of a Quarterly Principal Payment as determined by dividing $605,263 by the Issue Price or (b) the number of shares of Common Stock to be issued in payment of a Quarterly Interest Payment by dividing the interest then due and owing by the Issue Price.

“Alternate Consideration” shall have the meaning set forth in Section 7.1.

“Business Day” means any day except Saturday, Sunday and any day which shall be a federal legal holiday in the United States or a day on which banking institutions in the Commonwealth of Pennsylvania are authorized or required by law or other government action to close.

“Closing Date” means the date on which this Debenture is executed and delivered by the Company and the original Holder.

“Common Stock” means the common stock, par value $.001 per share, of the Company and securities into which such shares may hereafter have been reclassified.

“Conversion Date” shall have the meaning set forth in Section 4.2.

“Conversion Price” shall have the meaning set forth in Section 6.2.

“Conversion Shares” means the shares of Common Stock issuable (a) upon conversion of the outstanding principal amount of this Debenture and accrued but unpaid interest thereon in accordance with the terms hereof or (b) as payment of the outstanding principal amount of this Debenture and interest thereon in accordance with the terms hereof.

“Debenture Register” shall have the meaning set forth in Section 4.2.

“Deemed Interest Payment Shortfall” shall have the meaning set forth in Section 4.3.

“Deemed Payment Amount” shall have the meaning set forth in Section 4.3.

“Deemed Payment Amount Notice” shall have the meaning set forth in Section 4.3.

“Deemed Principal Payment Shortfall” shall have the meaning set forth in Section 4.3

“Effectiveness Period” shall have the meaning given to such term in the Registration Rights Agreement.

“Equity Conditions” shall mean, during the period in question, (i) the Company shall have duly honored all conversions scheduled to occur or occurring by virtue of one or more Notice of Conversions, if any, and made all payments of principal and interest scheduled to occur or occurring by virtue of one or more notices pursuant to Section 4.1, if any, (ii) all amounts owing in respect of the Debenture shall have been paid; (iii) there is an effective Registration Statement pursuant to which the Holder is permitted to utilize the prospectus thereunder to resell all of the shares issuable pursuant this Debenture (and the Company believes, in good faith, that such effectiveness will continue uninterrupted for the foreseeable future), (iv) the Common Stock is trading on a Trading Market and all of the shares issuable pursuant to the Transaction Documents are listed for trading on a Trading Market (and the Company believes, in good faith, that trading of the Common Stock on a Trading Market will continue uninterrupted for the foreseeable future), (v) there is a sufficient number of authorized but unissued and otherwise unreserved shares of Common Stock for the issuance of all of the shares issuable pursuant to this Debenture, (vi) there is then existing no Event of Default or event which, with the passage of time or the giving of notice, would constitute an Event of Default, (vii) all of the shares issued or issuable pursuant to the transaction proposed would not violate the limitations set forth in Section 6.3 hereof, and (viii) the Holder is not then in possession of what could be deemed material, non-public information, in the reasonable determination of the Holder.

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“Event of Default” shall have the meaning set forth in Section 8.1.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Fundamental Transaction” shall have the meaning set forth in Section 7.1.

“Issue Price” means the ten (10) day VWAP at the Closing Date.

“Maturity Date” shall have the meaning set forth in Section 2.1.

“Net Proceeds” means the proceeds from the sale of Conversion Shares net of any commissions and other reasonable costs of sale incurred by the Holder.

“Notice of Conversion” shall have the meaning set forth in Section 6.1.

“Original Issue Date” shall mean the date of the first issuance of this Debenture regardless of the number of transfers of the Debenture and regardless of the number of instruments which may be issued to evidence such Debenture.

“Person” means a corporation, an association, a partnership, organization, a business, an individual, a government or political subdivision thereof or a governmental agency.

“Quarterly Interest Payment” shall have the meaning set forth in Section 3.1.

“Quarterly Payment Date” shall have the meaning set forth in Section 2.1.

“Quarterly Principal Payment” shall have the meaning set forth in Section 2.1.

“Registration Rights Agreement” means that certain Registration Rights Agreement of even date herewith to which the Company and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.

“Registration Statement” means a registration statement meeting the requirements set forth in the Registration Rights Agreement, covering among other things the resale of the Conversion Shares and naming the Holder as a “selling stockholder” thereunder.

“SEC” means the Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

“Security Agreement” means that certain Security Agreement of even date herewith among the Holder, the Company, Valley Drug Company South and Familymeds, Inc.

“Senior Lenders” means General Electric Capital Corporation, acting as lender and agent under that certain Amended Credit Agreement, dated as of December 9, 2004, among Familymeds, Inc., Valley Drug Company South, Valley Drug Company (the “GECC Credit Agreement”) and any party providing financing to the Company and/or its subsidiaries to repay or refinance the indebtedness under the GECC Credit Agreement to the extent provided in the Subordination Agreement referenced in the forepart and Section 10 of this Debenture.

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“Subordination Agreement” has the meaning given such term in the heading hereof.

“Trading Day” means a day on which the Common Stock is traded on a Trading Market.

“Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the Nasdaq SmallCap Market, the American Stock Exchange, or the Nasdaq National Market.

“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the Common Stock is not then listed or quoted on a Trading Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by the National Quotation Bureau Incorporated (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Holders and reasonably acceptable to the Company.

2. Principal.

2.1 Quarterly Principal Payments. Principal shall be due and payable in nineteen (19) successive quarterly installments of $605,263 (each a “Quarterly Principal Payment”) commencing on March 1, 2006 and on each March 1, June 1, September 1 and December 1 thereafter (each, a “Quarterly Payment Date”) and continuing until September 1, 2010, (the “Maturity Date”), on which date all outstanding amounts shall be paid.

2.2 Payment of Principal in Cash or Common Stock. Quarterly Principal Payments shall be payable in cash or shares of Common Stock in an amount equal to $605,263 divided by the Issue Price, or a combination thereof; provided, however, payment in cash may occur only if approved in writing by GECC or any successor Senior Lenders. Payment in cash shall be made by wire transfer of immediately available funds to such accounts as may be specified by the Holder. If the Company fails to obtain the approval of GECC or any successor Senior Lenders, payment shall be in shares of Common Stock; provided, however, payment in shares of Common Stock may only occur if during the 20 Trading Days immediately prior to the applicable Quarterly Payment Date all of the Equity Conditions have been met and the Company shall have given the Holder notice in accordance with the notice requirements set forth in Section 4 hereof; provided however, in the event the principal amount due on the final Quarterly Payment Date exceeds $605,263 due to adjustments pursuant to Section 4.3 below, the amount of such excess shall be paid by the Company in cash.

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2.3 Prepayment. This Debenture may be prepaid in full or in part at any time and from time to time without premium or penalty. The amount prepaid shall be calculated in accordance with Section 4.3 hereof.

3. Interest.

3.1 Interest Rate Calculated at Quarterly Payment Date. Interest on the aggregate unconverted and then outstanding principal balance of this Debenture shall be due and payable on each Quarterly Payment Date commencing on June 1, 2005 (each a “Quarterly Interest Payment”). This Debenture shall bear interest at rate which shall adjust on each Quarterly Payment Date and which shall be deemed to be:

(a) 10% if the Quarterly Interest Payment is made in shares of Common Stock; or

(b) the Prime Rate as published in the Wall Street Journal from time to time (the “WSJ Prime Rate”) plus one percent (1.0%) per annum if the Quarterly Interest Payment is made in cash; the interest rate under this Section 2(b) shall adjust on each Quarterly Payment Date based upon the WSJ Prime Rate in effect on each such Quarterly Payment Date; provided that in no event shall the quarterly interest rate in effect hereunder be less than five percent (5.0%) per annum or greater than ten percent (10%) per annum.

3.2 Interest Rate Calculated at Other Times. For purposes of any conversion of this Debenture at the Holder’s option, the interest rate on the Conversion Date shall be deemed to be 10%. For any other purpose, interest shall be deemed to have accrued since the last Quarterly Payment Date at the interest rate applicable to the last Quarterly Interest Payment.

3.3 Payment of Interest in Cash or Common Stock. Quarterly Interest Payments due and payable on June 1, 2005, September 1, 2005 and December 1, 2005 shall be payable in shares of Common Stock. Commencing March 1, 2006, Quarterly Interest Payments shall be payable in cash or shares of Common Stock in an amount equal to the interest then due and owing divided by the Issue Price, or a combination thereof; provided, however, payment in cash may occur only if approved in writing by GECC or any successor Senior Lender. Payment in cash shall be made by wire transfer of immediately available funds to such accounts as may be specified by the Holder. If the Company fails to obtain the approval of GECC or any successor Senior Lender, payment shall be in shares of Common Stock; provided, however, payment in shares of Common Stock may only occur if during the 20 Trading Days immediately prior to the applicable Quarterly Payment Date all of the Equity Conditions have been met and the Company shall have given the Holder notice in accordance with the notice requirements set forth in Section 4 hereof. Interest shall cease to accrue with respect to any principal amount converted provided that the Company in fact delivers the Conversion Shares within the time period required by Section 6.4(b).

4. Payment of Principal and Interest in Common Stock.

4.1 Company’s Election to Pay Principal and Interest in Common Stock. Subject to the terms and conditions herein and except as otherwise provided in Section 3.3 hereof, the decision whether to pay Quarterly Principal Payments and/or Quarterly Interest Payments in shares of Common Stock or cash shall be at the discretion of the Company. Not less than 20 Trading Days prior to each Quarterly Payment Date, the Company shall provide the Holder with

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written notice of its election to pay principal and/or interest hereunder either in cash or shares of Common Stock (the Company may indicate in such notice that the election contained in such notice shall continue for later periods until revised). Within 20 Trading Days prior to a Quarterly Payment Date, the Company’s election (whether specific to a Quarterly Payment Date or continuous) shall be irrevocable as to such Quarterly Payment Date. Subject to the aforementioned conditions, failure to timely provide such written notice shall be deemed to be an election by the Company to pay the Quarterly Principal Payment and the Quarterly Interest Payment on such Quarterly Payment Date in cash.

4.2 Mechanics of Payment in Common Stock. To the extent not inconsistent with this Section 4, Section 6.4(b) shall govern the mechanics of payment of principal and interest in common stock, and only for purposes of the payment of principal and/or interest in shares, the Quarterly Payment Date shall be deemed the Conversion Date. Principal and interest hereunder will be paid to the Person in whose name this Debenture is registered on the records of the Company regarding registration and transfers of Debentures (the “Debenture Register”).

4.3 Calculation of Deemed Payment Amount. Within 130 days after each Quarterly Payment Date, the Holder shall provide written notice to the Company of the Deemed Payment Amount (as defined herein) and the adjustment, if any, to the amount of principal then outstanding (the “Deemed Payment Amount Notice”). The “Deemed Payment Amount” shall be the Net Proceeds from sale of the Conversion Shares issued to Holder in payment of the Quarterly Principal Payment and/or Quarterly Interest Payment payable on such Quarterly Payment Date; provided, however, if any portion of such Conversion Shares are not sold within three (3) months after issuance to the Holder (the “Sale Period”), then the Deemed Payment Amount with respect to any unsold Conversion Shares shall be the ten (10) day VWAP for shares of Common Stock for the last ten (10) Trading Days of the applicable Sale Period (net of the lesser of (i) five percent (5%) of such ten (10) day VWAP or (ii) the average rate per share paid during the Sale Period by the Holder in commissions and costs of sale with respect to the Conversion Shares actually sold). Through December 31, 2005, the Holder may in no event sell in any Trading Day Conversion Shares issued in payment of principal and/or interest that, in the aggregate, exceed 25% of the average trading volume of Common Stock for the preceding ten (10) Trading Days. In the event that the Deemed Payment Amount for any Quarterly Payment Date is not equal the Actual Amount Due on such Quarterly Payment Date, the Holder shall make an adjustment to the amount of principal then outstanding in the manner set forth below. In the event that the Actual Amount Due exceeds the Deemed Payment Amount on any Quarterly Payment Date, the amount of principal deemed repaid by the Company on such Quarterly Payment Date shall be limited to the Deemed Payment Amount less the amount of interest then due and owing (such event shall hereinafter referred to as a “Deemed Principal Payment Shortfall”), and no Event of Default shall exist solely as a result of such Deemed Principal Payment Shortfall. In the event that the Actual Amount Due exceeds the Deemed Payment Amount with respect to the Quarterly Interest Payments due on June 1, 2005, September 1, 2005 and December 1, 2005 (such event hereinafter referred to as a “Deemed Interest Payment Shortfall”), the amount of principal then outstanding shall be increased by such shortfall amount, and no Event of Default shall exist solely as a result of such Deemed Interest Payment Shortfall. In the event that the Deemed Payment Amount exceeds the Actual Amount Due on any Quarterly Payment Date, the amount of principal deemed repaid on such Quarterly Payment Date shall be increased by the amount of such excess. The Company shall deliver to the Holder any objection to any calculation of the Deemed Payment Amount and the adjustment, if any, to the amount of principal then outstanding within five (5) Business Days of receipt of

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such calculation. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of demonstrable error. If the calculation of the “Deemed Payment Amount” is required prior to the Company’s receipt of the Deemed Payment Amount Notice, the Deemed Payment Amount shall be calculated, subject to the above described adjustment following receipt of the Deemed Payment Amount Notice, as (x) the number of Conversion Shares issued to Holder in payment of the Quarterly Principal Payment and/or Quarterly Interest Payment payable on a Quarterly Payment Date multiplied by (y) the ten (10) day VWAP for shares of Common Stock as of such Quarterly Payment Date.

5. Registration of Transfers and Exchanges.

5.1 Different Denominations. This Debenture is exchangeable for an equal aggregate principal amount of Debentures of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be made for such registration of transfer or exchange.

5.2 Reliance on Debenture Register. Prior to due presentment to the Company for transfer of this Debenture, the Company and any agent of the Company may treat the Person in whose name this Debenture is duly registered on the Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Debenture is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

6. Conversion.

6.1 Voluntary Conversion. At any time after the Original Issue Date until this Debenture is no longer outstanding, this Debenture shall be convertible into shares of Common Stock at the option of the Holder, in whole or in part at any time and from time to time (subject to the limitations on conversion set forth in Section 6.3 hereof). The Holder shall effect conversions by delivering to the Company the form of Notice of Conversion attached hereto as Annex A (a “Notice of Conversion”), specifying therein the outstanding principal amount of this Debenture to be converted and, if applicable, any accrued but unpaid interest thereon to be converted and the date on which such conversion is to be effected (a “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is provided hereunder. To effect conversions hereunder, the Holder shall not be required to physically surrender Debentures to the Company unless the entire principal amount of this Debenture plus all accrued and unpaid interest thereon has been so converted. Except as otherwise provided in Section 4.3, conversions hereunder shall have the effect of lowering the outstanding principal amount of this Debenture in an amount equal to the applicable conversion. The Holder and the Company shall maintain records showing the principal amount converted and the date of such conversions. The Company shall deliver any objection to any Notice of Conversion within two (2) Business Days of receipt of such notice. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder and any assignee, by acceptance of this Debenture, acknowledge and agree that, by reason of the provisions of this Section 6.1, following conversion of a portion of this Debenture, the unpaid and unconverted principal amount of this Debenture may be less than the amount stated on the face hereof.

6.2 Conversion Price. The conversion price in effect on any Conversion Date shall be equal to the Issue Price (the “Conversion Price”).

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6.3 Holder’s Restriction on Conversion. The Company shall not effect a voluntary conversion of this Debenture pursuant to Section 6.1 above during any period, not to exceed one hundred twenty (120) days, when the Company has publicly announced that it is in a “quiet period” with respect to a secondary offering of its securities. In addition, the Company shall not effect any payment of principal or interest in shares of Common Stock, and the Holder shall not have the right to convert any portion of this Debenture, pursuant to Section 6.1 or otherwise, to the extent that after giving effect to such conversion, the Holder (together with the Holder’s affiliates), as set forth on the applicable Notice of Conversion, would beneficially own in excess of 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to such conversion. For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its affiliates shall include the number of shares of Common Stock issuable upon conversion of this Debenture with respect to which the determination of such sentence is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (a) conversion of the remaining, unconverted portion of this Debenture beneficially owned by the Holder or any of its affiliates and (b) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its affiliates. Except as set forth in the preceding sentence, for purposes of this Section 6.3, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. To the extent that the limitation contained in this Section 6.3 applies, the determination of whether this Debenture is convertible (in relation to other securities owned by the Holder) and of which a portion of this Debenture is convertible shall be in the sole discretion of such Holder. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this Section 6.3 and the Company shall have no obligation to verify or confirm the accuracy of such determination. For purposes of this Section 6.3, in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Company’s most recent Form 10-Q or Form 10-K, as the case may be, (y) a more recent public announcement by the Company or (z) any other notice by the Company or the Company’s Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of the Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Debenture, by the Holder or its affiliates since the date as of which such number of outstanding shares of Common Stock was reported.

6.4 Mechanics of Conversion.

(a) Conversion Shares Issuable Upon Conversion of Principal and Accrued Interest. The number of shares of Common Stock issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Debenture to be converted and, if applicable, any accrued but unpaid interest thereon to be converted by (y) the Conversion Price.

(b) Delivery of Certificate Upon Conversion. Not later than three (3) Trading Days after any Conversion Date, the Company will deliver to the Holder a certificate or certificates representing the Conversion Shares which shall be free of restrictive legends and

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trading restrictions representing the number of shares of Common Stock being acquired upon the conversion of this Debenture pursuant to Section 6.4(a) hereof. The Company shall, if available and if allowed under applicable securities laws, use its commercially reasonable efforts to deliver any certificate or certificates required to be delivered by the Company under this Section 6.4(b) electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions.

(c) Failure to Deliver Certificates. If in the case of any Notice of Conversion such certificate or certificates are not delivered to or as directed by the applicable Holder by the third Trading Day after a Conversion Date, the Holder shall be entitled by written notice to the Company at any time on or before its receipt of such certificate or certificates thereafter, to rescind such conversion, in which event the Company shall immediately return the certificates representing the principal amount of Debentures tendered for conversion; provided that if as a result of the limitations set forth in Section 6.3 hereof, such failure by the Company is for a portion of the Conversion Shares for which a Notice of Conversion has been delivered, the Holder shall be permitted to rescind solely that portion not so converted.

(d) Obligation Absolute. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Debenture in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided, however, such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. In the event a Holder of this Debenture shall elect to convert any or all of the outstanding principal amount hereof and accrued but unpaid interest thereon, the Company may not refuse conversion based on any claim that the Holder or any one associated or affiliated with the Holder of has been engaged in any violation of law, agreement or for any other reason, unless, an injunction from a court, on notice, restraining and or enjoining conversion of all or part of this Debenture shall have been sought and obtained and the Company posts a surety bond for the benefit of the Holder in the amount of 150% of the principal amount of this Debenture then outstanding, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment. In the absence of an injunction precluding the same, the Company shall issue Conversion Shares upon a properly noticed conversion. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 8 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and such Holder shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holders from seeking to enforce damages pursuant to any other Section hereof or under applicable law.

(e) Damages for Failure to Timely Deliver Certificates Upon Conversion. The Company acknowledges that the Holder may determine, in its sole discretion, to sell Conversion Shares immediately upon conversion or payment thereof and, therefore, delivery of

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such certificate or certificates pursuant to Section 6.4(b) by the third Trading Date after the Conversion Date is of the essence. The Company further acknowledges that in addition to any other rights available to the Holder, if the Company fails for any reason, other than as a result of the limitations set forth in Section 6.3 hereof, to deliver to the Holder such certificate or certificates pursuant to Section 6.4(b) by the third Trading Day after the Conversion Date, the Company shall be responsible for any damages incurred by the Holder as a result of such failure.

(f) Reservation of Shares Issuable Upon Conversion. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock solely for the purpose of issuance upon conversion of the Debenture and payment of principal and interest on the Debenture, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of persons other than the Holder, not less than such number of shares of the Common Stock as shall be issuable upon the conversion of the outstanding principal amount of this Debenture and accrued but unpaid interest thereon and payment of principal and interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly and validly authorized, issued and fully paid, nonassessable and, if the Registration Statement is then effective under the Securities Act, registered for public sale in accordance with such Registration Statement.

(g) Fractional Shares. Upon a conversion hereunder the Company shall not be required to issue stock certificates representing fractions of shares of the Common Stock, but may if otherwise permitted, make a cash payment in respect of any final fraction of a share based on the VWAP at such time. If the Company elects not, or is unable, to make such a cash payment, the Holder shall be entitled to receive, in lieu of the final fraction of a share, one whole share of Common Stock.

(h) Transfer Taxes. The issuance of certificates for shares of the Common Stock on conversion of the Debenture shall be made without charge to the Holder thereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificate, provided that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of such Debenture so converted and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid.

7. Fundamental Transaction, Notice to Holders and Subdivision or Combination of Common Stock.

7.1 Fundamental Transaction. If, at any time while this Debenture is outstanding, (a) the Company effects any merger or consolidation of the Company with or into another Person, (b) the Company effects any sale of all, or substantially all, of its assets in one or a series of related transactions, (c) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (d) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a “Fundamental Transaction”), then upon any subsequent conversion of this Debenture, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion absent such Fundamental Transaction, the same kind and

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amount of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of one share of Common Stock (the “Alternate Consideration”). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Debenture following such Fundamental Transaction. To the extent necessary to effectuate the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new debenture consistent with the foregoing provisions and evidencing the Holder’s right to convert such debenture into Alternate Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 7.1 and ensuring that this Debenture (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction.

7.2 Notice to Allow Conversion by Holder. If (a) the Company shall declare a dividend (or any other distribution) on the Common Stock; (b) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock; (c) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights; (d) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, of any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property; (e) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company; then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Debenture, and shall cause to be mailed to the Holder at its last address as it shall appear upon the stock books of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided, that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder is entitled to convert this Debenture during the 20-day period commencing the date of such notice to the effective date of the event triggering such notice.

7.3 Subdivision or Combination of Common Stock. If the Company at any time after subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding

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shares of Common Stock into a greater number of shares, or combines (by combination, reverse stock split or otherwise) one or its outstanding shares of Common Stock into a smaller number of shares, appropriate inversely proportional adjustments shall be made to the Issue Price, and appropriate adjustments shall be made in making other determinations hereunder

8. Events of Default

8.1 Events of Default Defined. The Company shall be in default under this Debenture upon the occurrence of any of the events specified in this Section 8.1 (any of the following being an “Event of Default”):

(a) Default in the payment of the principal and accrued but unpaid interest of this Debenture when due and payable and failure to cure within fifteen (15) business days of written notice; or

(b) The Common Stock shall not be eligible for quotation on or quoted for trading on a Trading Market and shall not again be eligible for and quoted or listed for trading thereon within five (5) Trading Days; or

(c) A Registration Statement shall not have been declared effective by the SEC on or before the 180^th calendar day after the Closing Date; or

(d) If, during the Effectiveness Period (as defined in the Registration Rights Agreement), the effectiveness of the Registration Statement lapses for any reason or the Holder shall not be permitted to resell Registrable Securities (as defined in the Registration Rights Agreement) under the Registration Statement, in either case, for more than 30 consecutive Trading Days or 60 non-consecutive Trading Days during any 12 month period; provided, however, that in the event that the Company is negotiating a merger, consolidation, acquisition or sale of all or substantially all of its assets or a similar transaction and in the written opinion of counsel to the Company, the Registration Statement, would be required to be amended to include information concerning such transactions or the parties thereto that is not available or may not be publicly disclosed at the time, the Company shall be permitted an additional ten (10) consecutive Trading Days during any 12 month period relating to such an event; or

(e) An Event (as defined in the Registration Rights Agreement) shall not have been cured to the satisfaction of the Holder prior to the expiration of thirty days from the Event Date (as defined in the Registration Rights Agreement) relating thereto (other than an Event resulting from a failure of an Registration Statement to be declared effective by the SEC on or prior to the Effectiveness Date (as defined in the Registration Rights Agreement), which shall be covered by Section 8(d); or

(f) The Company shall fail for any reason, other than as a result of the limitations set forth in Section 6.3 hereof, to deliver certificates to the Holder prior to the fifth (5^th) Trading Day after a Conversion Date pursuant to and in accordance with Section 6.4 or the Company shall provide notice to the Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversions of this Debenture in accordance with the terms hereof; or

(g) If the Company shall materially fail to perform any material term, covenant or agreement of this Debenture, or

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(h) Business failure or admission of inability to pay debts as they become due of, or an assignment for the benefit of creditors by or the filing of a petition under bankruptcy, insolvency or debtor’s relief law, commenced against the Company or any of its subsidiaries (each, a “Bankruptcy Event”) which is not discharged within sixty (60) business days.

8.2 Remedies Upon Event of Default. Subject to the provisions of Section 10 below and any Subordination Agreement, upon the occurrence of an Event of Default:

(a) The entire principal amount of this Debenture and all interest thereon and all other amounts accrued hereunder shall at the option of the Holder be automatically accelerated and be immediately due and payable whether in cash or by check, or, solely at the Holder’s option, in shares of Common Stock; or

(b) To the extent set forth in the Security Agreement, the Holder shall have the right to exercise the remedies as “secured party” under the Security Agreement; or

(c) The Holder shall have all of the rights and remedies provided to the Holder, at law and in equity, by statute or otherwise, and no remedy herein conferred upon the Holder is intended to be exclusive of any other remedy and each remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law, in, equity, by statute or otherwise

Upon the occurrence and during the continuance of an Event of Default, interest on the outstanding principal amount of this Debenture shall accrue and be payable at the lesser of twelve percent (12%) per annum or the highest amount permitted by law.

8.3 Registration Defaults. Upon the occurrence of and during the continuance of any of the events specified in Section 8.3(a) or (b) hereof, interest on the outstanding principal amount of this Debenture shall accrue and be payable at the lesser of eighteen (18%) or the highest amount permitted by law:

(a) A Registration Statement shall not have been filed with the SEC on or before the 45^th calendar day after the Closing Date; or

(b) A Registration Statement shall not have been declared effective by the SEC on or before the 90^th calendar day after the Closing Date or, if the SEC conducts a full or limited review of such Registration Statement, on or before the 120^th calendar day after the Closing Date.

9. Debenture Holder Not Shareholder. This Debenture does not confer upon the Holder hereof, as such, any right whatsoever as a shareholder of the Company.

10. Subordination. The payment of the principal of and interest on this Debenture is subordinated, to the extent and in the manner provided in that certain Subordination Agreement of even date herewith among the Company, Familymeds, Inc., Valley Drug Company South, Valley Drug Company, as the Companies, the Holder as Subordinated Creditor and GECC, as agent, or any future Senior Lender (as defined therein) as Senior Lenders. Notwithstanding any other provision of this Debenture to the contrary, all rights and remedies of the Holder hereunder are subject to the terms and conditions of the Subordination Agreement.

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11. Guaranty of Debenture. Concurrently herewith, Valley Drug Company South and Familymeds, Inc. each shall execute a continuing guaranty agreement relating to this Debenture, in the form attached hereto as Annex B.

12. Waiver and Amendment. Any amendment, waiver or modification of any provision of this Debenture must be executed, in writing by the party against which it is to be enforced.

13. Severability. If any provision of this Debenture is invalid, illegal or unenforceable, the balance of this Debenture shall remain in effect, and if any provision is inapplicable to any person or circumstance, it shall nevertheless remain applicable to all other persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates applicable laws governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum permitted rate of interest. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Debenture as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Debenture, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impeded the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.

14. Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.

15. Assignment. Subject to the restrictions on transfer described in Section 16 below, the rights and obligations of the Company and the Holder of this Debenture shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

16. Transfer of this Debenture. The Holder may not assign, exchange, encumber, pledge, transfer, or otherwise dispose of this Debenture without the prior written consent of the Company and without such assignee having executed an acknowledgment of the Subordination Agreement in form and substance satisfactory to the Senior Lender. The Company will not unreasonably withhold or delay consent to the assignment or transfer of this Debenture to any other direct or indirect subsidiary of AmerisourceBergen Corporation, or its successor.

17. Release. The Company hereby waives and releases:

(a) all procedural errors, defects and imperfections in any proceeding instituted by Holder under this Debenture or any related documentation;

(b) unless specifically required herein, all defects in any notices of the Company’s default or of Holder’s election to exercise, or Holder’s actual exercise of, any option under this Debenture or any related documentation.

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18. Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Debenture shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Debenture. The failure of the Company or the Holder to insist upon strict adherence to any term of this Debenture on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Debenture. Any waiver must be in writing.

19. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if telegraphed or mailed by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto may by notice so given change its address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail or telegraphed in the manner set forth above and shall be deemed to have been received when delivered.

20. Lost or Mutilated Debenture. If this Debenture shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Debenture, or in lieu of or in substitution for a lost, stolen or destroyed Debenture, a new Debenture for the principal amount of this Debenture so mutilated, lost, stolen or destroyed but only upon receipt of evidence of such loss, theft or destruction of such Debenture, and of the ownership hereof, and indemnity, if requested, all reasonably satisfactory to the Company.

21. Governing Law. This Debenture shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, excluding that body of law relating to conflict of laws.

22. Heading; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Debenture. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.

23. Costs of Enforcement. The Company agrees to pay as incurred all costs and expenses, including reasonable attorneys’ fees, incurred by the Holder in connection with the enforcement of this Debenture or the protection or preservation of any rights of the Holder hereunder, including enforcement in any voluntary or involuntary bankruptcy proceeding filed by or against the Company or any guarantor hereof.

24. Stock Direct Program. In order to facilitate the Holder’s ability to successfully sell Conversion Shares, the Holder agrees to consider in good faith selling shares through any stock direct sales program the Company may implement, or any stock broker the Company may suggest, from time to time.

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IN WITNESS WHEREOF, the Company has caused this Debenture to be issued this 21st day of March, 2005.

DRUGMAX, INC.		Witness:
By:
Printed Name:	Edgardo A. Mercadante	Printed Name:
Title:	President and CEO	Title:

Corporate Seal

EX-10.3

Exhibit 10.3

The security represented hereby has not been registered under the Securities Act of 1933, as amended (the “Act”). This security cannot be sold or otherwise transferred unless this security is registered under the Act or the Company is furnished with an acceptable opinion of counsel that an exemption from registration is available.

This Note and the indebtedness evidenced hereby are subordinated in the manner and to the extent set forth herein; and each holder of this Note, by its acceptance hereof, shall be bound by the subordination provisions hereof.

THIS INSTRUMENT OR CERTIFICATE AND THE RIGHT EVIDENCED HEREBY ARE SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION AGREEMENT, DATED MARCH 21, 2005 AMONG FAMILYMEDS, INC., DRUGMAX, INC., VALLEY DRUG COMPANY SOUTH, AND VALLEY DRUG COMPANY, AS THE COMPANIES, AMERISOURCEBERGEN DRUG CORPORATION, AS SUBORDINATED CREDITOR, AND GENERAL ELECTRIC CAPITAL CORPORATION AS AGENT AND ANY FUTURE SENIOR LENDERS, AS SENIOR LENDERS (THE “SUBORDINATION AGREEMENT”). ANY TRANSFEREE BY ACCEPTANCE OF SUCH TRANSFER AGREES TO BE BOUND BY THE TERMS THEREOF.

SUBORDINATED PROMISSORY NOTE

$11,500,000 March 21, 2005    

FAMILYMEDS, INC., a Connecticut corporation (the “Company”), the principal office of which is located at 312 Farmington Avenue, Farmington, CT 06032, for value received hereby promises to pay as set forth below to AmerisourceBergen Drug Corporation (the “Holder”), with offices at 1300 Morris Drive, Chesterbrook, PA, the sum of eleven million five hundred thousand dollars ($11,500,000.00), together with interest at the rate set forth below, and any other charges which may accrue pursuant to the terms of this Note, or such other amount as shall then equal the outstanding principal amount hereof and any unpaid accrued interest hereon and other charges accrued. Principal shall be due and payable in twenty (20) successive quarterly installments each in the amount of $575,000 beginning on December 1, 2005 and on each March 1, June 1, September 1 and December 1 thereafter (each, a “Quarterly Payment Date”) and continuing until September 1, 2010, (the “Maturity Date”), on which date all outstanding amounts shall be paid. Interest accrued on the unpaid principal balance of this Note shall be due and payable on each Quarterly Payment Date thereafter commencing on June 1, 2005. Payment for all amounts due hereunder will be by wire transfer of immediately available funds to such accounts as may be specified by the Holder.

The following is a statement of the rights of the Holder of this unsecured Subordinated Note and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees:

1. Interest. This Note shall bear interest at a variable rate equal to the Prime Rate as published in the Wall Street Journal from time to time (the “WSJ Prime Rate”) plus two percent (2.0%) per annum. The interest rate in effect hereunder shall adjust on each Quarterly Payment Date based upon the WSJ Prime Rate in effect on each such Quarterly Payment Date; provided that in no event shall the interest rate in effect hereunder be less than five percent (5.0%) per annum or greater than ten percent (10%) per annum.

2. Events of Default

2.1 Events of Default Defined. The Company shall be in default under this Note upon the occurrence of any of the events specified in Section 2.1(a), (b) or (c) hereof (any of the foregoing being an “Event of Default”):

(a) Default in the payment of the principal and unpaid accrued interest of this Note when due and payable and failure to cure within fifteen (15) business days of written notice; or

(b) Admission of the Company’s inability to pay its debts as they become due of, or an assignment for the benefit of creditors of the Company by or the filing of a petition under bankruptcy, insolvency or debtor’s relief law, commenced against the Company or any of its subsidiaries (each, a “Bankruptcy Event”) which is not discharged within sixty (60) business days.

2.2 Remedies Upon Event of Default. Subject to the provisions of Section 5 below and to the terms and conditions of the Subordination Agreement, upon the occurrence and during the continuance of an Event of Default:

(a) the entire amount of the Note and all interest thereon and all other amounts accrued hereunder shall at the option of the Holder be automatically accelerated and be immediately due and payable whether in cash or by check;

(b) the Holder shall be entitled to exercise the remedies as “secured party” under that certain security Agreement of even date herewith between Holder, the Company, Valley Drug Company South, Valley Drug Company and DrugMax, Inc.; and

(c) the Holder shall have all of the rights and remedies provided to the Holder, at law and in equity, by statute or otherwise.

No remedy herein conferred upon the Holder is intended to be exclusive of any other remedy and each remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law, in, equity, by statute or otherwise.

Upon the occurrence and during the continuance of an event of default, interest on the principal amount of this Note shall accrue and be payable at the lesser of twelve percent (12%) per annum or the highest amount permitted by law.

3. Note Holder Not Shareholder. This Note does not confer upon the Holder hereof, as such, any right whatsoever as a shareholder of the Company.

4. Prepayment. Subject to the terms and conditions of the Subordination Agreement, this Note may be prepaid in full or in part at any time and from time to time without premium or penalty.

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5. Subordination

The payment of the principal of and interest on this Note is subordinated, to the extent and in the manner provided in that certain Subordination Agreement of even date herewith among the Company, Familymeds, Inc., Valley Drug Company South and Valley Drug Company, as the Companies, the Holder, as Subordinated Creditor and General Electric Capital Corporation, as agent, or any future Senior Lender (as defined therein) as Senior Lenders. Notwithstanding any other provision of this Note to the contrary, all rights and remedies of the Holder hereunder are subject to the terms and conditions of the Subordination Agreement.

6. Assignment. Subject to the restrictions on transfer described in Section 8 below, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

7. Waiver and Amendment. Any amendment, waiver or modification of any provision of this Note must be executed, in writing by the party against which it is to be enforced.

8. Transfer of this Note. The Holder may not assign, exchange, encumber, pledge, transfer, or otherwise dispose of this Note without the prior written consent of the Company and without such assignee having executed an acknowledgment of the Subordination Agreement in form and substance satisfactory to GECC. The Company will not unreasonably withhold or delay consent to the assignment or transfer of this Note to any other direct or indirect subsidiary of AmerisourceBergen Corporation, or its successor.

9. Release. The Company hereby waives and releases:

(a) all procedural errors, defects and imperfections in any proceeding instituted by Holder under this Note or any related documentation;

(b) unless specifically required herein, all defects in any notices of the Company’s default or of Holder’s election to exercise, or Holder’s actual exercise of, any option under this Note or any related documentation.

10. Waiver of Presentment. The Company and all endorsers, sureties and guarantors jointly and severally waive presentment for payment, demand, notice of demand, notice of nonpayment or dishonor, protest and notice of protest of this Note, and all other notices in connection with the delivery, acceptance, performance, default, or enforcement of the payment of this Note, and they agree that the liability of each of them shall be unconditional, without regard to the liability of any other party, and shall not be affected in any manner by any indulgence, extension of time, renewal, waiver or modification granted or consented to by Holder. The Company and all endorsers, sureties, and guarantors consent to any and all extensions of time, renewals, waivers, or modifications that may be granted by Payee with respect to the payment or other provisions of this Note, and agree that additional makers, endorsers, guarantors, or sureties may become parties to it without notice to them or affecting their liability under this Note.

11. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or if telegraphed or mailed by registered or certified mail, postage prepaid, at the respective addresses of the parties as set forth herein. Any party hereto may by notice so given change its

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address for future notice hereunder. Notice shall conclusively be deemed to have been given when personally delivered or when deposited in the mail or telegraphed in the manner set forth above and shall be deemed to have been received when delivered.

12. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, excluding that body of law relating to conflict of laws.

13. Heading; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.

14. Costs of Enforcement. The Company agrees to pay as incurred all costs and expenses, including reasonable attorneys’ fees, incurred by the Holder in connection with the enforcement of this Note or the protection or preservation of any rights of the Holder hereunder, including enforcement in any voluntary or involuntary bankruptcy proceeding filed by or against the Company or any guarantor hereof.

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IN WITNESS WHEREOF, the Company has caused this Note to be issued this 21st day of March, 2005.

FAMILYMEDS, INC.		Witness:
By:
Printed Name:	Edgardo A. Mercadante	Printed Name:
Title:	President and CEO	Title:

Corporate Seal

EX-10.4

Exhibit 10.4

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this “Agreement”) is made and entered into as of March 21, 2005, among DrugMax, Inc., a Nevada corporation (the “Company”), and AmerisourceBergen Drug Corporation, a Delaware corporation (“Purchaser”).

The Company and the Purchaser hereby agree as follows:

1. Definitions

Capitalized terms used and not otherwise defined herein that are defined in the Convertible Debenture shall have the meanings given such terms in the Convertible Debenture. As used in this Agreement, the following terms shall have the following meanings:

“Advice” shall have the meaning set forth in Section 6(d).

“Convertible Debenture” means the Subordinated Unsecured Convertible Debenture in the original principal amount of $11,500,000 issued by the Company to Purchaser.

“Effectiveness Date” means, with respect to the initial Registration Statement required to be filed hereunder, the 90^th calendar day following the date hereof (120th calendar day in the event of a “full review” by the Commission) and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 90^th calendar day following the date on which the Company first knows, or reasonably should have known, that such additional Registration Statement is required hereunder; provided, however, in the event the Company is notified by the Commission that one of the above Registration Statements will not be reviewed or is no longer subject to further review and comments, the Effectiveness Date as to such Registration Statement shall be the fifth Trading Day following the date on which the Company is so notified if such date precedes the dates required above.

“Effectiveness Period” shall have the meaning set forth in Section 2(a).

“Event” shall have the meaning set forth in Section 2(b).

“Event Date” shall have the meaning set forth in Section 2(b).

“Filing Date” means, with respect to the initial Registration Statement required hereunder, the 45^th calendar day following the earlier of the date the Company files its current Form 10-k or April 15, 2005 and, with respect to any additional Registration Statements which may be required pursuant to Section 3(c), the 15^th day following the date on which the Company first knows, or reasonably should have known that such additional Registration Statement is required hereunder.

“Holder” or “Holders” means the holder or holders, as the case may be, from time to time of Registrable Securities.

“Indemnified Party” shall have the meaning set forth in Section 5(c) hereof.

“Indemnifying Party” shall have the meaning set forth in Section 5(c) hereof.

“Losses” shall have the meaning set forth in Section 5(a).

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by a Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

“Registrable Securities” means, as of the date in question, (i) all of the shares of Common Stock issuable upon conversion in full by Purchaser of the shares of the Convertible Debenture, (ii) all shares issuable as interest or principal repayment on the Convertible Debenture assuming all permissible interest and principal payments are made in shares of Common Stock and the Convertible Debenture is held until maturity, (iii) any securities issued or issuable upon any stock split, dividend or other distribution recapitalization or similar event with respect to the foregoing and (iv) any additional shares issuable in connection with any anti-dilution provisions associated with the Convertible Debenture.

“Registration Statement” means the registration statements required to be filed hereunder and any additional registration statements contemplated by Section 3(c), including (in each case) the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in such registration statement.

“Rule 415” means Rule 415 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

“Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or

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regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.

2. Shelf Registration

(a) On or prior to each Filing Date, the Company shall prepare and file with the Commission a “Shelf” Registration Statement covering the resale of 100% of the Registrable Securities on such Filing Date for an offering to be made on a continuous basis pursuant to Rule 415. The Registration Statement shall be on Form S-3 (except if the Company is not then eligible to register for resale the Registrable Securities on Form S-3, in which case such registration shall be on another appropriate form in accordance herewith) and shall contain (unless otherwise directed by the Holders) substantially the “Plan of Distribution” attached hereto as Annex A. Subject to the terms of this Agreement, the Company shall use its best efforts to cause the Registration Statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event prior to the applicable Effectiveness Date, and shall use its best efforts to keep such Registration Statement continuously effective under the Securities Act until all Registrable Securities covered by such Registration Statement have been sold or may be sold without volume restrictions pursuant to Rule 144(k) as determined by the counsel to the Company pursuant to a written opinion letter to such effect, addressed and acceptable to the Company’s transfer agent and the affected Holders (the “Effectiveness Period”). The Company shall immediately notify the Holders via facsimile or email of the effectiveness of the Registration Statement on the same day that the Company receives notification of the effectiveness from the Commission. Failure to so notify the Holder within 1 Trading Day of such notification shall be deemed an Event under Section 2(b).

(b) If: (i) a Registration Statement is not filed on or prior to its Filing Date (if the Company files a Registration Statement without affording the Holders the opportunity to review and comment on the same as required by Section 3(a), the Company shall not be deemed to have satisfied this clause (i)), or (ii) the Company fails to file with the Commission a request for acceleration in accordance with Rule 461 promulgated under the Securities Act, within five Trading Days of the date that the Company is notified (orally or in writing, whichever is earlier) by the Commission that a Registration Statement will not be “reviewed,” or not subject to further review, or (iii) prior to its Effectiveness Date, the Company fails to file a pre-effective amendment and otherwise respond in writing to comments made by the Commission in respect of such Registration Statement within 10 calendar days after the receipt of comments by or notice from the Commission that such amendment is required in order for a Registration Statement to be declared effective, or (iv) a Registration Statement filed or required to be filed hereunder is not declared effective by the Commission by its Effectiveness Date, or (v) after the Effectiveness Date, a Registration Statement ceases for any reason to remain continuously effective as to all Registrable Securities for which it is required to be effective, or the Holders are not permitted to utilize the Prospectus therein to resell such Registrable Securities for 30 consecutive calendar days but no more than an aggregate of 45 calendar days during any 12-month period (which need not be consecutive Trading Days) provided, however, that in the event that the Company is negotiating a merger, consolidation, acquisition or sale of all or substantially all of its assets or a similar transaction and in the written opinion of counsel to the Company, the Registration Statement, would be required to be amended to include information concerning such

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transactions or the parties thereto that is not available or may not be publicly disclosed at the time, the Company shall be permitted an additional ten (10) consecutive Trading Days during any 12 month period relating to such an event (any such failure or breach being referred to as an “Event,” and for purposes of clause (i) or (iv) the date on which such Event occurs, or for purposes of clause (ii) the date on which such five Trading Day period is exceeded, or for purposes of clause (iii) the date which such 30 calendar day period is exceeded, or for purposes of clause (v) the date on which such 30 or 45 calendar day period, as applicable, is exceeded being referred to as “Event Date”), then in addition to any other rights the Holders may have hereunder or under applicable law, interest under the Convertible Debenture shall accrue at the rate of 18% per annum.

3. Registration Procedures

In connection with the Company’s registration obligations hereunder, the Company shall:

(a) Not less than five Trading Days prior to the filing of each Registration Statement or any related Prospectus or any amendment or supplement thereto (including any document that would be incorporated or deemed to be incorporated therein by reference), the Company shall, (i) furnish to each Holder copies of all such documents proposed to be filed, which documents (other than those incorporated or deemed to be incorporated by reference) will be subject to the review of such Holders, and (ii) cause its officers and directors, counsel and independent certified public accountants to respond to such inquiries as shall be necessary, in the reasonable opinion of respective counsel to conduct a reasonable investigation within the meaning of the Securities Act. The Company shall not file the Registration Statement or any such Prospectus or any amendments or supplements thereto to which the Holders of a majority of the Registrable Securities shall reasonably object in good faith, provided that, the Company is notified of such objection, including the substance of such objection, in writing no later than 5 Trading Days after the Holders have been so furnished copies of such documents. Each Holder agrees to furnish to the Company a completed Questionnaire in the form attached to this Agreement as Annex B (a “Selling Holder Questionnaire”) not less than two Trading Days prior to the Filing Date or by the end of the fourth Trading Day following the date on which such Holder receives draft materials in accordance with this Section.

(b) (i) Prepare and file with the Commission such amendments, including post-effective amendments, to a Registration Statement and the Prospectus used in connection therewith as may be necessary to keep a Registration Statement continuously effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and file with the Commission such additional Registration Statements in order to register for resale under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be amended or supplemented by any required Prospectus supplement (subject to the terms of this Agreement), and as so supplemented or amended to be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible to any comments received from the Commission with respect to a Registration Statement or any amendment thereto and as promptly as reasonably possible provide the Holders true and complete copies of all correspondence from and to the Commission relating to a Registration Statement; and (iv) comply in all material respects with the provisions

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of the Securities Act and the Exchange Act with respect to the disposition of all Registrable Securities covered by a Registration Statement during the applicable period in accordance (subject to the terms of this Agreement) with the intended methods of disposition by the Holders thereof set forth in such Registration Statement as so amended or in such Prospectus as so supplemented.

(c) Intentionally Omitted.

(d) Notify the Holders of Registrable Securities to be sold (which notice shall, pursuant to clauses (ii) through (vi) hereof, be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made) as promptly as reasonably possible (and, in the case of (i)(A) below, not less than five Trading Days prior to such filing) and (if requested by any such Person) confirm such notice in writing no later than one Trading Day following the day (i)(A) when a Prospectus or any Prospectus supplement or post-effective amendment to a Registration Statement is proposed to be filed; (B) when the Commission notifies the Company whether there will be a “review” of such Registration Statement and whenever the Commission comments in writing on such Registration Statement (the Company shall provide true and complete copies thereof and all written responses thereto to each of the Holders); and (C) with respect to a Registration Statement or any post-effective amendment, when the same has become effective; (ii) of any request by the Commission or any other Federal or state governmental authority for amendments or supplements to a Registration Statement or Prospectus or for additional information; (iii) of the issuance by the Commission or any other federal or state governmental authority of any stop order suspending the effectiveness of a Registration Statement covering any or all of the Registrable Securities or the initiation of any Proceedings for that purpose; (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities for sale in any jurisdiction, or the initiation or threatening of any Proceeding for such purpose; (v) of the occurrence of any event or passage of time that makes the financial statements included in a Registration Statement ineligible for inclusion therein or any statement made in a Registration Statement or Prospectus or any document incorporated or deemed to be incorporated therein by reference untrue in any material respect or that requires any revisions to a Registration Statement, Prospectus or other documents so that, in the case of a Registration Statement or the Prospectus, as the case may be, it will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and (vi) the occurrence or existence of any pending corporate development with respect to the Company that the Company believes may be material and that, in the determination of the Company, makes it not in the best interest of the Company to allow continued availability of the Registration Statement or Prospectus; provided that any and all of such information shall remain confidential to each Holder until such information otherwise becomes public, unless disclosure by a Holder is required by law; provided, further, notwithstanding each Holder’s agreement to keep such information confidential, the Holders make no acknowledgement that any such information is material, non-public information.

(e) Use its best efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of a Registration Statement, or (ii) any

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suspension of the qualification (or exemption from qualification) of any of the Registrable Securities for sale in any jurisdiction, at the earliest practicable moment.

(f) Furnish to each Holder, without charge, at least one conformed copy of each such Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference to the extent requested by such Person, and all exhibits to the extent requested by such Person (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the Commission.

(g) Promptly deliver to each Holder, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Persons may reasonably request in connection with resales by the Holder of Registrable Securities. Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each of the selling Holders in connection with the offering and sale of the Registrable Securities covered by such Prospectus and any amendment or supplement thereto, except after the giving on any notice pursuant to Section 3(d).

(h) Prior to any resale of Registrable Securities by a Holder, use its commercially reasonable efforts to register or qualify or cooperate with the selling Holders in connection with the registration or qualification (or exemption from the Registration or qualification) of such Registrable Securities for the resale by the Holder under the securities or Blue Sky laws of such jurisdictions within the United States as any Holder reasonably requests in writing, to keep each registration or qualification (or exemption therefrom) effective during the Effectiveness Period and to do any and all other acts or things reasonably necessary to enable the disposition in such jurisdictions of the Registrable Securities covered by each Registration Statement; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction.

(i) If requested by the Holders, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be delivered to a transferee pursuant to a Registration Statement, which certificates shall be free of all restrictive legends, subject, however, to any applicable terms of the Convertible Debenture, and to enable such Registrable Securities to be in such denominations and registered in such names as any such Holders may request.

(j) Upon the occurrence of any event contemplated by this Section 3, as promptly as reasonably possible under the circumstances taking into account the Company’s good faith assessment of any adverse consequences to the Company and its stockholders of the premature disclosure of such event, prepare a supplement or amendment, including a post-effective amendment, to a Registration Statement or a supplement to the related Prospectus or any document incorporated or deemed to be incorporated therein by reference, and file any other required document so that, as thereafter delivered, neither a Registration Statement nor such

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Prospectus will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Company notifies the Holders in accordance with clauses (ii) through (v) of Section 3(d) above to suspend the use of any Prospectus until the requisite changes to such Prospectus have been made, then the Holders shall suspend use of such Prospectus. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as is practicable. The Company shall be entitled to exercise its right under this Section 3(j) to suspend the availability of a Registration Statement and Prospectus, subject to the payment of partial liquidated damages pursuant to Section 2(b), for a period not to exceed 60 days (which need not be consecutive days) in any 12 month period.

(k) Comply with all applicable rules and regulations of the Commission.

(l) The Company may require each selling Holder to furnish to the Company a certified statement as to the number of shares of Common Stock beneficially owned by such Holder and, if required by the Commission, the person thereof that has voting and dispositive control over the Shares. During any periods that the Company is unable to meet its obligations hereunder with respect to the registration of the Registrable Securities solely because any Holder fails to furnish such information within three Trading Days of the Company’s request, any liquidated damages that are accruing at such time as to such Holder only shall be tolled and any Event that may otherwise occur solely because of such delay shall be suspended as to such Holder only, until such information is delivered to the Company.

4 Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities are sold pursuant to the Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the Trading Market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions of the Registrable Securities and determination of the eligibility of the Registrable Securities for investment under the laws of such jurisdictions as requested by the Holders), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities included in a Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the fees and expenses incurred in connection with the listing of the Registrable Securities on any securities exchange as required hereunder. In no event shall the

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Company be responsible for any broker or similar commissions or, except to the extent provided for in the Transaction Documents, any legal fees or other costs of the Holders.

5. Indemnification

(a) Indemnification by the Company. The Company shall, notwithstanding any termination of this Agreement, indemnify and hold harmless each Holder, the officers, directors, agents, brokers (including brokers who offer and sell Registrable Securities as principal as a result of a pledge or any failure to perform under a margin call of Common Stock), investment advisors and employees of each of them, each Person who controls any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in a Registration Statement, such Prospectus or such form of Prospectus or in any amendment or supplement thereto (it being understood that the Holder has approved Annex A hereto for this purpose) or (ii) in the case of an occurrence of an event of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). The Company shall notify the Holders promptly of the institution, threat or assertion of any Proceeding arising from or in connection with the transactions contemplated by this Agreement of which the Company is aware.

(b) Indemnification by Holders. Each Holder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: (x) such Holder’s failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue or alleged untrue statement of a material fact contained in any Registration Statement, any Prospectus, or any form of prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading (i) to the extent, but only to the extent, that such untrue statement or omission is

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contained in any information so furnished in writing by such Holder to the Company specifically for inclusion in such Registration Statement or such Prospectus or (ii) to the extent that (1) such untrue statements or omissions are based solely upon information regarding such Holder furnished in writing to the Company by such Holder expressly for use therein, or to the extent that such information relates to such Holder or such Holder’s proposed method of distribution of Registrable Securities and was reviewed and expressly approved in writing by such Holder expressly for use in the Registration Statement (it being understood that the Holder has approved Annex A hereto for this purpose), such Prospectus or such form of Prospectus or in any amendment or supplement thereto or (2) in the case of an occurrence of an event of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an outdated or defective Prospectus after the Company has notified such Holder in writing that the Prospectus is outdated or defective and prior to the receipt by such Holder of the Advice contemplated in Section 6(d). In no event shall the liability of any selling Holder hereunder be greater in amount than the dollar amount of the net proceeds received by such Holder upon the sale of the Registrable Securities giving rise to such indemnification obligation.

(c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have prejudiced the Indemnifying Party.

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of one separate counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement

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includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such Proceeding.

Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten Trading Days of written notice thereof to the Indemnifying Party; provided, that the Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is not entitled to indemnification hereunder, determined based upon the relative faults of the parties.

(d) Contribution. If a claim for indemnification under Section 5(a) or 5(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section was available to such party in accordance with its terms.

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 5(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 5(d), no Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the proceeds actually received by such Holder from the sale of the Registrable Securities subject to the Proceeding exceeds the amount of any damages that such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission, except in the case of fraud by such Holder.

The indemnity and contribution agreements contained in this Section are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

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6. Miscellaneous

(a) Remedies. In the event of a breach by the Company or by a Holder, of any of their obligations under this Agreement, each Holder or the Company, as the case may be, in addition to being entitled to exercise all rights granted by law and under this Agreement, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and each Holder agree that monetary damages would not provide adequate compensation for any losses incurred by reason of a breach by it of any of the provisions of this Agreement and hereby further agrees that, in the event of any action for specific performance in respect of such breach, it shall waive the defense that a remedy at law would be adequate.

(b) No Piggyback on Registrations. Except as set forth on Schedule 6(b) attached hereto, neither the Company nor any of its security holders (other than the Holders in such capacity pursuant hereto) may include securities of the Company in the Registration Statement other than the Registrable Securities. The Company shall not file any other registration statements until the initial Registration Statement required hereunder is declared effective by the Commission, provided that this Section 6(b) shall not prohibit the Company from (i) filing amendments to registration statements already filed and (ii) fulfilling existing registration obligations to stockholders, warrant holders and option holders existing as of the date of, or granted in connection with, the merger of Familymeds Group, Inc. into DrugMax, Inc.

(c) Compliance. Each Holder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities pursuant to the Registration Statement.

(d) Discontinued Disposition. Each Holder agrees by its acquisition of such Registrable Securities that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 3(d), such Holder will forthwith discontinue disposition of such Registrable Securities under a Registration Statement until such Holder’s receipt of the copies of the supplemented Prospectus and/or amended Registration Statement, or until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus may be resumed, and, in either case, has received copies of any additional or supplemental filings that are incorporated or deemed to be incorporated by reference in such Prospectus or Registration Statement. The Company will use its best efforts to ensure that the use of the Prospectus may be resumed as promptly as it practicable. The Company agrees and acknowledges that any periods during which the Holder is required to discontinue the disposition of the Registrable Securities hereunder shall be subject to the provisions of Section 2(b).

(e) Piggy-Back Registrations. If at any time during the Effectiveness Period there is not an effective Registration Statement covering all of the Registrable Securities and the Company shall determine to prepare and file with the Commission a registration statement relating to an offering for its own account or the account of others under the Securities Act of any of its equity securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or their then equivalents relating to equity securities to be issued solely in connection with any acquisition of any entity or business or equity securities issuable in

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connection with the stock option or other employee benefit plans, then the Company shall send to each Holder a written notice of such determination and, if within fifteen days after the date of such notice, any such Holder shall so request in writing, the Company shall include in such registration statement all or any part of such Registrable Securities such holder requests to be registered; provided, that, the Company shall not be required to register any Registrable Securities pursuant to this Section 6(e) that are eligible for resale pursuant to Rule 144(k) promulgated under the Securities Act or that are the subject of a then effective Registration Statement.

(f) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and each Holder of the then outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to depart from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders and that does not directly or indirectly affect the rights of other Holders may be given by Holders of all of the Registrable Securities to which such waiver or consent relates; provided, however, that the provisions of this sentence may not be amended, modified, or supplemented except in accordance with the provisions of the immediately preceding sentence.

(g) Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be delivered to the Company as set forth in the Convertible Debenture.

(h) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of each of the parties and shall inure to the benefit of each Holder. The Company may not assign its rights or obligations hereunder without the prior written consent of all of the Holders of the then-outstanding Registrable Securities. Each Holder may assign its respective rights hereunder to its affiliates and any permitted assignee under the Convertible Debenture.

(i) No Inconsistent Agreements. Neither the Company nor any of its subsidiaries has entered, as of the date hereof, nor shall the Company or any of its subsidiaries, on or after the date of this Agreement, enter into any agreement with respect to its securities, that would have the effect of impairing the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. Except as set forth on Schedule 6(i), neither the Company nor any of its subsidiaries has previously entered into any agreement granting any registration rights with respect to any of its securities to any Person that have not been satisfied in full.

(j) Execution and Counterparts. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

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(k) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be determined with the provisions of the Convertible Debenture.

(l) Cumulative Remedies. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

(m) Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

(n) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

(o) Independent Nature of Holders’ Obligations and Rights. The obligations of each Holder hereunder are several and not joint with the obligations of any other Holder hereunder, and no Holder shall be responsible in any way for the performance of the obligations of any other Holder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Holder pursuant hereto or thereto, shall be deemed to constitute the Holders as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Holders are in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Holder shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Holder to be joined as an additional party in any proceeding for such purpose.

7. Limitations on the Sale of Registrable Securities. Notwithstanding anything in this Agreement, the Holders shall not

(a) on or before December 31, 2005, sell on any Trading Day a number of Registrable Securities in excess of 25% of the volume of Common Stock traded in the previous ten (10) Trading Days as reported by the applicable Trading Market;

(b) in any calendar quarter, sell a number of Registrable Securities in excess of 2% of the outstanding shares of Common Stock at the beginning of such calendar quarter.

********************

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IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.

DRUGMAX, INC.
By:	/s/
Name:
Title:

[SIGNATURE PAGE OF HOLDERS FOLLOWS]

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PURCHASER’S SIGNATURE PAGE TO DRUGMAX, INC.

REGISTRATION RIGHTS AGREEMENT

Name of Investing Entity: AmerisourceBergen Drug Corporation
Signature of Authorized Signatory of Investing Entity:	/s/
Name of Authorized Signatory:
Title of Authorized Signatory:	CEO

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EX-10.5

Exhibit 10.5

SUBORDINATION AGREEMENT

THIS AGREEMENT, dated as of March 21, 2005, is made and entered into by and among DRUGMAX, INC., a Nevada corporation (“DrugMax”), VALLEY DRUG COMPANY, an Ohio corporation (“Valley”); VALLEY DRUG COMPANY SOUTH, a Louisiana corporation (“Valley South”), FAMILYMEDS, INC., a Connecticut corporation (“Familymeds”; DrugMax, Valley, Valley South and Familymeds each a “Company” and, collectively, the “Companies”), GENERAL ELECTRIC CAPITAL CORPORATION, a Delaware corporation (“GECC”), as Agent (the “Agent”) for the Lenders referenced below, and AMERISOURCEBERGEN DRUG CORPORATION, a Delaware (the “Subordinated Creditor”).

In consideration of the loans or other extensions of credit made and to be made to Familymeds and the other Borrowers under the Credit Agreement (as defined below), as well as for other good and valuable consideration, the parties do hereby agree as follows:

1. Definitions. When used herein, the following terms shall have the following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa):

“Bankruptcy Code” shall mean 11 U.S.C. §§ 101-1330 and any amendment, supplement or successor of such provision.

“Borrower” means each Borrower under and as defined in the Credit Agreement.

“Collateral” has the meaning assigned to such term in Section 8 hereof.

“Company” and “Companies” shall have the meanings assigned to such terms in the preamble to this Agreement, and shall include each of their successors and assigns.

“Credit Agreement” means the Second Amended and Restated Credit Agreement, dated as of December 9, 2004, among Familymeds, the other Borrowers signatory thereto, the other Credit Parties signatory thereto, the Lenders signatory thereto and Agent, as the same may be amended, modified, supplemented or replaced with a new credit facility from time to time, including, without limitation, amendments, modifications, supplements, restatements and replacements thereof giving effect to increases, renewals, extensions, refundings, deferrals, restructurings, replacements or refinancings of, or additions to, the credit arrangements originally provided in such Second Amended and Restated Credit Agreement, whether or not GECC or any other Lenders originally party to such Second Amended and Restated Credit Agreement continue to be agent or lenders under any such replacement credit facility.

“Default” shall have the meaning assigned to such term in the Credit Agreement.

“Guaranty” shall mean that certain Guaranty, dated as of March 21, 2005, executed by Valley South and Familymeds in favor of the Subordinated Creditor with respect to the Subordinated Debt.

“Loan Documents” shall have the meaning assigned to such term in the Credit Agreement.

“Lenders” shall mean the Lenders from time to time party to the Credit Agreement, any other holder of the Senior Debt and their respective successors and assigns.

“Notes” means each of (a) that certain Subordinated Unsecured Convertible Debenture, dated as of March 21, 2005, in the amount of $11,500,000 issued by DrugMax in favor of the Subordinated Creditor (the “Subordinated Debenture”), and (b) that certain Subordinated Promissory Note, dated as of March 21, 2005, in the amount of $11,500,000 issued by DrugMax in favor of the Subordinated Creditor (the “Subordinated Note”), as each may be amended or modified from time to time in accordance with the express provisions of this Agreement.

“Payment in full” or “Paid in full” shall mean, with respect to the Senior Debt, the indefeasible payment in full in cash or cash equivalents of 100% of the principal, interest, fees, expenses and other amounts due or to become due to the Agent and Lenders under the Credit Agreement and the other Loan Documents in the manner provided under the terms of such documents or in such other manner to which the Agent and Lenders shall have consented in writing; provided, however, that any payment in full of the Senior Debt in connection with a refinancing or replacement of the Senior Debt with new senior financing of any Company shall not constitute “payment in full” hereunder.

“Senior Debt” shall mean any and all indebtedness, obligations or liabilities that now or hereafter may be owing by any Company or any Subsidiary of any Company to the Agent and Lenders under the Credit Agreement or any of the other Loan Documents, whether for principal, interest, fees or other amounts, and whether such indebtedness, obligations or liabilities are from time to time reduced and thereafter increased or entirely extinguished and thereafter reincurred, and whether such indebtedness, obligations or liabilities are absolute, joint or several, or due or to become due, as well as all indebtedness, obligations or liabilities of the Companies to the Agent and Lenders now or hereafter existing under this Agreement, and any extension, renewal, refinancing, modification or replacement of or for any of the foregoing, and including without limitation any interest which, but for the filing by or against any Company or any affiliate thereof, of a petition in bankruptcy, would accrue on any of the foregoing indebtedness, obligations or liabilities as well as any other indebtedness, obligations or liabilities of any Company or any Subsidiary of any Company to the Agent and Lenders which may be incurred in any bankruptcy proceeding of any Company whether or not recoverable by the Agent or Lenders from any Company or any affiliate thereof or

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its estate under 11 U.S.C. § 506. “Senior Debt” shall also include any indebtedness owing by any Company to a new Senior Lender and incurred in connection with the payment in full or re-financing in full of the indebtedness under the Credit Agreement and the other Loan Documents.

“Senior Lender” means the Agent on behalf of itself and the other Lenders under the Credit Agreement or any other replacement senior lender who refinances or extends Senior Debt to the Companies.

“Subordinated Creditor” shall have the meaning assigned to such term in the preamble to this Agreement, and shall include each of its successors and assigns.

“Subordinated Debenture” has the meaning given such term in the definition of “Notes.”

“Subordinated Debt” shall mean and include any and all indebtedness, liabilities or obligations of any Company to the Subordinated Creditor arising under or in connection with the Notes, the Guaranty or any other Subordinated Debt Document, whether for principal, interest, fees or other amounts, and whether such indebtedness, obligations or liabilities are from time to time reduced and thereafter increased or entirely extinguished and thereafter reincurred, and whether such indebtedness, obligations or liabilities are absolute, joint or several, or due or to become due, and any extension, renewal, refinancing, modification or replacement related to the foregoing in whole or in part.

“Subordinated Debt Documents” shall mean the Notes, the Guaranty, the Subordinated Security Agreement and any other agreement or document evidencing or relating to the Subordinated Debt.

“Subordinated Note” has the meaning given such term in the definition of “Notes.”

“Subordinated Security Agreement” means that certain Security Agreement among Subordinated Creditor and the Companies dated March 21, 2005, as in effect on the date hereof.

“Subsidiary” means any person of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by DrugMax, Inc., a Nevada corporation.

“Termination Date” shall mean the date ninety-one (91) days following the date on which (i) all Senior Debt has been paid in full, and (ii) the Lenders are under any obligation to make any further loans or extend any further credit to or for the benefit of any Company pursuant to the Credit Agreement or any other Loan Document.

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2. Payment Subordination Provisions.

a. No Payments. From and after the date of this Agreement and thereafter until the Termination Date, and unless the Agent expressly consents in writing to the contrary, no payment on the Subordinated Debt (including without limitation any payment by any Company under the Guaranty) shall be made or given by or on behalf of any Company, any Subsidiary or any affiliate thereof and no payment on account thereof shall be received, accepted or retained by the Subordinated Creditor, nor shall the Subordinated Creditor accelerate, make any demand for, or attempt to receive, collect or retain the same from any Company, whether by collection, set-off, foreclosure, counterclaim or otherwise. Notwithstanding the foregoing, so long as no Default or Event of Default under the Credit Agreement or any other Loan Document shall occur and be continuing at the time of or after giving effect to a payment, payments of principle and interest in either cash or common stock of DrugMax pursuant to the preamble and Section 1 of the Subordinated Note and pursuant to Sections 2.1 and 3.1 of the Subordinated Debenture may be made by DrugMax or Familymeds, as applicable, and may be received and retained by the Subordinated Creditor; provided, however, that DrugMax may make, and the Subordinated Creditor may receive, payments of principle and interest in common stock of DrugMax notwithstanding the existence of a Default or Event of Default under the Credit Agreement. In addition, Subordinated Creditor may at any time after giving prior written notice to Agent make demand for and collect or attempt to collect through the exercise of its remedies as an unsecured creditor any amounts permitted to be paid in accordance with the immediately preceding sentence, or which were so permitted to be paid when accrued; provided, however, that the Subordinated Creditor shall not exercise any rights or remedies with respect to any Collateral or take possession of, sell or otherwise realize (judicially or non judicially) upon any of the Collateral (including, without limitation, through the notification of account debtors or any right with respect to any deposit account) or institute any action or proceeding with respect to such rights or remedies (including any action of foreclosure) or take any action to enforce a judgment lien obtained by the Subordinated Creditor on the assets of DrugMax or any Subsidiary.

b. Turnover of Payments. Should any payment or prepayment be received by the Subordinated Creditor in violation of this Agreement, the Subordinated Creditor forthwith shall deliver the same to the Agent in precisely the form received (but with the endorsement of the Subordinated Creditor where necessary for the collection thereof by the Agent) for application on the Senior Debt, and the Subordinated Creditor agrees that, until so delivered, the same shall be deemed received by the Subordinated Creditor as agent for the Agent and such payment or prepayment shall be held in trust by the Subordinated Creditor as property of the Agent for the benefit of itself and the Lenders.

3. Modification of Subordinated Debt. None of the terms of the Subordinated Debt, the Notes, the Guaranty, the Subordinated Security Agreement or the other Subordinated Debt Documents shall be modified, and there shall be no additions to or modifications of the Collateral described in the Notes or the Subordinated Security Agreement, without the express prior written consent of the Agent.

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4. Insolvency Proceedings. The Agent shall have the right and is hereby empowered to vote the full amount of the Subordinated Debt in any insolvency or receivership proceeding, any proceeding under the Bankruptcy Code or any other proceeding under any bankruptcy or insolvency law or laws relating to the relief of debtors, readjustment of indebtedness, reorganizations, compositions or extensions which may be brought by or against any Company and at any meeting of creditors of any Company whether or not such meeting is held in a proceeding under any insolvency, bankruptcy or similar laws. In any of the foregoing proceedings or at any of the foregoing meetings, the Agent shall be entitled to vote the Subordinated Debt as the Agent in its sole good faith discretion shall determine without regard to the interests of anyone other than the Agent. In any of the foregoing proceedings, the Agent shall be entitled to collect and enforce the Subordinated Debt and to receive any distributions, dividends or other payments upon the Subordinated Debt by filing such claim, proof of debt or proof of claim as appropriate in the proceeding, in the Agent’s name or the Subordinated Creditor’s name. The Agent and any officer or employee designated by the Agent for such purpose is hereby constituted and appointed attorney-in-fact for the Subordinated Creditor with full power (which power, being coupled with an interest, shall be irrevocable so long as this Agreement is in effect) to vote the Subordinated Debt in any of the foregoing proceedings and at any meeting of either Company’s creditors and to file any claim, proof of debt or proof of claim in any such proceeding, and to compromise, settle and to give releases for any of the Subordinated Debt, and to endorse the Subordinated Creditor’s name upon any instruments given as a payment on or distribution in connection with the Subordinated Debt. Without limiting the generality of the foregoing, the Subordinated Creditor agrees that in any of the foregoing proceedings it shall have no right to seek relief from the automatic stay, seek adequate protection, or request the marshalling of assets of any of the Companies.

5. Consent to Incurrence of Senior Debt and Subordinated Debt. The Subordinated Creditor by its execution hereof, hereby consents to each Company’s and its affiliates’ execution and delivery of the Credit Agreement and each of the Loan Documents to which such person is a party and to the incurrence by each such person of its obligations thereunder and to the performance thereof. Agent, on behalf of the Senior Lenders, acknowledges the Subordinated Debt and agrees that the incurrence of the Subordinated Debt and the issuance of the Notes and the execution of the Subordinated Security Agreement and the Guaranty will not violate or cause a default under the Loan Documents, provided the Subordinated Creditor and the Companies comply with terms and conditions of this Agreement.

6. Pledge or Transfer of Subordinated Debt. The Subordinated Creditor agrees not to assign, transfer, pledge, or grant a security interest in all or any part of the Subordinated Debt unless (i) such assignment, transfer, pledge or grant is made expressly subject to this Agreement and (ii) the Subordinated Creditor’s assignee, transferee, pledgee or grantee expressly agrees in writing to assume the Subordinated Creditor’s obligations hereunder. The Subordinated Creditor will place the following legend on the Notes and any other instrument or certificate evidencing the Subordinated Debt.

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“THIS INSTRUMENT OR CERTIFICATE AND THE RIGHT EVIDENCED HEREBY ARE SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION AGREEMENT, DATED MARCH 21, 2005 AMONG FAMILYMEDS, INC., DRUGMAX, INC., VALLEY DRUG COMPANY AND VALLEY DRUG COMPANY SOUTH AS THE COMPANIES, AMERISOURCEBERGEN DRUG CORPORATION AS THE SUBORDINATED CREDITOR AND GENERAL ELECTRIC CAPITAL CORPORATION AS AGENT, AND ANY FUTURE SENIOR LENDERS, AS SENIOR LENDERS (THE “SUBORDINATION AGREEMENT”). ANY TRANSFEREE BY ACCEPTANCE OF SUCH TRANSFER AGREES TO BE BOUND BY THE TERMS THEREOF.”

7. Waivers. The Subordinated Creditor agrees and consents (a) to waive, and does hereby waive, any and all notice of the creation, renewal, extension, modification, compromise or release of any of the Senior Debt or any collateral therefor or guaranties thereof, in whole or in part; (b) that without further notice to or further assent by the Subordinated Creditor, the liability of the Companies or any other party or parties for or upon any of the Senior Debt may, from time to time, in whole or in part, be renewed, extended, modified, replaced, compromised or released by the Agent and Lenders as they may deem advisable; and (c) that any collateral for or guaranties of the Senior Debt, or any part of the Senior Debt, may, from time to time, in whole or in part, be modified, released, collected, sold or otherwise disposed of by the Agent, as it may deem advisable, and that any balance of funds with the Agent at any time standing to the credit of any Company may, from time to time, in whole or in part, be surrendered or released by the Agent, as it may deem advisable.

8. Collateral; Lien Subordination and Guaranty Subordination.

a. The Subordinated Creditor hereby subordinates and makes inferior any and all of its now existing or hereafter acquired security interests in, security titles to, and other liens and encumbrances on any of the present or future, real or personal, tangible or intangible, property of each Company and any of their Subsidiaries (collectively, the “Collateral”), including without limitation any security interests, security titles or other liens and encumbrances on such Collateral arising under the Notes or the Subordinated Security Agreement or any other security agreement respecting such Collateral, to the security interests, security titles, and other liens and encumbrances of the Agent, whether now existing or hereafter acquired, in, to and on the Collateral. The provisions of the immediately preceding sentence shall apply notwithstanding the date, time, method, manner or order of grant, attachment or perfection of any security interests, security titles and other liens securing the Subordinated Debt granted on the Collateral or of any security interests, security titles and other liens securing the Senior Debt granted on the Collateral and notwithstanding any provision of the Uniform Commercial Code, or any other applicable law or any defect or deficiencies in, or failure to perfect, the security interests, security titles and other liens of the Agent securing the Senior Debt or any other circumstance whatsoever.

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b. If any Company shall default under any Senior Debt secured by any of the Collateral, the Agent may exercise any or all of its rights and remedies with respect to such Collateral without any obligation to give the Subordinated Creditor notice of such exercise and without regard to any interest of the Subordinated Creditor in such Collateral.

c. The Subordinated Creditor will not (and hereby waives any right to) contest or support any other person in contesting in any proceeding (including without limitation any proceeding under the Bankruptcy Code) the validity, perfection, priority or enforceability of any lien or security interest granted to the Agent in any of the Collateral.

d. Until the Termination Date, the Subordinated Creditor will not exercise or seek to exercise any rights or remedies with respect to any Collateral or take possession of, sell or otherwise realize (judicially or non judicially) upon any of the Collateral (including, without limitation, through the notification of account debtors or the exercise of any right of setoff) or institute any action or proceeding with respect to such rights or remedies (including any action of foreclosure) or file any involuntary bankruptcy petition against any Company.

e. The parties hereto agree, and the Subordinated Creditor acknowledges that the Subordinated Security Agreement provides, that (i) a security interest in the Collateral in favor of the Subordinated Creditor shall only attach under the Subordinated Security Agreement, if at all, if a “Condition” (as such term is defined in the Subordinated Security Agreement) has occurred and is continuing, and (ii) such security interest in the Collateral under the Subordinated Security Agreement shall be automatically released without any further action by the Subordinated Creditor, any Company or any other entity if the event creating the “Condition” (as defined in the Subordinated Security Agreement) is cured within 45-days after the occurrence thereof; provided, however, that such release upon a Condition being cured or ceasing to exist may only occur once in any period of 365 consecutive days. Without limiting the generality of Section 3 hereof, the Subordinated Creditor agrees that the Subordinated Security Agreement shall not be modified in any manner, including without limitation to alter the provisions described in the immediately preceding sentence, without the prior written consent of the Agent. The Subordinated Creditor agrees that it will give prompt written notice to Agent of (a) the occurrence of an “Event of Default” under Section 8.1(a) of the Subordinated Debenture, (b) the occurrence of any “Condition” (as defined in the Subordinated Security Agreement), (c) the attachment of a security interest in favor of Subordinated Creditor under the Subordinated Security Agreement and (d) the release of any security interest pursuant to the terms of the Subordinated Security Agreement and this paragraph; provided that no “Condition” (as defined in the Subordinated Security Agreement) shall occur until Subordinated Creditor gives written notice to Agent of the circumstances constituting such “Condition” and a period of fifteen (15) days has passed since receipt of such notice.

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f. The Subordinated Creditor subordinates and makes inferior any and all of its now existing or hereafter acquired guaranties of the Subordinated Debt from whomever received and in whatever form to the rights of the Agent on the same terms and conditions as apply to the subordination of the Subordinated Debt to the Senior Debt hereunder.

g. The Subordinated Creditor hereby agrees that if it shall obtain possession of any Collateral (other than payments made pursuant to the terms and conditions of Section 2(a)), it shall deliver such Collateral to the Agent in precisely the form received, and the Subordinated Creditor agrees that, until so delivered, such Collateral shall be held in trust by the Subordinated Creditor as property of the Agent for the benefit of itself and the Lenders.

9. Continuing Agreement and Termination.

a. This is a continuing agreement, and this Agreement and the subordination of indebtedness (the “Debt Subordination”) and the subordination of security interests, security titles, liens and encumbrances and guaranties (the “Security Interest Subordination”) provided for herein shall remain in full force and effect until the Termination Date regardless of whether the Senior Debt is from time to time reduced and thereafter increased or entirely extinguished and thereafter reincurred or incurred anew or replaced. This Agreement, the Debt Subordination and the Security Interest Subordination shall remain in full force and effect and shall be irrevocable until and shall terminate on the Termination Date. No notice purporting to terminate this Agreement, the Debt Subordination or the Security Interest Subordination which is received by the Agent at any time prior to the Termination Date shall be effective, in any manner or at any time whatsoever, to terminate this Agreement, the Debt Subordination or the Security Interest Subordination.

b. This Agreement, the Debt Subordination and the Security Interest Subordination shall continue to be effective regardless of the solvency or insolvency of any Company, any Subsidiary or any affiliate thereof or the Subordinated Creditor; the liquidation or dissolution of any Company, any Subsidiary or any affiliate thereof or the Subordinated Creditor; the institution by or against any Company, any Subsidiary or any affiliate thereof or the Subordinated Creditor of any proceeding under the Bankruptcy Code or any similar law; the appointment of a receiver or trustee for any Company, any Subsidiary or any affiliate thereof or any of such Person’s property or for the Subordinated Creditor any of the Subordinated Creditor’s property or for any guarantor or any guarantor’s property; any reorganization, merger or consolidation of any Company, any Subsidiary or any affiliate thereof or the Subordinated Creditor or any guarantor; or any other change in the ownership, composition or nature of any Company, any Subsidiary or any affiliate thereof or the Subordinated Creditor or any guarantor.

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c. The Agreement, the Debt Subordination and the Security Interest Subordination shall be reinstated in the event any payment on the Senior Debt is rescinded, disgorged as a preference or otherwise or must otherwise be returned by the Agent or any Lender.

10. Acknowledgments, Consents and Agreements.

Each Company, on behalf of itself and its Subsidiaries and its affiliates, hereby acknowledges and consents to the execution, delivery and performance of this Agreement by the Subordinated Creditor and the Agent and further agrees to be bound by the provisions of this Agreement as they relate to the relative rights, remedies and priorities of the Subordinated Creditor and the Agent and the respective obligations of each Company or any affiliate thereof to them; provided, however that nothing in this Agreement shall amend, modify, change or supersede the respective terms of any of the Senior Debt or the Subordinated Debt as between the Companies or any Subsidiary or affiliate thereof, on the one hand, and the Agent, Lenders or the Subordinated Creditor, on the other hand, and in the event of any conflict or inconsistency between the terms of this Agreement and those of any agreement, note or other document evidencing or securing any of the Senior Debt, the Subordinated Debt or the Collateral, the provisions of such other agreement, instrument or document shall govern as between the Companies or any Subsidiary or affiliate thereof, on the one hand, and the Agent, Lenders or the Subordinated Creditor (as the case may be), on the other hand, and each Company further agrees that this Agreement shall not give any Company any substantive rights relative to the Agent, Lenders or the Subordinated Creditor and no Company shall be entitled to raise any actions or inactions on the part of the Agent, Lenders or the Subordinated Creditor hereunder as a defense, counterclaim or other claim against such party. Each Company hereby agrees that it is not a beneficiary of this Agreement and may not enforce any rights or remedies hereunder.

11. Miscellaneous.

a. Wherever possible, each provision of this Agreement is to be interpreted in such manner as to be effective and valid under applicable law, but if any provision hereof is prohibited or invalid under such law, such provision is to be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

b. This Agreement shall be binding upon each Company, the Subordinated Creditor and their respective heirs, legal representatives, successors and assigns, and shall inure to the benefit of the Agent, Lenders and their respective successors and assigns. In the event that the Credit Agreement is replaced with another senior credit facility and GECC is no longer the agent thereunder, the Subordinated Creditor hereby agrees that GECC may assign its rights and remedies hereunder to the new agent or lender(s), as applicable, under such new facility, and such new agent or lender(s), as applicable, shall succeed to the rights and remedies of the Agent specified hereunder. Upon such assignment by GECC, the assignee shall be a Senior Lender hereunder and all references in this Agreement to “Agent” shall be deemed to be “Senior Lender.”

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c. This Agreement constitutes the sole and entire agreement between the Subordinated Creditor, on the one hand, and the Agent, on the other, with respect to the subject matter hereof and supersedes and replaces any and all prior or concurrent agreements, understandings, negotiations or correspondence between them with respect thereto.

d. Time is of the essence of this Agreement.

e. No amendment or waiver of any provision of this Agreement, nor consent to any departure therefrom, shall be effective or binding upon the Agent unless the Agent shall first have given its written consent thereto.

f. This Agreement may be executed in one or more counterparts and each such counterpart shall constitute an original and all such counterparts together shall constitute one and the same instrument.

g. All sections headings herein are for convenience of reference only and shall not limit or otherwise affect the meaning or interpretation of this Agreement.

h. All notices, demands and other communications hereunder to the Agent or the Subordinated Creditor shall be effective:

(i) if given by telecopy, when such communication is transmitted to the telecopy number set forth beneath such Person’s signature below (with such telecopy to be promptly confirmed by delivery of a copy thereof by personal delivery or United States mail as otherwise provided herein),

(ii) if given by mail, three (3) Business Days after such communication is deposited in the United States mail with first class postage prepaid, return receipt requested, and addressed to such Person at its address set forth beneath its signature below,

(iii) if sent for overnight delivery by Federal Express, United Parcel Service or other reputable national overnight delivery service, one (1) Business Day after such communication is entrusted to such service for overnight delivery and with recipient signature required, addressed as aforesaid, or

(iv) if given by any other means, when delivered at the address of such Person shown below.

The Agent or the Subordinated Creditor may designate a different address or telecopy number for its receipt of such notices or other communications but no such change shall be effective unless and until the other party actually receives such written notice.

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i. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York applicable to contracts made and performed in such state.

13. Waiver of Certain Rights. The Subordinated Creditor expressly waives any and all rights of subrogation, reimbursement, indemnity, exoneration or contribution or any other claim which the Subordinated Creditor may now or hereafter have against any Company or any affiliate thereof or against any property of any Company or any affiliate thereof arising from the existence, performance or enforcement of the Subordinated Creditor’s obligations and liabilities under this Agreement until such time as the Senior Debt shall have been paid in full.

14. No Third Party Beneficiaries. This Agreement does not and is not intended to create any rights in any third party beneficiaries.

15. Jury Trial Waiver and Forum Consents. EACH OF THE SUBORDINATED CREDITOR, THE AGENT AND THE COMPANIES HEREBY WAIVES ANY RIGHT SUCH PERSON MAY HAVE UNDER ANY APPLICABLE LAW TO A TRIAL BY JURY WITH RESPECT TO ANY SUIT OR LEGAL ACTION WHICH MAY BE COMMENCED BY OR AGAINST SUCH PERSON CONCERNING THE INTERPRETATION, CONSTRUCTION, VALIDITY, ENFORCEMENT OR PERFORMANCE OF THIS AGREEMENT. IN THE EVENT ANY SUCH SUIT OR LEGAL ACTION IS COMMENCED BY THE AGENT, EACH OF THE SUBORDINATED CREDITOR AND THE COMPANIES HEREBY EXPRESSLY AGREES, CONSENTS AND SUBMITS TO THE PERSONAL JURISDICTION OF ANY STATE OR FEDERAL COURT SITTING IN FULTON COUNTY, GEORGIA, WITH RESPECT TO SUCH SUIT OR LEGAL ACTION AND FURTHER EXPRESSLY CONSENTS AND SUBMITS TO AND AGREES THAT VENUE IN ANY SUCH SUIT OR LEGAL ACTION IS PROPER IN SAID COURTS AND FURTHER EXPRESSLY WAIVES ANY AND ALL PERSONAL RIGHTS UNDER APPLICABLE LAW OR IN EQUITY TO OBJECT TO THE JURISDICTION AND VENUE OF SAID COURTS. THE JURISDICTION AND VENUE OF THE COURTS CONSENTED TO AND SUBMITTED TO AND AGREED UPON IN THIS SECTION ARE NOT EXCLUSIVE BUT ARE CUMULATIVE AND IN ADDITION TO THE JURISDICTION AND VENUE OF ANY OTHER COURT UNDER ANY APPLICABLE LAW OR IN EQUITY.

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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly signed, sealed and delivered, all as of the day and year first above written.

SUBORDINATED CREDITOR:
AMERISOURCEBERGEN DRUG CORPORATION
By:
Name:
Title:
Address For Notices:
1300 Morris Drive
Chesterbrook, PA 19087
Attn:	John Chou, Esq.
	Vice President and
	Deputy General Counsel
Telecopy No.: (610) 727-3612
COMPANIES:
FAMILYMEDS, INC.
By:
Name:	Edgardo A. Mercadante
Title:	President and CEO

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VALLEY DRUG COMPANY
By:
Name:	Edgardo A. Mercadante
Title:	President and CEO
VALLEY DRUG COMPANY SOUTH
By:
Name:	Edgardo A. Mercadante
Title:	President and CEO
DRUGMAX, INC.
By:
Name:	Edgardo A. Mercadante
Title:	President and CEO
AGENT:
GENERAL ELECTRIC CAPITAL CORPORATION, as Agent
By:
Title:	Its Duly Authorized Signatory
Address For Notices:
2 Bethesda Metro Center, Suite 600
Bethesda, Maryland 20814
Attention: DrugMax Account Manager
Telecopier No.: 301-664-9890

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EX-10.6

Exhibit 10.6

THIS AGREEMENT AND THE RIGHTS OF THE SECURED PARTY EVIDENCED HEREBY ARE SUBJECT TO THE TERMS OF THAT CERTAIN SUBORDINATION AGREEMENT, DATED MARCH 21, 2005 AMONG FAMILYMEDS, INC., DRUGMAX, INC., VALLEY DRUG COMPANY, AND VALLEY DRUG COMPANY SOUTH, AS THE COMPANIES, AMERISOURCEBERGEN DRUG CORPORATION AS THE SUBORDINATED CREDITOR AND GENERAL ELECTRIC CAPITAL CORPORATION, AS AGENT, AND ANY FUTURE SENIOR LENDERS, AS SENIOR LENDER (SUCH AGREEMENT, THE “SUBORDINATION AGREEMENT”). ANY ASSIGNEE BY ACCEPTANCE OF SUCH ASSIGNMENT AGREES TO BE BOUND BY THE TERMS THEREOF.

SUBORDINATED SECURITY AGREEMENT

Each of the corporations appearing on the signature page(s) hereto (hereinafter each called “Debtor” and collectively “Debtors”) hereby agrees that, upon the occurrence and during the continuance of the Condition (as defined below), each Debtor shall be deemed to have automatically and without any further action of any party hereto granted to AmerisourceBergen Drug Corporation, a Delaware corporation with an office at 1300 Morris Drive, Chesterbrook, PA 19087 (hereinafter called “Secured Party”), to secure the payment and performance of all obligations, liabilities and indebtedness of such Debtor to Secured Party, whether direct or indirect, absolute or contingent, now due or to become due, now existing or hereinafter arising,:

(1) under, from or with respect to that certain $11,500,000 Subordinated Promissory Note dated of even date herewith from Familymeds, Inc. to Secured Party (the “Note”);

(2) under, from or with respect to that certain $11,500,000 Subordinated Convertible Debenture dated of even date herewith from DrugMax, Inc. to Secured Party (the “Debenture”);

(3) under, from or with respect to those certain Continuing Guaranty Agreements dated of even date herewith from each Debtor for the benefit of Secured Party (each a “Guaranty “ and together “Guaranties”) and all amendments of, supplements to and substitutions for such Guaranties and collateral documents;

(4) all expense of Secured Party in protecting any collateral or enforcing any rights under the Note, Debenture and Guaranties, this Security Agreement or any other collateral documents, including reasonable attorney’s fees (subject to any limitations set forth in the Subordination Agreement on the rights of the Secured Party to protect the collateral or enforce any such rights)

(collectively, hereinafter called the “Obligations”) a lien upon and security interest in the following personal property of Debtors at the occurrence and during the continuance of a Condition (as defined below), and any and all additions, substitutions, accessions and proceeds thereto or thereof (collectively, the “Collateral”):

(i) all of the Debtors’ Accounts, General Intangibles, Securities, Instruments, Chattel Paper and Instruments then existing or hereafter arising;

(ii) all guarantees of Debtors’ existing and future Accounts, General Intangibles, Chattel Paper and Instruments and all other security held by the Debtor for the payment and satisfaction thereof;

(iii) all of the Debtors’ Inventory then owned or hereafter acquired;

(iv) all of the Debtors’ Equipment then owned or hereafter acquired;

(v) all of the Debtors’ books and records which relate to the Debtors’ Inventory, Equipment, Accounts, General Intangibles, Chattel Paper and Instruments or guarantees thereof;

(vi) all of Debtors’ then owned or thereafter acquired deposit accounts;

(vii) all insurance on all of the foregoing and the proceeds of that insurance;

(viii) all of Debtors’ money and other property of every kind and nature then or at any time or times thereafter in the possession of or under the control of Secured Party; and

(ix) all cash and noncash proceeds and products of all of the foregoing and the proceeds and products of other proceeds and products.

Patient medical records shall not constitute Collateral hereunder notwithstanding anything contained in this Agreement.

Notwithstanding any other provision of this Security Agreement to the contrary, the parties hereby agree that (A) the security interest and lien described herein with respect to the Collateral shall only attach, if at all, upon the occurrence and during the continuance of a Condition, and (B) any such security interest and lien described herein that attaches upon any such Condition shall automatically be released without any action by any party hereto upon the waiver or cure of such Condition under the terms of the Note, if a default under the Note caused the Condition, or under the terms of the Debenture, if a default under the Debenture caused the Condition.

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As used herein:

(A) “Account” means any account as that term is defined in the Uniform Commercial Code as in effect in the jurisdiction of Debtor’s organization (the “U.C.C.”) and includes any right of the Debtor to payment for goods sold or leased or for services rendered or money loaned which is not evidenced by an instrument or chattel paper (as those terms are defined in the U.C.C.) whether or not it has been earned by performance.

(B) “Chattel Paper” means any chattel paper as that term is defined in the U.C.C.

(C) “Condition” means either (i) the occurrence and continuance of any Event of Default described in Section 2.1(a) of the Note or Section 8.1(a) of the Debenture, after the Secured Party has given General Electric Capital Corporation (“GECC”), written notice of such Event of Default at the notice address for GECC set forth in the Subordination Agreement and fifteen (15) days have passed since receipt by GECC of such notice, or (ii) both (1) an Event of Default described in any of Sections 8.1(b), 8.1(c), 8.1(d) and 8.1(e) of the Debenture shall have occurred and be continuing and (2) on the next Quarterly Payment Date following such Event of Default under any of Sections 8.1(b), 8.1(c), 8.1(d) and 8.1(e) of the Debenture DrugMax fails to make the required Quarterly Principal Payment and Quarterly Interest Payment in cash.

(D) “Equipment” means any equipment as that term is defined in the U.C.C. and shall include, without limitation, all equipment, machinery, appliances, tools, furniture and tangible personal property, whether or not the same are or may become fixtures, used or bought for use primarily in the Debtors’ business or leased by the Debtor to others, of every nature, presently existing or hereafter acquired or created, wherever located, additions, accessories and improvements thereto and substitutions therefor and all parts which may be attached to or which are necessary for the operation and use of such personal property or fixtures, whether or not the same shall be deemed to be affixed to real property, and all rights under or arising out of present or future contracts relating to the foregoing. All equipment is and shall remain personal property irrespective of its use or manner of attachment to real property.

(E) “General Intangibles” means all general intangibles as that term is defined in the U.C.C., including, without limitation, all books, correspondence, credit files, records and other documents, computer programs, computer tapes and cards and other paper and documents in the possession or control of the Debtor or in the possession or control of any affiliate or computer service bureau, and all contract rights, claims, chooses in action, judgments, patents, patent applications, trademarks, license agreements, royalty payments, copyrights, service names, service marks, logos, goodwill and deposit accounts.

(F) “Instruments” means all instruments as that term is defined in the U.C.C.

(G) “Inventory” means any inventory as that term is defined in the U.C.C. and shall include tangible personal property held for sale or lease or to be furnished under

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contracts of service, tangible personal property which the Debtor has so leased or furnished, and raw materials, work in process and materials used, produced or consumed in the Debtors’ business, and shall include tangible personal property returned to the Debtor by a purchaser or lessor thereof following the sale or lease thereof by the Debtor. All equipment, accessories and parts related to, attached to or added to items of Inventory or used in connection therewith and all accessions thereto shall be deemed to be part of the Inventory.

(H) “Prior Lien” means the existing lien on Debtors’ assets in favor of General Electric Capital Corporation (“GECC”), as Agent for itself and Bank of America, NA, or any lien on Debtors’ assets granted to any successor Senior Lender (as defined in the Subordination Agreement).

(I) “Proceeds” means whatever is received when Collateral is sold, exchanged, collected or otherwise disposed of.

(J) “Subordination Agreement” means the agreement dated of even date herewith by and among GECC, as Agent, and any other Senior Lenders (as defined therein) as Senior Lender, Secured Party and Debtors.

Secured Party agrees that (i) no enforcement action pursuant to this Agreement shall be taken due to any Condition unless all events of default are not cured within 45 days after the commencement of such Condition; and (ii) the security interest granted under this Agreement upon the occurrence and continuance of any Condition will be automatically released if such Condition is cured or ceases to exist within 45 days after the commencement of such Condition; provided, however, that such release upon a Condition being cured or ceasing to exist may only occur once in any period of 365 consecutive days. Without limiting the generality of the foregoing, a “Condition” as defined in part (ii) of this definition thereof shall cease to exist even if a default under Sections 8.1(b), 8.1(c), 8.1(d) or 8.1(e) of the Debenture has occurred and is continuing so long as DrugMax makes required Quarterly Principal Payments and Quarterly Interest Payments in cash thereafter. Upon any release of the security interest in accordance with this paragraph, the Secured Party hereby authorizes the Debtors or GECC to terminate any UCC financing statements filed by Secured Party against any Debtor if the Secured Party fails to terminate such UCC financing statements within 5 days after such release. If the security interest is released in accordance with this paragraph, a security interest will re-attach should any subsequent Condition occur. Except for the express provisions relating to cure periods set forth in this Agreement, no provision of this Agreement shall be deemed or construed to create or extend any cure periods with respect to the Note or Debenture beyond those set forth in the Note or Debenture, as applicable, or to permit the cure of an Event of Default other than as permitted under the Note or Debenture.

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Upon the occurrence and during the continuance of a Condition and subject to the terms and conditions of the Subordination Agreement, the Debtors shall warrant and covenant that:

(a) The Collateral and Debtors’ records with respect to its Accounts will be kept at Debtors’ addresses shown on the Guaranties until such time as written consent to a change of location is obtained from Secured Party.

(b) Except for the security interest to be granted hereby, the Prior Lien and “Permitted Encumbrances,” as defined in the First Amendment to Credit Agreement of December 9, 2004 among GECC, as Agent and certain of the Debtors, Debtors are the owner of the Collateral free from all encumbrances and will defend the same against the claims and demands of all persons. Except for the Prior Lien and Permitted Encumbrances, Debtors will not pledge, mortgage or create, or suffer to exist, a security interest in the Collateral in favor of any person other than Secured Party, and will not sell or transfer the Collateral or any interest therein except in the ordinary course of its business without the prior written consent of Secured Party.

(c) The Collateral shall remain personal property irrespective of the manner of its attachment to any real estate.

(d) Debtors will immediately notify Secured Party in writing of any change in address from that shown in the Guaranties, any change of state of incorporation or other organization from the state shown in this Agreement, any change of name from the name shown in this Agreement, and shall do, make, execute and deliver all such additional and further acts, things, deeds, assurances, and instruments as Secured Party may require more completely to vest in and assure to Secured Party its rights hereunder or in any of the Collateral.

(e) Subject to the terms and conditions of the Subordination Agreement, upon the occurrence and during the continuance of the Condition and upon further occurrence of any of the following events or conditions: (i) default in the payment or performance of any of the Obligations of a Debtor, of any liability or obligation to Secured Party of any maker, endorser, guarantor or surety of or for any of such Obligations, or of any covenant or liability contained or referred to herein or in any note, instrument, document or agreement evidencing any such Obligations; (ii) any representation or warranty of a Debtor to induce Secured Party to enter into this Agreement or to extend credit terms to Debtors proving false or erroneous in any material respect; (iii) material loss, material theft, material damage, destruction, sale (other than in the ordinary course of business) or encumbrances of or to the Collateral, or the making of any levy, thereon or seizure or attachment thereof by legal process; (iv) death, dissolution, termination of existence, insolvency, business failure, appointment of a receiver of any part of the property of, assignment for the benefit of creditors by, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against any Debtor, or any endorser, guarantor or surety of or for any Obligation; thereupon, and as long as such default continues, Secured Party may, subject to the terms of the Subordination Agreement, without notice or demand declare all of the Obligations to be immediately due and payable, and Secured Party shall then have in any jurisdiction where enforcement hereof is sought, in addition to all other rights and remedies, the rights and remedies of a secured party under the U.C.C., including without limitation thereto the right to take immediate possession of the Collateral, and for the purpose Secured Party may, so far as Debtors can give authority

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therefore, enter upon any premises on which the Collateral, or any part thereof, may be situated and remove the same there from. Debtors will upon demand make the Collateral available to Secured Party at a place and time designed by Secured Party which is reasonably convenient to both parties. Secured Party will give Debtor at least ten days’ prior written notice of the time and place of any public sale of the Collateral or of the time after which any private sale thereof is to be made. From the proceeds of the sale, Secured Party shall be entitled to retain (i) all sums secured hereby, (ii) its reasonable expenses of retaking, holding, preparing for sale and selling and (iii) reasonable legal expenses incurred by it in connection herewith and with such sale. No waiver by Secured Party of any default shall be effective unless in writing nor operate as a waiver of any other default or of the same default on another occasion.

(f) Subject to the terms and conditions of the Subordination Agreement, in the event of the Secured Party’s exercising any of its rights and remedies of a secured party under the U.C.C. or by any person, firm, corporation or other entity who has guaranteed the Debtors’ obligations to the Secured Party, the Secured Party shall have the right to conduct a sale under this Security Agreement and Guarantee singly, jointly or concurrently, and in such order as, in the opinion of the Secured Party, it deems best to protect the interest of the Secured Party. The Secured Party, in the event of a sale under this Security Agreement or under any such Guarantee, shall have the right to offer all, or a portion, of the secured assets hereunder and all, or a portion, of the assets under the Guarantee, separately, or as an entirety, or in any combination thereof, and the income of such sale accounted for in one account, without distinction between the items of security, or without assigning to them any proportion of such income, the Debtor hereby waiving the application of any doctrine of marshaling.

(g) Upon the occurrence and during the continuance of a Condition, Secured Party is hereby authorized to file such U.C.C. financing statements relating to Collateral in any jurisdiction, and the Debtors shall pay all costs and expenses of filing the same or of filing this Security Agreement in all public filing offices. Upon the occurrence and during the continuance of a Condition, the original or a copy of this Security Agreement may be filed as a financing statement.

(h) Subject to the terms and conditions of the Subordination Agreement, upon the occurrence and during the continuance of a Condition, Debtors hereby constitute and appoint Secured Party the true and lawful attorney of Debtors with full power of substitution to take any and all appropriate action and to execute any and all documents or instruments that may be necessary or desirable to accomplish the purpose and carry out the terms of this Security Agreement. The foregoing power of attorney is coupled with an interest and shall be irrevocable until all of the Obligations have been paid and performed in full.

Secured Party agrees that nothing in this Agreement shall be construed to create an event of default under the Note due solely to the occurrence of an event of default under the Debenture, or to create an event of default under the Debenture due solely to the occurrence of an event of default under the Note.

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Debtors hereby warrant and covenant from and after the date hereof:

(a) Debtors waive demand, notice, protest, notice of acceptance of this Agreement, notice of loans made, credit extended, collateral received or delivered or other action taken in reliance hereon and all other demands and notices of any description. With respect both to the Obligations and the Collateral, Debtor assents to any extension or postponement of the time of payment or any other indulgence, to any substitution, exchange or release of Collateral, to the addition or release of any party or person primarily or secondarily liable, to the acceptance of partial payment thereon and the settlement, compromising or adjusting of any thereof, all in such manner and at such time or times as Secured Party may deem advisable. Secured Party shall have no duty as to the collection or protection of the Collateral or any income thereon, nor as to the preservation of rights against prior parties, nor as to the preservation of any right pertaining thereto beyond the safe custody thereof. Secured Party may exercise its rights with respect to the Collateral without resorting or regard to other collateral or sources of reimbursement for liability. Secured Party shall not be deemed to have waived any of its rights upon or under the Obligations or the Collateral unless such waiver is in writing and signed by Secured Party. No delay or omission on the part of Secured Party in exercising any right shall operate as a waiver of such right or any other right. A waiver on any one occasion shall not be construed as a bar to or waiver of any right on any future occasion. All rights and remedies of Secured Party on the Obligations or the Collateral, whether evidenced hereby or by any other instrument or paper, shall be cumulative and may be exercised separately or concurrently.

(b) This Agreement and all rights and obligations hereunder, including matters of construction, validity and performances, shall be governed by the law of the Commonwealth of Pennsylvania.

(c) Except for the security interest to be granted hereby and the Prior Lien, Debtors are the owner of the Collateral free from all encumbrances and will defend the same against the claims and demands of all persons. Except for the Prior Lien and “Permitted Encumbrances,” as defined in the First Amendment to Credit Agreement of December 9, 2004 among GECC, as Agent and certain of the Debtors, Debtors will not pledge, mortgage or create, or suffer to exist, a security interest in the Collateral in favor of any person other than Secured Party.

(d) The rights granted herein shall be cumulative of, and shall not supercede, any rights in the Collateral or otherwise which Secured party may have pursuant to any other document or instrument or at law; provided, however, that the Secured Party hereby authorizes the Debtors or GECC to terminate on the date hereof UCC financing statement number 09-1037555 filed by Secured Party against Valley Drug Company South in Caddo Parish, Louisiana and any other UCC financing statements filed by the Secured Party against any debtor on or before the date hereof.

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(e) This Agreement may be executed in one or more counterparts and each such counterpart shall constitute an original, and all such counterparts together shall constitute one and the same instrument.

[THE NEXT PAGE IS THE SIGNATURE PAGE]

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Notwithstanding any other provision of this Security Agreement to contrary, the rights and remedies of the Secured Party hereunder are subject to the terms and conditions of the Subordination Agreement. In the event of any direct conflict between the terms and conditions of this Security Agreement and the Subordination Agreement, the terms and conditions of the Subordination Agreement shall prevail.

IN WITNESS WHEREOF, Debtors and Secured Party have executed this Agreement on this 21st day of March, 2005.

DrugMax, Inc.		Familymeds Holdings, Inc.
By:		By:
	Edgardo A. Mercadante		Edgardo A. Mercadante
	President and CEO		President and CEO
Familymeds, Inc.		Valley Drug Company South
By:		By:
	Edgardo A. Mercadante		Edgardo A. Mercadante
	President and CEO		President and CEO
Valley Drug Company
By:
	Edgardo A. Mercadante
	President and CEO
AmerisourceBergen Drug Company
By:
Name:
Title:

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