MKTG SERVICES INC - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

(MARK ONE)

[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003

OR

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

FOR THE TRANSITION PERIOD FROM __________ TO __________

COMMISSION FILE NUMBER 0-16730

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MKTG SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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NEVADA 88-0085608
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

333 SEVENTH AVENUE, 20TH FLOOR 10001
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

(917) 339-7100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)

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

APPLICABLE ONLY TO CORPORATE ISSUERS

State number of shares outstanding of each of the issuer's classes of common
equity as of the latest practical date:

As of May 9, 2003 there were 1,092,366 shares of the Issuer's Common Stock,
par value $.01 per share outstanding.

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MKTG SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q REPORT
MARCH 31, 2003

TABLE OF CONTENTS

1

PART I -- FINANCIAL INFORMATION

ITEM 1 -- INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MKTG SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements.

2

MKTG SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements.

3

MKTG SERVICES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements.

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MKTG SERVICES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements
include the accounts of MKTG Services, Inc. and Subsidiaries ('MKTG' or the
'Company'). These condensed consolidated financial statements are unaudited and
should be read in conjunction with the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2002 and the historical consolidated financial
statements and related notes included therein. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments, consisting of only normal recurring accruals, necessary to present
fairly the condensed consolidated financial position, results of operations and
cash flows of the Company. Certain information and footnote disclosure normally
included in financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted pursuant to the Securities
and Exchange Commission's rules and regulations. Operating results for the three
and nine-month periods ended March 31, 2003 are not necessarily indicative of
the results that may be expected for the fiscal year ending June 30, 2003.
Certain reclassifications have been made in the fiscal 2002 financial statements
to conform to the fiscal 2003 presentation.

The Company has limited capital resources and has incurred significant
historical losses and negative cash flows from operations. The Company believes,
based in part on past performance as well as the reduced corporate overhead,
that funds on hand, funds available from its present operations and its unused
lines of credit should be adequate to finance its operations and capital
expenditure requirements and enable the Company to meet its obligations for the
next twelve months. As explained in Note 5, the Company recently sold
substantially all the assets relating to its direct list sales and database
services and website development and design business held. In addition, the
Company has instituted cost reduction measures, including the reduction of
workforce. Failure of the remaining operation, to generate sufficient future
cash flow could have a material adverse effect on the Company's ability to
continue as a going concern and to achieve its business objectives. The
accompanying financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.

On January 22, 2003, the Board of Directors approved an eight-for-one
reverse split of the common stock. The stock split was effective January 27,
2003. Par value of the common stock remained $.01 per share and the number of
authorized shares of common stock was reduced to 9,375,000 shares. The effect of
the stock split has been reflected in the balance sheets and in all share and
per share data in the accompanying condensed consolidated financial statements
and Notes to Financial Statements. Stockholders' equity accounts have been
adjusted to reflect the reclassification of an amount equal to the par value of
the decrease in issued common shares from common stock account to
paid-in-capital.

2. RECENT ACCOUNTING PRONOUNCEMENT

Effective July 1, 2002, the Company adopted the provisions of SFAS No. 141,
'Business Combinations,' in its entirety and SFAS No. 142, 'Goodwill and Other
Intangible Assets.' SFAS No. 141 applies to all business combinations with a
closing date after June 30, 2001. SFAS No. 141 eliminates the
pooling-of-interests method of accounting and further clarifies the criteria for
recognition of intangible assets separately from goodwill. SFAS No. 142
eliminates the amortization of goodwill and indefinite-lived intangible assets
and initiates an annual review for impairment. Identifiable intangible assets
with a determinable useful life continue to be amortized. The adoption required
the Company to cease amortization of its remaining net goodwill balance and to
perform a transitional impairment test of its existing goodwill based on a fair
value concept as of the date of adoption (see Note 7).

Goodwill is not subject to amortization and is tested for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset may be impaired. The impairment test consists of a comparison of the
fair value of goodwill with its carrying amount. If the carrying amount of
goodwill exceeds its fair value, an impairment loss shall be recognized in an
amount equal to that

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excess. After an impairment loss is recognized, the adjusted carrying amount of
goodwill is its new accounting basis.

Effective July 1, 2002, the Company adopted SFAS No. 144 'Accounting for the
Impairment or Disposal of Long-Lived Assets'. SFAS No. 144 addresses financial
accounting and reporting for the disposal of long-lived assets. The objectives
of SFAS No. 144 are to address significant issues relating to the implementation
of SFAS No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of' and to develop a single accounting model,
based on the framework established in SFAS No. 121, for the long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired. SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 recognition and
measurement of the impairment of long-lived assets to be held and used. The
Company reviews for impairment of its long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, the Company will
recognize an impairment when the sum of undiscounted future cash flows (without
interest charges) is less than the carrying amount of such assets. The
measurement for such impairment loss is based on the fair value of the asset.
SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion
No. 30, 'Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions', for segments of a business to be disposed
of. However, this Statement retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. The adoption of such pronouncement did not have a
material impact on the Company's financial position and results of operations.

In April 2002, the FASB issued SFAS No. 145 'Rescission of SFAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002.' SFAS
No. 145 became effective for financial statements issued for fiscal years
beginning after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The
adoption of the statement did not have a material impact on the Company's
financial position and results of operations. However, the loss on
extinguishment of debt that was classified as an extraordinary item in the prior
period has been reclassified and included in loss from discontinued operation as
the loss does not meet the criteria in APB Opinion No. 30 'Reporting the Results
of Operations Reporting the Effects of Disposal of a Segment of a Business', for
classification as an extraordinary item.

In June 2002, the FASB issued SFAS No. 146, 'Accounting for Costs Associated
with Exit or Disposal Activities.' SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, 'Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).' Under Issue No. 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair market value only when the liability is incurred
and not when management has completed the plan. FAS 146 is effective for exit
and disposal activities that are initiated after December 31, 2002. The adoption
of such pronouncement did not have a material impact on the Company's financial
position and results of operations.

In November 2002, the FASB issued FIN 45, 'Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Other,' an interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34. FIN 45 elaborates on the existing
disclosure requirements of guarantees and obligations to stand ready to perform
over the term of the guarantee in the event that specified triggering events or
conditions occur and the identification of those contingent obligations to make
future payments if those triggering events or conditions occur. Additional
disclosures have been added to Commitments and Contingencies footnote describing
the nature of the guarantee; amount and event triggering the Company's
obligation under the guarantee and the Company's recourse to recover in such an
event. Management does not believe that this pronouncement will have a material
impact on its financial statements.

6

In December 2002, the FASB issued SFAS No. 148, 'Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB No. 123.' SFAS
No. 148 amends SFAS No. 123, 'Accounting for Stock-Based Compensation,' to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on the reported results. SFAS No. 148 is effective for
fiscal years and interim periods beginning after December 15, 2002. The Company
continues to account for stock-based employee compensation under the intrinsic
value method of APB 25, 'Accounting for Stock Issued to Employees.' The Company
has adopted the disclosure provisions of SFAS No. 148. (See Note 4).

In January 2003, the FASB issued FIN 46, 'Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51.' FIN 46 requires an investor to
consolidate a variable interest entirety if it is determined that the investor
is a primary beneficiary of that entity, subject to the criteria set forth in
FIN 46. Assets, liabilities, and non controlling interests of newly consolidated
variable interest entities will be initially measured at fair value. After
initial measurement, the consolidated variable interest entity will be accounted
for under the guidance provided by Accounting Research Bulletin No. 51,
'Consolidated Financial Statements.' FIN 46 is effective for variable interest
entities created or entered into after January 2003. For variable interest
entities created or acquired before February 1, 2003, FIN 46 applies in the
first fiscal year or interim period beginning after June 15, 2003. Management
does not believe that this pronouncement will have a material impact on its
financial statements.

3. EARNINGS PER SHARE

In the quarter ending March 31, 2002, the Company recorded a loss on
redemption of preferred stock of approximately $2.8 million in net loss
attributable to common stockholders. The Company is revising the loss on
redemption amount to reflect the beneficial conversion feature associated with
the carrying value of the preferred stock redeemed of approximately $2.4
million. This amount was recorded in the fourth quarter of fiscal 2002 and
included in the annual financial statements. The revised loss on redemption of
preferred stock is approximately $.4 million, which is included in net loss
attributable to common shareholders and reflected in earnings per share from
continuing operations and total basic and diluted loss per share (See note 11).

The revision affected the statement of operations as follows:

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** As reported is defined as amounts which would have been recorded in the
statement of operations in the prior period after giving effect to
adjustments for reverse stock split (see Note 1) and discontinued operations
(see Note 6).

7

Common share equivalents included in weighted average shares
outstanding-diluted for the three and nine months ending March 31, 2003 is as
follows:

Stock options and warrants in the amount of 65,998 shares for the three and
nine months ended March 31, 2003 have not been included in the computation of
diluted EPS as they were antidilutive. Stock options and warrants in the amount
of 340,672 and convertible preferred stock in the amount of 1,553,840 for the
three and nine months ended March 31, 2002 were not included in the computation
of diluted EPS as they were antidilutive as a result of net losses during the
period.

4. STOCK BASED COMPENSATION

The Company applies Accounting Principles Board Opinion APB No. 25 and
related interpretations in accounting for its stock option issuances, and has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards No. 123. No compensation cost related to grants of stock options was
reflected in the Company's net loss, as all options granted under the plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. Had the Company determined compensation cost based on the
fair value methodology of SFAS 123 at the grant date for its stock options, the
Company's loss and earnings per share from continuing operations would have been
adjusted to the pro forma amounts indicated below:

Pro forma net loss reflects only options granted in fiscal 1996 through 2001.
The Company has not granted stock options during the nine months ended
March 31, 2003 and the fiscal year ended June 30, 2002. Therefore, the
full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the options' maximum vesting
period of seven years and compensation cost for options granted prior to
July 1, 1995, has not been considered. The fair value of each stock option
is estimated on the date of grant using the Black-Scholes option pricing
model. Pro forma compensation costs for stock options under SFAS No. 123
is recognized over the service period. Previously recognized pro forma
compensation cost is not to be reversed if a vested employee option expires
unexercised. The Company stops recognizing pro forma compensation cost when an
option expires.

5. DEBT

In November 2002, the Company repaid approximately $.3 million balance of
one credit facility. In connection with the sale of the Company's Northeast
Operations (See Note 6), another credit facility of approximately $.3 million
was fully repaid and terminated in December 2002.

8

At March 31, 2003, the Company had amounts outstanding of approximately
$951,000 on its remaining line of credit facility. The Company had approximately
$.5 million available on its line of credit as of March 31, 2003. As of March
31, 2003, the Company was in compliance with its line of credit covenants.

In August 2001, the Company entered into a stand-by letter of credit with a
bank in the amount of approximately $4.9 million to support the remaining
obligations under a holdback agreement with the former shareholders of Grizzard.
The letter of credit was collateralized by cash, which had been classified as
restricted cash in the current asset section of the balance sheet as of June 30,
2002. The Company has a remaining obligation of approximately $4.6 million under
the holdback agreement. In January 2003, the Company entered into an agreement
and settled the outstanding amount owed to the former Grizzard shareholders in
connection with such agreement. The Company paid approximately $4.6 million and
utilized its restricted cash. Approximately $.3 million of restricted cash
became available for general corporate use. Accordingly, the stand-by letter of
credit was terminated.

6. DISCONTINUED OPERATIONS

In December 2002, the Company completed the sale of substantially all of the
assets relating to its direct list sales and database services and website
development and design business held by certain of its wholly owned subsidiaries
(the 'Northeast Operations') to Automation Research, Inc. ('ARI'), a wholly
owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash
plus the assumption of all directly related liabilities. Approximately $.5
million is being held in escrow for six months in connection with certain
indemnifications made by the Company and its subsidiaries in accordance with the
terms and conditions of the purchase agreement. As such, the operations and cash
flows of the Northeast Operations have been eliminated from ongoing operations
and the Company no longer has continuing involvement in the operations.
Accordingly, the statement of operations and cash flows for the three and nine
months ending March 31, 2003 and 2002 have been reclassed into a one-line
presentation and is included in Loss from Discontinued Operations and Net Cash
Used by Discontinued Operations. In addition, the assets and liabilities of the
Northeast Operations have been segregated and presented in Net Assets of
Discontinued Operations and Net Liabilities of Discontinued Operations as of
June 30, 2002.

In connection with the sale of the Northeast Operations, the Company
recognized a loss on disposal of discontinued operations of approximately
$69,000 and $.2 million in the three and nine months ended March 31, 2003,
respectively. The loss represents the difference in the net book value of assets
and liabilities as of the date of the sale as compared to the net consideration
received after settlement of purchase price adjustments plus any additional
expenses incurred. Additional expenses include costs incurred during the quarter
for legal expenses, severance and other expenses offset by a gain of
approximately $110,000 in connection with the change in estimate for a lease
liability due to the subleasing of certain office space. There was no tax impact
on this loss.

On July 31, 2001, the Company completed the sale of all the outstanding
capital stock of its Grizzard subsidiary to Omnicom Group, Inc. As a result of
the sale agreement, the Company repaid a term loan of $35.5 million and a $12.0
million line of credit. The Company recorded a loss of approximately $4.9
million for the nine months ended March 31, 2002 as a result of the early
extinguishment of debt which is included in the loss from discontinued
operations. For the six months ended March 31, 2002, the Company recognized a
gain on sale of Grizzard in the amount of approximately $1.8 million which is
included in the statement of operations in Gain from Disposal of Discontinued
Operations. The gain represents the difference in the net book value of assets
and liabilities as of the date of the sale as compared to the net consideration
received after settlement of purchase price adjustments. The statement of
operations and cash flows for the nine months ending March 31, 2002 have been
reclassified into a one-line presentation and is included in Loss from
Discontinued Operations and Net Cash Used by Discontinued Operations as a result
of the sale of the list and database operations in December 2002 of which
Grizzard was a component.

Revenue recognized for the nine months ended March 31, 2003 relating to the
discontinued operations, which is included in Loss from Discontinued Operations,
was approximately $7.6 million. Revenue recognized for the three and nine months
ended March 31, 2002 relating to the discontinued

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operations, which is included in Loss from Discontinued Operations, was
approximately $5.3 million and $18.5 million, respectively. In connection with
the disposal of the discontinued operations, the Company no longer provides
services for the list sales and services, database marketing, website
development design and marketing communication services product lines.

7. GOODWILL AND OTHER INTANGIBLE ASSETS

As a result of the adoption of SFAS No. 142, the Company discontinued the
amortization of goodwill effective July 1, 2002. Identifiable intangible assets
are amortized under the straight-line method over the period of expected benefit
of five years. The Company recharacterized acquired workforce of approximately
$51,000 which is no longer defined as an intangible asset under SFAS No. 141. In
addition, the Company recharacterized non-contractual customer relationships of
approximately $.8 million which do not meet the separability criterion under
SFAS No. 141.

The Company completed the transition requirements under SFAS No. 142. The
Company determined that it had three reporting units. Reporting unit 1
represents the operations of list sales and services and database marketing.
Reporting unit 2 represents the operations of telemarketing. Reporting unit 3
represents the operations of web site development and design. The Company
recognized an impairment charge of approximately $5.1 million in connection with
the adoption of SFAS No. 142 for reporting units 1 and 3. The impairment charge
has been booked by the Company in accordance with SFAS 142 transition provisions
as a cumulative effect of a change in accounting principle for the nine months
ended March 31, 2003. In connection with the sale of the Northeast Operations
(See Note 5), the only remaining reporting unit consists of telemarketing. At
June 30, 2002, approximately $13.2 million of goodwill was included in net
liabilities of discontinued operations.

The following table sets forth the components of goodwill, net as of March
31, 2003:

Reporting unit -- 1 represents list sales and services and database marketing

Reporting unit -- 2 represents telemarketing

Reporting unit -- 3 represents website development and design

The following table sets forth the components of the intangible assets
subject to amortization as of March 31, 2003 and June 30, 2002:

Amortization expense for the nine months ended March 31, 2003 and 2002 was
approximately $15,000. Amortization for the three months ended March 31, 2003
and 2002 was approximately $5,000.

Estimated amortization expense by fiscal year as of June 30, are as follows:

2003..................................................... $20,000
2004..................................................... 20,000
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$40,000
-------
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The following table provides a reconciliation of net income (loss) available
for stockholders for exclusion of goodwill amortization:

8. CONTINGENCIES AND LITIGATION

In December 2000, an action was filed by Red Mountain, LLP in the United
States Court for the Northern District of Alabama, Southern Division against J.
Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG
Services, Inc., and WiredEmpire, Inc. Red Mountains' complaint alleges, among
other things, violations of Section 12(2) of the Securities Act of 1933, Section
10(b) of the Securities Act of 1934 and Rule 10(b)(5) promulgated there under,
and various provisions of Alabama state law and common law, arising from Red
Mountain's acquisition of WiredEmpire Preferred Series A stock in a private
placement. Red Mountain invested approximately $.2 million in WiredEmpire's
preferred stock and it seeks that amount, attorney's fees and punitive damages.
The Company believes that the allegations in the complaint are without merit.
The Company intends to vigorously defend against the lawsuit.

In December 2001, an action was filed by a number of purchasers of preferred
stock of WiredEmpire, Inc., a discontinued subsidiary, in the Alabama State
Court (Circuit Court of Jefferson County, Alabama, 10 Judicial Circuit of
Alabama, Birmingham Division), against J. Jeremy Barbera, Chairman of the Board
and Chief Executive Officer of MKTG, MKTG and WiredEmpire, Inc. The plaintiffs'
complaint alleges, among other things, violation of sections 8-6-19(a)(2) and
8-6-19(c) of the Alabama Securities Act and various other provisions of Alabama
state law and common law, arising from the plaintiffs' acquisition of
WiredEmpire Preferred Series A stock in a private placement. The plaintiffs
invested approximately $1.7 million in WiredEmpire's preferred stock and they
seek that amount, attorney's fees and punitive damages. On February 8, 2002, the
defendants filed a petition to remove the action to federal court on the grounds
of diversity of citizenship. The Company believes that the allegations in the
complaint are without merit. The Company intends to vigorously defend against
the lawsuit.

In June 2002, the Company entered into a Tolling Agreement (the 'Agreement')
with various claimants who acquired WiredEmpire Preferred Series A stock in a
private placement. The Agreement states that the passage of time from June 15,
2002 through August 31, 2002 shall not be counted toward the limit as set out by
any applicable statute of limitations. In addition, the claimants agree that
none of them shall initiate or file a legal action against Mr. Barbera, MKTG or
WiredEmpire prior to the termination of the agreement. The claimants invested
approximately $1.2 million in WiredEmpire's preferred stock. In January 2003, a
lawsuit was filed in Alabama, Circuit Court for Jefferson County by

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certain plaintiffs involved in the Agreement. The action was filed against J.
Jeremy Barbera, Chairman of the Board and Chief Executive Officer of MKTG, MKTG
and WiredEmpire, Inc. The plaintiffs' complaint alleges among other things
violations of state securities laws and breach of fiduciary duty. The Company
believes that the allegations in the complaint are without merit. The Company
intends to vigorously defend against the lawsuit.

In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act of
1934 was commenced against General Electric Capital Corporation ('GECC') by Mark
Levy, derivatively on behalf of the Company, to recover short swing profits
allegedly obtained by GECC in connection with the purchase and sale of MKTG
securities. The case was filed in the name of Mark Levy v. General Electric
Capital Corporation, in the United States District Court for the Southern
District of New York, Civil Action Number 99 Civ. 10560(AKH). In February 2002,
a settlement was reached among the parties. The settlement provided for a $1.3
million payment to be made to MKTG by GECC and for GECC to reimburse MKTG for
the reasonable cost of mailing a notice to stockholders up to $30,000. On
April 29, 2002, the court approved the settlement for approximately $1.3
million, net of attorney fees plus reimbursement of mailing costs. In July 2002,
the court ruling became final and the Company received and recorded the net
settlement payment of approximately $1.0 million plus reimbursement of mailing
costs. The net settlement has been recorded as a gain from settlement of lawsuit
and is included in the statement of operations for the nine months ending March
31, 2003.

In June 2002, the Company received notification from The Nasdaq Stock Market
('Nasdaq') that the Company's common stock has closed below the minimum $1.00
per share requirement for continued inclusion under Marketplace Rule 4310(c)(4).
In October 2002, the Company received another notification from Nasdaq that
based on its June 30, 2002 filing the Company does not meet compliance with
Marketplace Rule 4310(c)(2)(B). Such rule requires the Company to have a minimum
of $2.0 million in net tangible assets or $2.5 million in stockholders' equity
or a market value of listed securities of $35.0 million or $.5 million of net
income from continuing operations for the most recently completed fiscal year or
two of the three most recently completed fiscal years. In December 2002, the
Company received notification from Nasdaq indicating that the Company was
subject to delisting. The Company has responded to Nasdaq with its plan and
believed that it could achieve compliance with Marketplace Rule 4310(c)(2)(B) by
achieving minimum stockholders' equity of $2.5 million. In addition, in January
2003, the Company affected an eight-for-one reverse stock split (See Note 1). In
February 2003, the Company received notification from Nasdaq that the Company's
was not in compliance with the Nasdaq's market value of publicly held shares
requirements, as set forth in Nasdaq Marketplace Rule 4310(c)(07). The Company
believed that the issuance of common shares for the redemption of its preferred
stock (See Note 11) has brought the Company back into compliance with the
minimum public float requirement. The Company appealed the Staff's decision to
delist the Company to a Nasdaq Listing Qualification Panel. The hearing was held
on February 13, 2003. On March 5, 2003, a Nasdaq Listing Qualifications Panel
determined to continue the listing of the Company's securities on the Nasdaq
SmallCap Market on the condition, among other things, that the Company make a
public filing with the Securities and Exchange Commission and Nasdaq evidencing
shareholders' equity of at least $2.5 million and further that the Company file
its quarterly report on Form 10-Q for the March 31, 2003 quarter on or before
May 15, 2003. On March 13, 2003, the Company filed an unaudited balance sheet as
of January 31, 2003 evidencing shareholders' equity of at least $2.5 million. At
March 31, 2003, shareholders' equity was approximately $3.1 million.

In addition to the above, certain other legal actions in the normal course
of business are pending to which the Company is a party. The Company does not
expect that the ultimate resolution of the above matters and other pending legal
matters will have a material effect on the financial condition, results of
operations or cash flows of the Company, although there can be no assurances in
this regard.

9. RELATED PARTY TRANSACTIONS

During the quarter ending December 31, 2001, the Company advanced $1.0
million pursuant to a promissory note receivable agreement with an officer due
and payable to the Company at maturity, October 15, 2006. The Company recorded
the note receivable at a discount of approximately $58,000 to reflect the
incremental borrowing rate of the officer and is being amortized into interest
income over the

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term of the note. The note receivable is collateralized by current and future
holdings of MKTG common stock owned by the officer and bears interest at prime.
Interest is due and payable yearly on October 15th. The Company recognized
interest income of approximately $52,500 and $15,000 for the nine months ended
March 31, 2003 and 2002, respectively. The note will be forgiven in the event of
a change in control.

10. SEGMENT INFORMATION

In accordance with SFAS No. 131, 'Disclosures about Segments of an
Enterprise and Related Information' segment information is being reported
consistent with the Company's method of internal reporting. In accordance with
SFAS No. 131, operating segments are defined as components of an enterprise for
which separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and in
assessing performance. The Company believes it has one reporting segment. The
Company has one remaining product line (telemarketing), as a result of the sale
of its Northeast Operations, which are classified as Discontinued Operations. No
single customer accounted for 10% or more of total revenues. The Company earns
100% of its revenue in the United States.

11. PREFERRED STOCK

The preferred shareholders converted 696 and 1,799 shares of preferred stock
to 44,008 and 112,984 shares of common stock for the three and nine months ended
March 31, 2002, respectively.

On October 2, 2002, the common stockholders ratified the issuance of the
Series E preferred stock and approved the stockholders right to convert such
preferred stock to common stock beyond the previous 19.99% limitation.
Subsequently, the preferred shareholders converted 1,192 shares of Series E
preferred into 79,762 shares of common stock.

In January 2003, the Company redeemed the outstanding shares of the
preferred stock for a cash payment of approximately $6.0 million and the
issuance of 181,302 shares of common stock valued at approximately $.2 million.
The carrying value of the preferred stock was approximately $20.2 million which
included a beneficial conversion feature of approximately $10.3 million. The
transaction resulted in a gain on redemption of approximately $14.0 million and
is reflected in net income attributable to common stockholders for the three and
nine months ended March 31, 2003.

In February 2002, the Company recognized a loss on the redemption of
preferred stock of approximately $.4 million reflected in net loss attributable
to common stockholders (as revised--see note 3). The loss is the result of the
difference between the consideration paid for redemption of the preferred stock
for $5.0 million cash and the carrying value of the preferred stock of $4.6
million which included a beneficial conversion feature of approximately
$2.4 million.

12. GAIN ON TERMINATION OF LEASE

In December 2002, the Company terminated a lease for abandoned property.
The lease termination agreement required an up front payment of $.3
million and the Company is obligated to pay approximately $60,000 per month
until the landlord has completed certain leasehold improvements for a new tenant
(expected to be completed in the Company's fourth quarter) and then Company is
obligated to pay $20,000 per month until August 2010. The Company was released
from all other obligations under the lease. The gain on lease termination
represents a change in estimate representing the difference between the
Company's present value of its future obligations and the entire obligation that
remained on the books under the original lease obligation. The remaining
obligation has been recorded in accrued expenses and other current liabilities
and other liabilities.

13

ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements contained in this Report on Form 10-Q discuss our
plans and strategies for our business or state other forward-looking statements,
as this term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause the actual results, performance or
achievements of MKTG Services, Inc. ('MKTG' or the 'Company'), or industry
results to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions; industry capacity; direct marketing and other industry trends;
demographic changes; competition; the loss of any significant customers; changes
in business strategy or development plans; availability and successful
integration of acquisition candidates; availability, terms and deployment of
capital; advances in technology; retention of clients not under long-term
contract; quality of management; business abilities and judgment of personnel;
availability of qualified personnel; changes in, or the failure to comply with,
government regulations; and technology, telecommunication and postal costs.

BOARD OF DIRECTORS CONSENTS

In March 2003, the Company's Board of Directors adopted by unanimous consent
the following resolutions: Accepted the resignation of Alan I. Annex from the
Board of Directors; Accepted the resignation of Cindy Hill as Chief Accounting
Officer due to medical reasons and; lastly, appointed Jeremy Barbera as interim
Chief Financial Officer until his successor shall be duly elected.

INTRODUCTION

This discussion summarizes the significant factors affecting the
consolidated operating results, financial condition and liquidity/cash flows of
the Company for the three and nine-month periods ended March 31, 2003 and 2002.
This should be read in conjunction with the financial statements, and notes
thereto, included in this Report on Form 10-Q and the Company's financial
statements and notes thereto, included in the Company's Annual Report on Form
10-K for the year ended June 30, 2002.

Financial Reporting Release No. 60 requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief description of the more
significant accounting policies and methods used by the Company.

REVENUE RECOGNITION:

Revenues derived from on-site telemarketing and telefundraising are
generally based on hourly billing rates and a mutually agreed percentage of
amounts received by the Company's client from a campaign. These services are
performed on-site at the clients' location. These revenues are earned and
recognized when the cash is received by the respective client. Revenues derived
from off-site telemarketing and telefundraising are generally based on a
mutually agreed amount per telephone contact with a potential donor without
regard to amounts raised for the client. These services are performed at the
Company's calling center. These revenues are earned and recognized when the
services are performed.

GOODWILL:

Effective July 1, 2002, the Company adopted the provisions of SFAS No. 141,
'Business Combinations,' in its entirety and SFAS No. 142, 'Goodwill and Other
Intangible Assets.' SFAS No. 141 applies to all business combinations with a
closing date after June 30, 2001. SFAS No. 141 eliminates the
pooling-of-interests method of accounting and further clarifies the criteria for
recognition

14

of intangible assets separately from goodwill. SFAS No. 142 eliminates the
amortization of goodwill and indefinite-lived intangible assets and initiates an
annual review for impairment. Identifiable intangible assets with a determinable
useful life continue to be amortized. The adoption required the Company to cease
amortization of its remaining net goodwill balance and to perform a transitional
impairment test of its existing goodwill based on a fair value concept as of the
date of adoption.

Goodwill is not subject to amortization and is tested for impairment
annually, or more frequently if events or changes in circumstances indicate that
the asset may be impaired. The impairment test consists of a comparison of the
fair value of goodwill with its carrying amount. If the carrying amount of
goodwill exceeds its fair value, an impairment loss shall be recognized in an
amount equal to that excess. After an impairment loss is recognized, the
adjusted carrying amount of goodwill is its new accounting basis.

LONG-LIVED ASSETS:

Effective July 1, 2002, the Company adopted SFAS No. 144 'Accounting for the
Impairment or Disposal of Long-Lived Assets'. SFAS No. 144 addresses financial
accounting and reporting for the disposal of long-lived assets. The objectives
of SFAS No. 144 are to address significant issues relating to the implementation
of SFAS No. 121, 'Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of' and to develop a single accounting model,
based on the framework established in SFAS No. 121, for the long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired. SFAS
No. 144 retains the fundamental provisions of SFAS No. 121 recognition and
measurement of the impairment of long-lived assets to be held and used. The
Company reviews for impairment of long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In general, the Company will
recognize an impairment when the sum of undiscounted future cash flows (without
interest charges) is less than the carrying amount of such assets. The
measurement for such impairment loss is based on the fair value of the asset.
SFAS No. 144 supersedes the accounting and reporting provisions of APB Opinion
No. 30, 'Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions', for segments of a business to be disposed
of. However, this Statement retains the requirement of Opinion 30 to report
discontinued operations separately from continuing operations and extends that
reporting to a component of an entity that either has been disposed of or is
classified as held for sale. The adoption of such pronouncement did not have a
material impact on the Company's financial position and results of operations.

USE OF ESTIMATES:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. The most
significant estimates and assumptions made in the preparation of the
consolidated financial statements relate to the carrying amount and lives of
intangible assets, deferred tax valuation allowance, abandoned lease reserves
and the allowance for doubtful accounts. Actual results could differ from those
estimates.

RECENT ACCOUNTING PRONOUNCEMENTS:

In April 2002, the FASB issued SFAS No. 145 'Rescission of SFAS Nos. 4, 44,
and 64, Amendment of FAS 13, and Technical Corrections as of April 2002.' SFAS
No. 145 became effective for financial statements issued for fiscal years
beginning after May 15, 2002. The Company adopted SFAS 145 on July 1, 2002. The
adoption of the statement did not have a material impact on the Company's
financial position and results of operations. However, the loss on
extinguishment of debt that was classified as an extraordinary item in the prior
period has been reclassified and included in loss from discontinued operation as
the loss does not meet the criteria in APB Opinion No. 30 'Reporting the Results
of

15

Operations Reporting the Effects of Disposal of a Segment of a Business', for
classification as an extraordinary item.

In June 2002, the FASB issued SFAS No. 146, 'Accounting for Costs Associated
with Exit or Disposal Activities.' SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force Issue No. 94-3, 'Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).' Under Issue No. 94-3, a
liability for an exit cost as defined in Issue 94-3 was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair market value only when the liability is incurred
and not when management has completed the plan. The adoption of such
pronouncement did not have a material impact on the Company's financial position
and results of operations.

In November 2002, the FASB issued FIN 45, 'Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Other,' and interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34, FIN 45 elaborates on the existing
disclosure requirements of guarantees and obligations to stand ready to perform
over the term of the guarantee in the event that specified triggering events or
conditions occur and the identification of those contingent obligations to make
future payments if those triggering events or conditions occur. Additional
disclosures have been added to Commitments and Contingencies footnote describing
the nature of the guarantee; amount and event triggering the Company's
obligation under the guarantee and the Company's recourse to recover in such an
event. Management does not believe that this pronouncement will have a material
impact on its financial statements.

In December 2002, the FASB issued SFAS No. 148, 'Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB No. 123.' SFAS
No. 148 amends SFAS No. 123, 'Accounting for Stock-Based Compensation,' to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on the reported results. SFAS No. 148 is effective for
fiscal years and interim periods beginning after December 15, 2002. The Company
continues to account for stock-based employee compensation under the intrinsic
value method of APB 25, 'Accounting for Stock Issued to Employees.' The Company
adopted the disclosure provisions of SFAS No. 148 in the quarter ending March
31, 2003.

In January 2003, the FASB issued FIN 46, 'Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51.' FIN 46 requires an investor to
consolidate a variable interest entirety if it is determined that the investor
is a primary beneficiary of that entity, subject to the criteria set forth in
FIN 46. Assets, liabilities, and non controlling interests of newly consolidated
variable interest entities will be initially measured at fair value. After
initial measurement, the consolidated variable interest entity will be accounted
for under the guidance provided by Accounting Research Bulletin No. 51,
'Consolidated Financial Statements.' FIN 46 is effective for variable interest
entities created or entered into after January 2003. For variable interest
entities created or acquired before February 1, 2003, FIN 46 applies in the
first fiscal year or interim period beginning after June 15, 2003. Management
does not believe that this pronouncement will have a material impact on its
financial statements.

To facilitate an analysis of MKTG operating results, certain significant
events should be considered.

In December 2002, the Company completed its sale of substantially all the
assets relating to its direct list sales and database services and website
development and design business held by certain of its wholly owned subsidiaries
(the 'Northeast Operations') to Automation Research, Inc. ('ARI'), a wholly
owned subsidiary of CBC Companies, Inc. for approximately $10.4 million in cash
plus the assumption of all directly related liabilities. Approximately $.5
million is being held in escrow for six months in connection with certain
indemnifications made by the Company and its subsidiaries in accordance with the
terms and conditions of the purchase agreement. As such, the operations and cash
flows of the Northeast Operations have been eliminated from ongoing operations
and the Company no longer has continuing involvement in the operations.
Accordingly, the statement of operations and cash

16

flows for the three and nine months ending March 31, 2003 and 2002 have been
reclassed into a one-line presentation and is included in Loss from Discontinued
Operations and Net Cash Used by Discontinued Operations. In addition, the assets
and liabilities of the Northeast Operations have been segregated and presented
in Net Assets of Discontinued Operations and Net Liabilities of Discontinued
Operations as of June 30, 2002.

On July 31, 2001, the Company completed the sale of all the outstanding
capital stock of its Grizzard subsidiary to Omnicom Group, Inc. The purchase
price of the transaction was approximately $89.8 million payable in cash. As a
result of the sale agreement, the Company fully paid the term loan of $35.5
million and $12.0 million line of credit. The statement of operations and cash
flows for the nine months ending March 31, 2002 have been reclassed into a
one-line presentation and is included in Loss from Discontinued Operations and
Net Cash Used by Discontinued Operations as a result of the sale of the list and
database operations in December 2002 of which Grizzard was a component.

On January 22, 2003, the Board of Directors approved an eight-for-one
reverse split of the common stock. The stock split was effective January 27,
2003. Par value of the common stock remained $.01 per share and the number of
authorized shares of common stock was reduced to 9,375,000. All amounts
presented reflect the effect of the stock split.

In March 2003, the Company's Board of Directors adopted by unanimous consent
the following resolutions: Accepted the resignation of Alan Annex from the Board
of Directors; Accepted the resignation of Cindy Hill as Chief Accounting Officer
due to medical reasons and; lastly, appointed Jeremy Barbera as interim Chief
Accounting Officer until his successor shall be duly elected.

The Company's business tends to be seasonal. The remaining business of
Telemarketing services have higher revenues and profits occurring in the fourth
fiscal quarter, followed by the first fiscal quarter. This is due to
subscription renewal campaigns for its performing arts clients, which generally
begin in the springtime and continue during the summer months.

Results of Operations for the Three Months Ended March 31, 2003, Compared to
the Three Months Ended March 31, 2002.

Revenues of approximately $3.5 million for the three months ended March 31,
2003 (the 'Current Period') increased by approximately $.1 million or 3% over
revenues of approximately $3.4 million during the three months ended March 31,
2002 (the 'Prior Period'). The Company moved its call center during the Fall of
2001 and as a result slowed down operations for a period of time in the Prior
Period.

Salaries and benefits of approximately $3.2 million in the Current Period
decreased by approximately $.2 million or 6% over salaries and benefits of
approximately $3.4 million in the Prior Period. Salaries and benefits decreased
due to decreased headcount in several areas of the Company. The Company has been
actively consolidating its offices and infrastructure. Redundant functions in
operations were eliminated due to the consolidation of offices with the move of
the call center in the Fall of 2001. In connection with a reduction in force,
corporate head count was reduced from seven to three. In February 2003, certain
compensation arrangements were modified. The Chief Executive Officer voluntarily
forgave part of his base compensation to effect a reduction of approximately 30%
to $350,000. The Chief Accounting Officer also forgave part of her base
compensation to effect a reduction of approximately 30% and $125,000 per year
and in addition, due to medical reasons resigned as Chief Accounting Officer of
the Company in March 2003. The Chief Executive Officer has assumed the duties as
the Chief Accounting Officer in his role as Interim Chief Financial Officer
until such a replacement has been elected.

Direct costs of approximately $.1 million in the Current Period and Prior
Period remained consistent. Direct costs as a percentage of revenue was 3% and
4% for the Current Period and the Prior Period, respectively.

Selling, general and administrative expenses of approximately $.5 million in
the Current Period decreased by approximately $.6 million or 55% over comparable
expenses of approximately $1.1 million in the Prior Period. Selling, general and
administrative expenses decreased principally due to decreased professional
fees, rent, travel and other expenses due to the consolidation of certain office
spaces and the reduction of head count.

17

Depreciation and amortization expense of approximately $56,000 in the
Current Period decreased by approximately $38,000 over expense of approximately
$94,000 in the Prior Period. The decrease is primarily due to the adoption of
SFAS No. 142, 'Goodwill and Other Intangible Assets.' The Company adopted the
new pronouncement as of July 1, 2002. This Statement eliminates amortization of
goodwill and indefinite-lived intangible assets and initiates an annual review
for impairment. Identifiable intangible assets with a determinable useful life
will continue to be amortized. The adoption required the Company to cease
amortization of its remaining net goodwill balance and to perform a transitional
impairment test as of the adoption date in addition to an impairment test of its
existing goodwill based on a fair value concept. The Company will perform its
annual impairment test during the fourth quarter of its fiscal year.

In the prior period, due to the weekend economy and lower than expected
results, the Company had determined that there may not be sufficient cash flows
to recover the remaining book value of goodwill. As a result, the Company
recognized an impairment charge of approximately $6.5 million, which is included
in loss from continuing operations.

Net interest income of approximately $2,000 in the Current Period increased
by approximately $59,000 over net interest expense of approximately $57,000 in
the Prior Period. Net interest income increased primarily due to less borrowing
on the line of credit coupled with the repayment of the Grizzard debt in January
2003.

The provision for income taxes of approximately $11,000 in the Current
Period decreased by approximately $13,000 over the provision for income taxes of
approximately $25,000 in the Prior Period. The Company records provisions for
state and local taxes incurred on taxable income or equity at the operating
subsidiary level, which cannot be offset by losses incurred at the parent
company level or other operating subsidiaries. The Company has recognized a full
valuation allowance against the deferred tax assets because it is not certain
sufficient taxable income will be generated during the carry forward period to
utilize the deferred tax assets.

The loss from discontinued operations in the Current Period and the Prior
Period are the results of losses incurred during the respective periods from
Grizzard and the Northeast Operations which have been sold. The Prior Period
includes a write-down for the impairment of goodwill of approximately $29.4
million.

In connection with the sale of the Northeast Operations, the Company
incurred a loss on disposal of discontinued operations of approximately $69,000
in the three months ended March 31, 2003. The loss represents the additional
costs incurred during the quarter for legal expenses, severance and other
expenses offset by a gain of approximately $110,000 in connection with the
change in estimate for a lease liability due to the subleasing of certain office
space.

As a result of the above, net loss of approximately $.4 million in the
Current Period decreased by approximately $39.0 million over comparable net loss
of approximately $39.4 million in the Prior Period.

In the Current Period the Company recognized a gain on redemption of
preferred stock of approximately $14.0 million and is reflected in net income
attributable to common stockholders. The gain is a result of the difference
between the consideration paid for redemption of the preferred stock of
approximately $6.0 million cash and the issuance of 181,302 shares of common
stock valued at approximately $.2 million and the carrying value of the
preferred stock which was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million.

In the Prior Period, the Company recognized a loss on the redemption of
preferred stock of approximately $.4 million reflected in net loss attributable
to common stockholders (as revised -- see Note 3 in financial statements). The
loss is the result of the difference between the consideration paid for
redemption of the preferred stock for $5.0 million cash and the carrying value
of the preferred stock of $4.6 million which included a beneficial conversion
feature of approximately $2.4 million.

Results of Operations for the Nine Months Ended March 31, 2003, Compared to
the Nine Months Ended March 31, 2002

18

Revenues of approximately $11.1 million for the nine months ended March 31,
2003 (the 'Current Period') increased by approximately $1.0 million or 10% over
revenues of approximately $10.1 million during the nine months ended March 31,
2002 (the 'Prior Period'). In the prior year revenue was depressed due to
unexpected client cancellations and postponed fundraising campaigns due to the
terrorist events of September 11th. In addition, the Company moved its call
center during the Fall of 2001 and as a result slowed down operations for a
period of time in the Prior Period.

Salaries and benefits of approximately $10.1 million in the Current Period
decreased by approximately $.7 million or 6% over salaries and benefits of
approximately $10.8 million in the Prior Period. Salaries and benefits decreased
due to decreased headcount in several areas of the Company. The Company has been
actively consolidating its offices and infrastructure. Redundant functions in
operations were eliminated due to the consolidation of offices with the move of
the call center. In connection with a reduction in force corporate head count
was reduced from seven to three. In February 2003, certain compensation
arrangements were modified. The Chief Executive Officer voluntarily forgave part
of his base compensation to effect a reduction of approximately 30% to $350,000.
The Chief Accounting Officer also forgave part of her base compensation to
effect a reduction of approximately 30% to $125,000 per year and in addition,
due to medical reasons resigned as Chief Accounting Officer of the Company in
March 2003. The Chief Executive Officer has assumed the duties as the Chief
Financial Officer until such a replacement has been elected.

Direct costs of approximately $.5 million in the Current Period increased by
approximately $.1 or 25% over direct costs of approximately $.4 million in the
Prior Period. Direct costs as a percentage of revenue was 4% for both the
Current Period and the Prior Period.

Selling, general and administrative expenses of approximately $1.4 million
in the Current Period decreased by approximately $1.8 million or 56% over
comparable expenses of approximately $3.2 million in the Prior Period. Selling,
general and administrative expenses decreased principally due to decreased
professional fees, rent, travel and other expenses due to the consolidation of
certain office spaces and the reduction of head count.

Depreciation and amortization expense of approximately $.2 million in the
Current Period decreased by approximately $.1 over expense of approximately $.3
million in the Prior Period. The decrease is primarily due to the adoption of
SFAS No. 142, 'Goodwill and Other Intangible Assets.' The Company adopted the
new pronouncement as of July 1, 2002. This Statement eliminates amortization of
goodwill and indefinite-lived intangible assets and initiates an annual review
for impairment. Identifiable intangible assets with a determinable useful life
will continue to be amortized. The adoption required the Company to cease
amortization of its remaining net goodwill balance and to perform a transitional
impairment test as of the adoption date in addition to an impairment test of its
existing goodwill based on a fair value concept. The Company will perform its
annual impairment test during the fourth quarter of its fiscal year.

In the prior period, due to the weekend economy and lower than expected
results, the Company had determined that there may not be sufficient cash flows
to recover the remaining book value of goodwill. As a result, the Company
recognized an impairment charge of approximately $6.5 million, which is included
in loss from continuing operations.

Gain on termination of lease of approximately $3.9 million in the Current
Period was a result of the Company successfully negotiating a termination of a
lease for an abandoned lease property. The agreement required an up front
payment of approximately $.3 million and the Company is obligated to pay
approximately $60,000 per month until the landlord has completed certain
leasehold improvements for a new tenant (expected to be completed in the
Company's fourth quarter) and then Company is obligated to pay $20,000 per month
until August 2010. The gain on lease termination represents a change in estimate
representing the difference between the Company's present value of its new
future obligations and the entire obligation that remained on the books under
the original lease obligation as a result of the abandonment. The remaining
obligation has been recorded in accrued expenses and other current liabilities
and other liabilities.

During the Current Period, the Company recognized a gain on a settlement of
a lawsuit. In 1999, a lawsuit under Section 16(b) of the Securities Exchange Act
of 1934 was commenced against General

19

Electric Capital Corporation ('GECC') by Mark Levy, derivatively on behalf of
the Company, to recover short swing profits allegedly obtained by GECC in
connection with the purchase and sale of MKTG securities. The case was filed in
the name of Mark Levy v. General Electric Capital Corporation, in the United
States District Court for the Southern District of New York, Civil Action Number
99 Civ. 10560(AKH). In February 2002, a settlement was reached among the
parties. The settlement provided for a $1.3 million payment to be made to MKTG
by GECC and for GECC to reimburse MKTG for the reasonable cost of mailing a
notice to stockholders up to $30,000. On April 29, 2002, the court approved the
settlement for approximately $1.3 million, net of attorney fees plus
reimbursement of mailing costs. In July 2002, the court ruling became final and
the Company received and recorded the net settlement payment of approximately
$1.0 million plus reimbursement of mailing costs.

Net interest expense of approximately $15,000 in the Current Period
decreased by approximately $.2 million over net interest income of approximately
$.2 million in the Prior Period. Net interest income decreased primarily due to
the decrease in interest rates coupled with the decrease in average cash.

The provision for income taxes of approximately $42,000 in the Current
Period decreased by approximately $24,000 over the provision for income taxes of
approximately $66,000 in the Prior Period. The Company records provisions for
state and local taxes incurred on taxable income or equity at the operating
subsidiary level, which cannot be offset by losses incurred at the parent
company level or other operating subsidiaries. The Company has recognized a full
valuation allowance against the deferred tax assets because it is not certain
sufficient taxable income will be generated during the carry forward period to
utilize the deferred tax assets.

The loss from discontinued operations in the Current Period and the Prior
Period are the results of loss incurred during the respective periods from
Grizzard and the Northeast Operations which have been sold. The Company recorded
a loss of approximately $4.9 million for the nine months ended March 31, 2002 as
a result of the early extinguishment of debt which is included in the loss from
discontinued operations and was previously classified as an extraordinary item.

In connection with the sale of the Northeast Operations, the Company
realized a loss on disposal of discontinued operations of approximately $.2
million in the nine months ended March 31, 2003. The loss primarily results from
the difference in the net book value of assets and liabilities as of the date of
the sale as compared to the net consideration received after settlement of
purchase price adjustments.

For the nine months ended March 31, 2002, the Company recognized a gain on
sale of Grizzard in the amount of approximately $1.8 million which is included
in the statement of operations in Gain From Disposal of Discontinued Operations.
The gain represents the difference in the net book value of assets and
liabilities as of the date of the sale as compared to the net consideration
received after settlement of purchase price adjustments.

As of December 31, 2002, the Company completed the transition requirements
under SFAS No. 142. There is no impairment for its telemarketing unit. The
Company recognized an impairment charge of approximately $5.1 million in
connection with the adoption of SFAS No. 142 for its list sales and database
marketing and website development and design reporting units. The impairment
charge has been booked by the Company in accordance with SFAS 142 transition
provisions as a cumulative effect of change in accounting for the nine months
ended March 31, 2003.

As a result of the above, net loss of approximately $2.7 million in the
Current Period decreased by approximately $51.2 million over comparable net loss
of $53.9 million in the Prior Period.

In the Current Period the Company recognized a gain on redemption of
preferred stock of approximately $14.0 million and is reflected in net income
attributable to common stockholders. The gain is a result of the difference
between the consideration paid for redemption of the preferred stock of
approximately $6.0 million cash and the issuance of 181,302 shares of common
stock valued at approximately $.2 million and the carrying value of the
preferred stock which was approximately $20.2 million which included a
beneficial conversion feature of approximately $10.3 million.

In the Prior Period, the Company recognized a loss on redemption of
preferred stock of approximately $.4 million reflected in net loss attributable
to common stockholders (as revised -- see Note 3 in financial statements). The
loss is the result of the difference between the consideration paid

20

for redemption of the preferred stock for $5.0 million cash and the carrying
value of the preferred stock of $4.6 million which included a beneficial
conversion feature of approximately $2.4 million.

CAPITAL RESOURCES AND LIQUIDITY

Financial Reporting Release No. 61, which was released by the SEC, requires
all companies to include a discussion to address, among other things, liquidity,
off-balance sheet arrangements, contractual obligations and commercial
commitments. The Company currently does not maintain any off-balance sheet
arrangements.

Leases: The Company leases various office space and equipment under
non-cancelable long-term leases. The Company incurs all costs of insurance,
maintenance and utilities.

Future minimum rental commitments under all non-cancelable leases, as of
March 31, 2003 are as follows:

Debt: In August 2001, the Company entered into a stand-by letter of credit
with a bank in the amount of approximately $4.9 million to support the remaining
obligations under a holdback agreement with the former shareholders of Grizzard.
The letter of credit was collateralized by cash, which had been classified as
restricted cash in the current asset section of the balance sheet as of June 30,
2002. The Company has a remaining obligation of approximately $4.6 million under
the holdback agreement. In January 2003, the Company entered into an agreement
and settled the outstanding amount owed to the former Grizzard shareholders in
connection with such agreement. The Company paid approximately $4.6 million and
utilized its restricted cash. Approximately $.3 million of restricted cash
became available for general corporate use. Accordingly, the stand-by letter of
credit was terminated.

In connection with an acquisition, the Company incurred promissory notes
payable to former shareholders, payable monthly at 5.59% interest through
January 2004. The remaining obligation is approximately $.3 million and is
classified as a current liability.

In December 2002, the Company terminated a lease for abandoned lease
property. The agreement required an up front payment of $.3 million and the
Company is obligated to pay approximately $60,000 per month until the landlord
completed certain leasehold improvements for a new tenant (expected to be
completed in the Company's fourth quarter) and then Company is obligated to pay
$20,000 per month until August 2010. The gain on lease termination represents a
change in estimate representing the difference between the Company's present
value of its new future obligations and the entire obligation that remained on
the books under the original lease obligation as a result of the abandonment.
The remaining obligation is approximately $1.7 million in aggregate with $.3
million included in accrued expense and other current liabilities and
approximately $1.4 million included in other liabilities.

In January 2003, the Company redeemed the outstanding shares of the
preferred stock for a cash payment of approximately $6.0 million and the
issuance of 181,302 shares of common stock valued at approximately $.2 million.
The carrying value of the preferred stock was approximately $20.2 million which
included a beneficial conversion feature of approximately $10.3 million. The
transaction resulted in a gain on redemption of approximately $14.0 million and
is reflected in net income attributable to common stockholders for the three and
nine months ended March 31, 2003.

Historically, the Company has funded its operations, capital expenditures
and acquisitions primarily through cash flows from operations, private
placements of common and preferred stock, and its credit

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facilities. At March 31, 2003, the Company had cash and cash equivalents of
approximately $1.5 million and accounts receivable net of allowances of
approximately $1.9 million, $.5 million due from CBC, offset by current
liabilities of approximately $4.0 million.

The Company has limited capital resources and has incurred significant
historical losses and negative cash flows from operations. The Company believes
that funds on hand, funds available from its remaining operations and its unused
lines of credit should be adequate to finance its operations and capital
expenditure requirements and enable the Company to meet interest and debt
obligations for the next twelve months. As explained in Note 5 to the
Consolidated Financial Statements and in this MD&A, the Company recently sold
off substantially all the assets relating to its direct list sales and database
services and website development and design business held by certain of its
wholly owned subsidiaries. In addition, the Company has instructed cost
reduction measures, including the reduction of workforce. The Company believes,
based on past performance as well as the reduced corporate overhead, that its
remaining operations should generate sufficient future cash flow to fund
operations. Failure of the remaining operation to generate such sufficient
future cash flow could have a material adverse effect on the Company's ability
to continue as a going concern and to achieve its business objectives. The
accompanying financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result should the Company be unable to continue as a
going concern.

The Company generated net income from continuing operations of approximately
$3.8 million in the nine months ended March 31, 2003 ('Current Period'),
adjusted for discontinued operations and cumulative effect of change in
accounting.

Cash used in operating activities in the Current Period was approximately
$2.7 million. Cash used by operating activities principally consists of the net
income from continuing operations adjusted for the gain on termination of lease
offset by a decrease in accounts payable and accrued expenses, offset by a
decrease in accounts receivable. Cash used in operating activities in the Prior
Period of approximately $7.6 million consists of the net loss from continuing
operations, a decrease in accounts payable and accrued expenses offset by the
impairment of goodwill.

In the Current Period, net cash of approximately $13.5 million was provided
by investing activities consisting of net proceeds from the sale of the
Northeast Operations and the release of restricted cash to satisfy the related
debt. In the Prior Period, net cash provided by investing activities of
approximately $72.9 million consisted of proceeds from the sale of Grizzard of
approximately $78.7 million, offset by the increase in restricted cash of
approximately $4.9 million and purchases of property and equipment of
approximately $.7 million.

In the Current Period, net cash of approximately $12.1 million was used in
financing activities consisting primarily of cash payment of approximately $6.0
million for the redemption of preferred stock, repayments of credit facilities
of approximately $1.3 million and repayment of debt of approximately $4.8
million. In the Prior Period, net cash used in financing activities of
approximately $6.0 million consisted of payment in connection with the
redemption of preferred stock of $5.0 million, issuance of related party note
receivable of approximately $1.0 million, repayments of related party notes
payable of approximately $.2 million, repayments of long term debt of
approximately $.1 million offset by approximately $.4 million in proceeds from
credit facilities.

At March 31, 2003, the Company had amounts outstanding of approximately $1.0
million on its lines of credit. The Company had approximately $.5 million
available on its lines of credit as of March 31, 2003. As of March 31, 2003, the
Company was in compliance with its line of credit covenants.

ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risks in the ordinary course of its
business, primarily risks associated with interest rate fluctuations.
Historically, fluctuations in interest rates have not had a significant impact
on the Company's operating results. At March 31, 2003 the Company had
approximately $1.0 million of variable rate indebtedness outstanding.

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ITEM 4 -- CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.

Our principal executive officer and financial officer, after evaluating the
effectiveness of our 'disclosure controls and procedures' (as defined in the
Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date
within 90 days before the filing date of this quarterly report (the 'Evaluation
Date'), has concluded that as of the Evaluation Date our disclosure controls and
procedures were adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made known to them by
others within those entities.

CHANGES IN INTERNAL CONTROLS

There were no significant changes in our internal controls or, to our
knowledge, in other factors that could significantly affect our disclosure
controls and procedures subsequent to the Evaluation Date.

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PART II -- OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

(a) Included herein in the Company's Report on Form 10-Q for the quarter
ended March 31, 2003

99.1 Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 Sarbanes Oxley Act of 2002

REPORTS ON FORM 8-K

On or about February 21, 2003, the company filed a current report on form
8-K regarding the redemption of all of its Series E Preferred Stock for
approximately $6 million in cash and the issuance of 181,302 shares of common
stock as well as its effecting an eight-for-one reverse split of its common
stock on January 27, 2003.

On or about March 5, 2003, the company filed a current report on form 8-K
regarding the company's receipt of notification by Nasdaq that, following a
hearing held on February 13, 2003 before a Nasdaq Listing Qualifications Panel,
a determination was made to continue the listing of the company's securities on
the Nasdaq SmallCap Market.

On or about March 14, 2003, the company filed a current report on form 8-K
regarding a required public filing with the Securities and Exchange Commission
and Nasdaq of a balance sheet, no older than 45 days, evidencing stockholders'
equity of at least $2.5 million.

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SIGNATURES

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

MKTG SERVICES, INC.

(Registrant)

By: /s/ J. Jeremy Barbera
.....................................
J. JEREMY BARBERA
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
INTERIM CHIEF FINANCIAL OFFICER

Date: May 15, 2003

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CERTIFICATES

MKTG SERVICES, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER

I, J. Jeremy Barbera, certify that:

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

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

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

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

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

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

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

5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and to the
audit committee of registrant's board of directors:

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

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

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

By: /s/ J. JEREMY BARBERA
.....................................
J. JEREMY BARBERA
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER AND INTERIM CHIEF FINANCIAL
OFFICER (PRINCIPAL EXECUTIVE OFFICER
AND PRINCIPAL ACCOUNTING OFFICER)

26