ADVANTAGE MARKETING SYSTEMS INC/OK - 10-Q Quarterly Report

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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(X)QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the
quarterly period ended June 30, 2002

or

( )TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT OF 1934

For the transition period from to

Commission File Number: 001-13343

ADVANTAGE MARKETING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Oklahoma 73-1323256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2601 NW Expressway, Suite 1210W
Oklahoma City, Oklahoma 73112
(Address of principal executive offices) (Zip Code)

(405) 842-0131
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) 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 [ ]

On July 31, 2002, we had outstanding 4,423,879 shares of our common stock,
$.0001 par value.

ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2002

Table of Contents

Part I - Financial Information ..................................................... 3
Item 1. Financial Statements. ..................................................... 3
Condensed Consolidated Balance Sheets ..................................... 3
Condensed Consolidated Statements of Income ............................... 4
Condensed Consolidated Statements of Cash Flows ........................... 5
Notes to Condensed Consolidated Financial Statements ...................... 6
Report of Independent Certified Public Accountants ........................ 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations .......................................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................. 18
Part II - Other Information ....................................................... 19
Item 1. Legal Proceedings. ........................................................ 19
Item 2. Changes in Securities and Use of Proceeds ................................. 19
Item 3. Defaults Upon Senior Securities ........................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ....................... 19
Item 5. Other Information ......................................................... 19
Item 6. Exhibits and Reports on Form 8-K .......................................... 19

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements under the caption "Item 2 - Management's Discussion and
Analysis or Plan of Operation" constitute "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Certain, but not
necessarily all, of such forward-looking statements can be identified by the use
of forward-looking terminology such as "anticipates", "believes", "expects",
"may", "will", or "should" or other variations thereon, or by discussions of
strategies that involve risks and uncertainties. The actual results of the
Company or industry results may be materially different from any future results
expressed or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include general economic and business
conditions; the ability of the Company to implement its business and acquisition
strategies; changes in the network marketing industry and changes in consumer
preferences; competition; availability of key personnel; increasing operating
costs; unsuccessful advertising and promotional efforts; changes in brand
awareness; acceptance of new product offerings; and changes in, or the failure
to comply with, government regulations (especially food and drug laws and
regulations); the ability of the Company to obtain financing for future
acquisitions; and other factors.

2

PART I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

5

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

1. UNAUDITED INTERIM FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements and
related notes have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States of America have been omitted pursuant to
such rules and regulations. The accompanying condensed consolidated
financial statements and related notes should be read in conjunction
with the audited consolidated financial statements of the Company, and
notes thereto, for the year ended December 31, 2001.

The information furnished reflects, in the opinion of
management, all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the results of the interim periods
presented. Operating results of the interim period are not necessarily
indicative of the amounts that will be reported for the year ending
December 31, 2002.

2. SIGNIFICANT ACCOUNTING POLICIES

In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets". This standard requires companies to stop
amortizing existing goodwill and intangible assets with indefinite
lives effective January 1, 2002. Under the new rules, companies would
only adjust the carrying amount of goodwill or indefinite life
intangible assets upon an impairment of the goodwill or indefinite life
intangible assets. The Company implemented these standards effective
January 1, 2002. No impairment of goodwill resulted from this
implementation, and there was no material impact on consolidated
results of operations, financial position or cash flows.

The table below shows the reconciliation between reported net
income and earnings per share and adjusted net income and earnings per
share, adjusted for goodwill amortization (tax-effected):

In August 2001, SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", was issued and is effective for
fiscal years beginning after December 15, 2001. SFAS No.

6

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

144 addresses accounting and reporting for the impairment or disposal
of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" and Accounting Principles Board ("APB") Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business". SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 and expands the reporting of discontinued
operations to include all components of an entity with operations that
can be distinguished from the rest of the entity and that will be
eliminated from the ongoing operations of the entity in a disposal
transaction. The Company implemented this standard effective January 1,
2002. Implementation did not have a material impact on consolidated
results of operations, financial position, or cash flows.

3. MARKETABLE SECURITIES

Securities are classified as available for sale with the
related unrealized gains and losses excluded from earnings and reported
net of income tax as a separate component of stockholders' equity until
realized. Realized gains and losses on sales of securities are based on
the specific identification method. Declines in the fair value of
investment securities below their carrying value that are other than
temporary are recognized in earnings.

Net unrealized loss, net of tax, included in accumulated other
comprehensive loss for the three and six months ended June 30, 2002 was
approximately $17,000 and $16,000, respectively.

4. ACQUISITION

On January 4, 2001 the Company and one of its wholly owned
subsidiaries, LifeScience Technologies Holdings, acquired LifeScience
Technologies Holding Limited Partnership, LifeScience Technologies
Limited, LifeScience Technologies of Japan, LST Fullfillment Limited
Partnership, and LifeScience Technologies of Canada, Inc. (the
"LifeScience Technologies Acquisition"). The purchase price to the
Company was approximately $1.2 million cash plus $41,667 per month or
5% of LifeScience Technology product sales, whichever is greater,
payable for 60 months commencing in January 2001. The seller, at its
option, has the right to take shares of the Company's common stock at
an option price of $3.00 per share in lieu of cash for the monthly
payment. However, such option is limited to a total of 860,000 shares.

The LifeScience Technologies Acquisition was accounted for as
a purchase under Accounting Principles Board Opinion No. 16 ("APB No.
16"). In accordance with APB No. 16, the Company allocated the purchase
price of the LifeScience Technologies Acquisition based on the fair
value of the assets acquired and liabilities assumed.

7

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

5. NOTES PAYABLE

Notes payable consists of the following:

6. EARNINGS PER SHARE

Earnings per common share - basic is computed based upon net
income divided by the weighted average number of common shares
outstanding during each period. Earnings per common share - assuming
dilution is computed based upon net income divided by the weighted
average number of common shares outstanding during each period adjusted
for the effect of dilutive potential common shares calculated using the
treasury stock method.

8

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

The following is a reconciliation of the common shares used in
the calculations of earnings per common share - basic and earnings per
common share - assuming dilution:

Options to purchase 693,376 shares of common stock at exercise
prices ranging from $2.60 to $6.13 per share and 472,004 shares of
common stock at exercise prices ranging from $3.00 to $6.13 per share
were outstanding at June 30, 2002 and 2001, respectively, but were not
included in the computation of earnings per common share - assuming
dilution for the three month ended because the options' exercise price
was greater than the average market price of the common shares.

Options to purchase 693,376 shares of common stock at exercise
prices ranging from $2.60 to $6.13 per share and 428,998 shares of
common stock at exercise prices ranging from $3.00 to $6.13 per share
were outstanding at June 30, 2002 and 2001, respectively, but were not
included in the computation of earnings per common share - assuming
dilution for the six months ended because the options' exercise price
was greater than the average market price of the common shares.

9

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

Warrants to purchase 1,874,768 shares of common stock at
exercise prices ranging from $3.40 to $5.40 per share were outstanding
at June 30, 2002 and 2001 but were not included in the computation of
earnings per common share - assuming dilution for the three or six
months ended because the warrants' exercise price was greater than the
average market price of the common shares.

As part of the LifeScience Technologies Acquisition, the
sellers receive monthly cash payments in an amount equal to the greater
of $41,667 or 5% of LifeScience Technologies product sales. The sellers
may elect to take each monthly payment in shares of common stock rather
than cash at $3.00 per share exercise price, but cannot acquire more
than 860,000 shares pursuant to elections. To date the sellers have not
elected to take stock rather than cash. None of the shares of common
stock subject to this election right were included in the computation
of earnings per common share - assuming dilution for the six months
ended June 30, 2001 or 2002 because the exercise price was greater than
the average market price of the common shares.

7. COMMITMENTS AND CONTINGENCIES

RECENT REGULATORY DEVELOPMENTS - A significant portion of the
Company's net sales continues to be dependent upon the Company's AM-300
product. The Company's net sales of AM-300 represented 44.6% and 53.5%
of net sales for the six months ended June 30, 2002 and 2001,
respectively. One of the ingredients in the Company's AM-300 products
is ephedra, an herb which contains naturally-occurring ephedrine. The
Company's manufacturer uses a powdered extract of that herb when
manufacturing AM-300. The Company markets AM-300 principally as an aid
in weight management. The extract is an 8% extract which means that
every 100 milligrams of the powdered extract contains approximately
eight milligrams of naturally occurring ephedrine alkaloids. Ephedrine
containing products have been the subject of adverse publicity in the
United States and other countries relating to alleged harmful effects.

On April 3, 2000, the FDA withdrew most of the provisions of
its proposed rule regarding dietary supplements that contain ephedrine
alkaloids. The proposed rule, which was published on June 4, 1997,
would have significantly limited the Company's ability to sell AM-300
if it had been made effective. The FDA's withdrawal of the provisions
removed most, but not all, of the limitations. This action was prompted
largely by a report issued by the United States General Accounting
Office ("GAO") in which the GAO criticized the scientific basis for the
proposed rule and the FDA's evaluation of approximately 900 reports of
adverse events supposedly related to the consumption of dietary
supplements containing ephedrine alkaloids. The FDA made available for
public inspection most of the adverse event reports on April 3, 2000.

On October 25, 2000, several trade organizations for the
dietary supplement industry submitted a petition to the FDA which
concerned the remaining provisions of the proposed rule regarding
dietary supplements that contain ephedrine alkaloids. The petition
requested the FDA to: (1) withdraw the remaining provisions of the
proposed rule, and (2) adopt new standards for dietary supplements that
contain ephedrine alkaloids, which were set forth in the petition. The
FDA has not publicly responded to this petition.

The FDA will, most likely, attempt to issue a new proposed
rule with respect to dietary supplements that contain ephedrine
alkaloids. However, it is uncertain what restrictions the new proposed
rule might contain or when a new proposed rule will be issued. In the
Company's opinion, it is unlikely that a final regulation will be
issued by the FDA during 2002. Consequently, management is unable at
the present time to predict the ultimate resolution of these issues,
nor their ultimate impact on the Company's results of operations or
financial condition.

10

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)

PRODUCT LIABILITY - The Company, like other marketers of
products that are intended to be ingested, face the inherent risk of
exposure to product liability claims in the event that the use of our
products results in injury. The Company maintains a claims made policy,
with limited (excluding ephedra) product liability insurance coverage.
The limits of this coverage are $1,000,000 per occurrence and
$4,000,000 aggregate. The Company generally does not obtain contractual
indemnification from parties manufacturing its products. However, all
of the Company's product manufacturers carry product liability
insurance which covers the Company's products. The Company has agreed
to indemnify a supplier against claims arising from claims made by
associates for products manufactured by the supplier and marketed by
the Company. Although a product liability claim has not been asserted
against the Company, such claims could result in material losses.

LEGAL PROCEEDINGS - The Company was sued in Feather v.
LifeScience Technologies, Ltd., Case No. C10-01-422, Circuit Court of
the Ninth Judicial Circuit in and for Orange County, Florida, on
January 16, 2001. Plaintiff alleged that LifeScience Technologies
breached a contract between the parties requiring LifeScience
Technologies to pay plaintiff a master distributor fee and a monthly
royalty fee upon LifeScience Technologies sales of adaptogen products.
Plaintiff additionally alleged that LifeScience Technologies breached
the contract by assigning the contract to the Company without his
express written consent. On February 8, 2002, the Company executed a
settlement agreement regarding this litigation with Mr. Feather.
Pursuant to the settlement agreement, Mr. Feather will continue to
receive a monthly royalty fee equal to 5% of the gross wholesale
revenue derived from adaptogen products. No other payments have been or
will be made to Mr. Feather. The case was dismissed with prejudice on
July 3, 2002.

******

11

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Stockholders
Advantage Marketing Systems, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of
Advantage Marketing Systems, Inc. and Subsidiaries as of June 30, 2002, and the
related condensed consolidated statements of income for the three- and six-month
periods ended June 30, 2002 and 2001, and the statement of cash flows for the
six months ended June 30, 2002 and 2001. These financial statements are the
responsibility of the Company's management.

We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.

Based on our review, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements for them to be
in conformity with accounting principles generally accepted in the United States
of America.

We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Advantage Marketing Systems, Inc. and Subsidiaries as of December 31, 2001 and
the consolidated statements of income, stockholders' equity and cash flows for
the year then ended (not presented herein) and, in our report dated February 22,
2002, we expressed an unqualified opinion on those statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 2001 is fairly stated, in all material respects.

GRANT THORNTON LLP

Oklahoma City, Oklahoma
July 25, 2002

12

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

GENERAL

We market a product line consisting of approximately one hundred products
in three categories; weight management, dietary supplement and personal care
products. These products are marketed through a network marketing organization
in which independent associates purchase products for resale to retail customers
as well as for their own personal use.

On January 4, 2001, we purchased the LifeScience Technologies ("LST") group
of companies for $1.2 million in cash and a five year payment of $41,667 per
month or 5% of the gross sales of LifeScience Technologies products, whichever
is greater. The seller has the option to take up to 860,000 shares of common
stock in lieu of cash at an option price of $3.00 per share. As a result of this
acquisition we added 14 products and over 5,000 associates.

Throughout this report, "net sales" represents the gross sales amounts
reflected on our invoices to our associates less associate discounts, sales
returns, and freight income. Beginning June 1, 2001, we adopted a new accounting
policy, which requires billing customers a portion of freight costs, which is
included in net sales. All of our products include a customer satisfaction
guarantee. Our products may be returned within 30 days of purchase for a full
refund or credit toward the purchase of another product. We also have a buy-back
program whereby we repurchase products sold to an independent associate (subject
to a restocking fee), provided the associate terminates his/her associateship
agreement with us and returns the product within 12 months of original purchase
in marketable condition. We receive our net sales price in cash or through
credit card payments upon receipt of orders from associates. Our "gross profit"
consists of net sales less (1) "commissions and bonuses", consisting of
commission payments to associates based on their current associate level within
their organization, and other one-time incentive cash bonuses to qualifying
associates, (2) "cost of products", consisting of the prices we pay to our
manufacturers for products and royalty overrides earned by qualifying associates
on sales within their associate organizations and (3) "cost of shipping",
consisting of costs related to shipments, duties and tariffs, freight expenses
relating to shipment of products to associates, and similar expenses.

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of our net sales, selected
results of operations for the three and six months ended June 30, 2002 and 2001.
The selected results of operations are derived from our unaudited condensed
consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of our future operations.

13

We expect to continue to expand our network of independent associates,
which may result in increased sales volume. However, there is no assurance that
increased sales volume will be achieved through expansion of our network of
independent associates or that, if sales volume increases, we will realize
increased profitability.

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001

Our net sales during the three months ended June 30, 2002 decreased by
$1,274,608, or 17.9%, to $5,865,850 from $7,140,458 during the three months
ended June 30, 2001.

Our cost of sales during the three months ended June 30, 2001 decreased by
$973,419, or 20.5%, to $3,775,179 from $4,748,598 during the same period in
2001. Total cost of sales, as a percentage of net sales, decreased to 64.4%
during the three months ended June 30, 2002 from 66.5% during the same period in
2001. The decrease in cost of sales was attributable to:

o A decrease of $630,747 in associate commissions and bonuses due to the
decreased level of sales;

o A decrease of $626,567 in the cost of products sold due to the
consolidation of product lines; and

o An increase of $283,895 in shipping costs primarily due to increased
shipping rates by U.P.S. and U.S.P.S.

The factors discussed above resulted in a decrease in gross profit of
$301,189, or 12.6%, to $2,090,671 for the three months ended June 30, 2002 from
$2,391,860 for the same period in 2001.

Marketing, distribution and administrative expenses decreased $179,798, or
8.6%, to $1,908,194 during the three months ended June 30, 2002, from $2,087,992
during the same period in 2001. This decrease was primarily attributable to:

o A decrease in depreciation and amortization expense of approximately
$58,000 due to cessation of goodwill amortization in 2002 per FASB 142
(See Note 2 to our financial statements);

14

o Non-recurring expenses in 2001 of approximately $29,000 related to the
operation of the LifeScience Technologies Florida offices and
LifeScience Technologies California warehouse in January and February
of 2001 plus the transition costs related to the LifeScience
Technologies acquisition in January, 2001; and

o A decrease in contract services of $106,000 from 2001, due to an
increase in 2001 of our technical staff during the LifeScience
Technologies acquisition transition.

The marketing, distribution and administrative expenses as a percentage of
net sales increased to 32.5% during the three months ended June 30, 2002 from
29.2% during the same period in 2001. Management expects marketing, distribution
and administrative expenses to continue at or near the current level.

Our other expense (reduced by other income) increased by $24,761 to net
other expense of $55,548 at June 30, 2002, from a net other expense of $30,787
during the same period in 2001. This increase was primarily attributable to a
loss on sale of assets of approximately $38,000.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001

Our net sales during the six months ended June 30, 2002 decreased by
$2,089,125, or 14.7%, to $12,147,223 from $14,236,348 during the six months
ended June 30, 2001.

Our cost of sales during the six months ended June 30, 2002 decreased by
$1,471,961, or 15.4%, to $8,065,290 from $9,537,251 during the same period in
2001. Total cost of sales, as a percentage of net sales decreased to 66.4%
during the six months ended June 30, 2002, from 67.0% during the same period in
2001. This decrease was attributed to:

o A decrease of $1,000,135 in distributor commissions and bonuses due to
the decreased level of sales;

o A decrease of $797,396 in the cost of products sold due to the
consolidation of product lines; and

o An increase of $325,570 in shipping expenses primarily due to
increased shipping rates by U.P.S. and U.S.P.S.

The factors discussed above resulted in a decrease in gross profit of
$617,164, or 13.1%, to $4,081,933 for the six months ended June 30, 2002 from
$4,699,097 for the same period in 2001.

Marketing, distribution and administrative expenses decreased $651,774, or
14.8%, to $3,755,800 during the six months ended June 30, 2002, from $4,407,574
during the same period in 2001. This decrease was primarily attributable to:

o A decrease in promotion costs of approximately $103,000;

o A decrease in staffing and related payroll cost of approximately
$220,000 due to a reduction in staff related to the LifeScience
Technologies acquisition;

o Non-recurring expenses in 2001 of approximately $244,000 related to the
operation of the LifeScience Technologies Florida offices and
LifeScience Technologies California warehouse in January and February
of 2001, plus the transition costs related to the LifeScience
Technologies acquisition in January 2001;

o A decrease in depreciation and amortization expense of approximately
$116,000, due to cessation of goodwill amortization in 2002 per FASB
142 (See Note 2 to our financial statements); and

o A decrease in contract services for 2001 of approximately $240,000
incurred to supplement the Company's technical staff during the
LifeScience Technologies acquisition transition.

The marketing, distribution and administrative expenses as a percentage of
net sales remained flat at 31.0% during the six months ended June 30, 2002
compared to the same period in 2001.

15

Our other income (reduced by other expense) decreased by $57,518 to net
other expense of $49,223 at June 30, 2002, from a net other income of $8,295
during the same period in 2001. This decrease was primarily due to:

o A decrease in investment income of $27,000 related to marketable
securities offset by an increase in interest income of $18,000;

o A decrease in collection of written off accounts receivable of $25,000
related to collection of old, outstanding debt;

o An increase in interest expense of $8,000 related to the warehouse and
equipment loans (See Note 5 to our financial statements); and

o A loss on sale of assets of $14,000.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets".
This standard requires companies to stop amortizing existing goodwill and
intangible assets with indefinite lives effective January 1, 2002. Under the new
rules, companies would only adjust the carrying amount of goodwill or indefinite
life intangible assets upon an impairment of the goodwill or indefinite life
intangible assets. The Company implemented these standards effective January 1,
2002. No impairment of goodwill resulted from this implementation, and there was
no material impact on consolidated results of operations, financial position or
cash flows.

The table below shows the reconciliation between reported net income and
earnings per share and adjusted net income and earnings per share, adjusted for
goodwill amortization (tax-effected):

In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", was issued and is effective for fiscal years beginning after
December 15, 2001. SFAS No. 144 addresses accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and Accounting Principles Board ("APB") Opinion No.
30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business". SFAS No. 144 retains the fundamental provisions of SFAS
No. 121 and expands the reporting of discontinued operations to include all
components of an entity with operations that can be distinguished from the rest
of the entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The Company implemented this standard
effective January 1, 2002. Implementation did not have a material impact on
consolidated results of operations, financial position, or cash flows.

16

SEASONALITY

No pattern of seasonal fluctuations exists due to the patterns that we are
currently experiencing. However, there is no assurance that we will not become
subject to seasonal fluctuations in operations.

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of liquidity has been cash provided by our operating
activities, sales of our common stock, and sales of our marketable securities.
At June 30, 2002, we had working capital of $3,315,602, compared to $3,110,607
at December 31, 2001. We believe our cash and cash equivalents, current
marketable securities, cash flows from operations and expected cash flows from
financing activities will be sufficient to fund our working capital and capital
expenditure needs over the foreseeable future. During the six months ended June
30, 2002, net cash provided by operating activities was $888,137, net cash used
in investing activities was $230,802 and net cash used in financing activities
was $260,130. This represented a net increase in cash during this period of
$397,205. Our working capital needs over the next 12 months consist primarily of
marketing, distribution and administrative expenses.

In 2001, we completed construction of a 23,346 square foot distribution and
call center facility in Oklahoma City. This project was funded, in part, with
bank loans of $980,000 for the land and building and $166,216 for the warehouse
equipment. Both loans are with Bank One Oklahoma, N.A. and accrue interest at an
annual rate of .25% under the prime rate.

The loans contain covenants restricting us from various activities without
written consent of Bank One, the most significant of which restrict us from:

o Transferring, selling or otherwise disposing of any assets;

o Making any loans to any persons or entity in excess of $500,000 in
the aggregate;

o Engaging in any merger or acquisition in which we are not the
surviving corporation;

o Changing executive management personnel; and

o Purchasing or acquiring any interest in any other entity.

The loans also contain financial covenants requiring us to maintain:

o Tangible Net Worth (total assets excluding intangible assets less
total liabilities excluding subordinated debt) of at least $5,500,000;

o Debt coverage ratio (net income plus amortization, depreciation and
interest expense, divided by current maturities of long term debt and
capital leases plus interest expense) of at least 125%; and

o Debt to EBITDA ratio (current and long term maturities of debt and
capital leases, divided by net income plus amortization, depreciation,
income tax and interest expense) of less than 250% through December
31, 2002, less than 225% for 2003 and less than 200% thereafter.

The following summarizes our contractual obligations at June 30, 2002 and
the effect such obligations are expected to have on our liquidity and cash flow
in future periods.

(1) See Note 5 to our financial statements.

17

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our balance sheet includes marketable securities, which we believe are a
conservative blend of income and growth investments resulting in moderate market
risk. We invest in equity marketable securities to generate capital growth, and
fixed-income marketable securities to provide current income. Because of the
nature of these investments, total return and risk will be affected by both
current interest rates and equity market movements. Our fixed income investments
of approximately $1,200,000 are subject to interest risk only. We have
approximately $460,000 of equity investments that are exposed to market risk.

INTEREST RATE RISK. We currently maintain an investment portfolio of
high-quality fixed-income marketable securities. All securities are available
for sale and recorded in the balance sheet at fair value with fluctuations in
fair value reported as a component of accumulated other comprehensive income in
stockholders equity. We do not hedge our investment portfolio or our outstanding
credit facility or other long-term indebtedness. Fixed-income investments with a
maturity date of three months or less at the date of purchase are deemed to be
cash equivalents. Any remaining fixed-income securities are considered
short-term and mainly consist of investments in U.S. Treasury notes and bonds.

The following table lists our cash equivalents and our short-term
fixed-income marketable securities at June 30, 2002 and December 31, 2001:

(1) Average interest rate is calculated by taking the individual security
interest rates multiplied by each investments' weighted average share
of the total fixed-income marketable securities.

Average interest rates for the six months ended June 30, 2002 decreased
..28% from December 31, 2001 due to the redemption of 100,000 units of 7.52% U.S.
Government Agency securities in the first quarter 2002, which represented 25% of
our total fixed-income marketable securities at December 31, 2001.

Fair value of the cash equivalents and fixed-income marketable securities
decreased $205,943 during the six months ended June 30, 2002 to $1,199,857 from
$1,405,800 at December 31, 2001. This decrease was due to: a reduction of
short-term investments of approximately $132,000, along with the redemption in
the first quarter 2002 of fixed-income securities resulting in a reduction of
$100,00, partially offset by the purchase of fixed-income securities net of
amounts due brokers of $32,000.

EQUITY MARKET RISKS. We currently maintain an investment portfolio of
equity securities. All securities are available for sale and recorded in the
balance sheet at fair value with fluctuations in fair value reported as a
component of accumulated other comprehensive income in stockholders equity. We
do not engage in hedging our equity portfolio or otherwise purchase derivative
securities. Because of the quality of our portfolio and liquid nature of our
equity investments, we do not consider the market risk related to these
investments to be material. At June 30, 2002, our equity investments had a value
of $456,952 compared to $257,850 at December 31, 2001, primarily due to the
purchase of mutual fund equity investments in the second quarter of 2002.

We attempt to manage our interest and market risk by evaluating and
purchasing what we believe to be the best investment securities and rates of
return available.

18

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We were sued in Feather v. LifeScience Technologies, Ltd., Case No.
C10-01-422, Circuit Court of the Ninth Judicial Circuit in and for
Orange County, Florida, on January 16, 2001. Plaintiff alleged that
LifeScience Technologies breached a contract between the parties
requiring LifeScience Technologies to pay plaintiff a master
distributor fee and a monthly royalty fee upon LifeScience Technologies
sales of adaptogen products. Plaintiff additionally alleged that
LifeScience Technologies breached the contract by assigning the
contract to us without his express written consent. On February 8,
2002, we executed a settlement agreement regarding this litigation with
Mr. Feather. Pursuant to the settlement agreement, Mr. Feather will
continue to receive a monthly royalty fee equal to 5% of the gross
wholesale revenue derived from adaptogen products. No other payments
have been or will be made to Mr. Feather. The case was dismissed with
prejudice on July 3, 2002.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

3.1 The Registrant's Certificate of Incorporation, incorporated by
reference to the Registration Statement on Form SB-2 (Registration No.
333-47801) filed with the commission on March 11, 1998.

3.2 The Registrant's Bylaws, incorporated by reference to the Registration
Statement on Form SB-2 (Registration No. 333-47801) filed with the
commission on March 11, 1998.

15 Letter of independent accountants as to unaudited interim financial
information.

(b) Form 8-K

None

19

SIGNATURES

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

ADVANTAGE MARKETING SYSTEMS, INC.

Dated: August 12, 2002 By: /s/ REGGIE B. COOK
Reggie B. Cook, Vice President and
Chief Financial Officer

20

INDEX TO EXHIBITS