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 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: 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
(Registrants' telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
------ -----

Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Exchange Act.

Yes No X
------ -----

On May 12, 2003, we had outstanding 4,424,314 shares of our common stock, $.0001
par value.

ADVANTAGE MARKETING SYSTEMS, INC.
QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED MARCH 31, 2003

Table of Contents

Part I - Financial Information ....................................... 3
Item 1. Financial Statements.......................................... 3
Condensed Consolidated Balance Sheets........................ 3
Condensed Consolidated Statements of Operations.............. 4
Condensed Consolidated Statements of Cash Flows.............. 5
Notes to Condensed Consolidated Financial Statements......... 6
Report of Independent Certified Public Accountants........... 11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 15
Item 4. Controls and Procedures....................................... 16
Part II - Other Information........................................... 17
Item 1. Legal Proceedings............................................. 17
Item 2. Changes in Securities and Use of Proceeds..................... 17
Item 3. Defaults Upon Senior Securities............................... 17
Item 4. Submission of Matters to a Vote of Security Holders........... 17
Item 5. Other Information............................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................. 17

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

Certain statements under the caption "Item 2 - Management's Discussion and
Analysis of Financial Condition and Results of Operations" 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. Our actual results 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; our ability to implement our 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; changes in, or
the failure to comply with, government regulations (especially food and drug
laws and regulations); product liability matters; our ability 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
MARCH 31, 2003 AND DECEMBER 31, 2002

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

3

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

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

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

4

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

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

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

5

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(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, 2002.

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, 2003.

2. SIGNIFICANT ACCOUNTING POLICIES

In December 2002, The FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure", which amended
SFAS No. 123, "Accounting for Stock-Based Compensation". The new
standard provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In compliance with SFAS No. 148, the Company
elected to continue to follow the intrinsic value method in accounting
for its stock-based employee compensation arrangement as defined by APB
No. 25. Accordingly, no compensation cost has been recognized for stock
options granted in the accompanying consolidated financial statements.
The following pro forma data is calculated net of tax as if
compensation cost for the Company's stock-based compensation awards was
determined based upon the fair value at the grant date consistent with
the methodology prescribed under SFAS No. 123.

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted average assumptions used for grants in 2003 and 2002,
respectively: risk-free interest rates of 2.77 and 2.65 percent; no
dividend yield or assumed forfeitures; an expected life of 5.0 years;
and volatility of 64 percent. The pro forma amounts above are not
likely to be representative of future years because there is no
assurance that additional awards will be made each year. In January
2003, the Company adopted a new stock incentive plan, under which
shares were issued in the first quarter of 2003. This plan is subject
to shareholder approval at the 2003 annual meeting of shareholders.

6

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities", or FIN 46. Subject to
certain criteria defined in the Interpretation, FIN 46 will require
consolidation by business enterprises of variable interest entities if
the enterprise has a variable interest that will absorb the majority of
the entity's expected losses, receive the majority of its expected
returns, or both. The provisions of FIN 46 are effective immediately
for interests acquired in variable interest entities after January 31,
2003, and at the beginning of the first interim or annual period
beginning after June 15, 2003, for interests acquired in variable
interest entities before February 1, 2003. The Company will adopt FIN
46 in the third quarter of 2003. Certain disclosures concerning
variable interest entities are required in financial statements
initially issued after January 31, 2003. The Company is evaluating the
effect of FIN 46 but does not believe FIN 46 will have a material
impact on its financial statements.

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 losses, net of tax, of approximately $8,285
were included in accumulated other comprehensive loss for the three
months ended March 31, 2003, and net unrealized gains, net of tax, of
approximately $874 were included in other comprehensive loss for the
three months ended March 31, 2002. Total comprehensive loss for the
three months ended March 31, 2003 was $284,038 and total comprehensive
income for the three months ended March 31, 2002 was $92,892.

4. NOTES PAYABLE

Notes payable consists of the following:

5. EARNINGS (LOSS) PER SHARE

Earnings (loss) per common share - basic is computed based
upon net income (loss) divided by the weighted average number of common
shares outstanding during each period. Earnings (loss) per common share
- assuming dilution is computed based upon net income (loss) 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.

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

7

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

Options to purchase 2,620,115 shares of common stock at
exercise prices ranging from $1.31 to $6.13 per share were outstanding
at March 31, 2003 but were not included in the computation of earnings
(loss) per common share - assuming dilution because such inclusion
would not be dilutive.

Options to purchase 684,805 shares of common stock at exercise
prices ranging from $2.60 to $6.13 per share were outstanding at March
31, 2002 but were not included in the computation of earnings per
common share - assuming dilution because the options' exercise price
was greater than the average market price of the common shares.

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 March 31, 2003 and 2002 but were not included in the computation of
earnings per common share - assuming dilution 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. The 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 (loss) per common share - assuming dilution for
the three months ended March 31, 2003 or 2002 because the exercise
price was greater than the average market price of the common shares.

6. DEFERRED TAXES

On a regular basis, management evaluates all available
evidence, both positive and negative, regarding the ultimate
realization of the tax benefits of its deferred tax assets. Management
has

8

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

concluded that it is more likely than not that a tax benefit will be
realized from its deferred tax assets. The Company has net operating
loss carryforwards of approximately $575,000 available to reduce future
taxable income, which will begin to expire in 2009. Net operating loss
carryforwards of $196,000 are limited in usage.

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 45.0% and 43.1%
of net sales for the three months ended March 31, 2003 and 2002,
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.

The FDA published a proposed rule in the Federal Register on
June 4, 1997, which proposed significant limitations on the sale of
ephedrine-containing dietary supplements. The proposed rule would have
significantly limited the Company's ability to sell products containing
ephedra if it had been made effective. On April 3, 2000, the FDA
withdrew most of the provisions of its proposed rule. 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 has made
available for public inspection most of these adverse event reports.

On March 7, 2003, the FDA published a notice in the Federal
Register, which indicates that it will be taking final action on the
1997 proposed rule in the near future. The FDA re-opened the public
comment period, until April 7, 2003, to allow for additional public
input on the two proposed limitations on the sale of
ephedrine-containing dietary supplements that remained after the FDA's
action of April 3, 2000. One proposed limitation is a warning that
would be required to appear on the label of all ephedrine-containing
supplements. The other proposed limitation is that ephedrine-containing
supplements may not contain other substances that are known to have
stimulant effects (e.g., caffeine). The proposed warning addresses
potential health risks allegedly associated with ephedrine-containing
dietary supplements. It is similar, but not identical, to mandatory
warnings that have been required by Texas law since 1999 and California
law since January 1, 2003. AM-300 and the Company's other
ephedrine-containing supplements comply with these state law
requirements. However, some of the Company's ephedrine-containing
products, like AM-300, contain caffeine or other stimulants. Therefore,
if the proposed rule is made final in its current form, it will
prohibit the sale of some of the Company's products.

On March 13, 2003, the FDA published a proposed rule in the
Federal Register which proposes comprehensive requirements for the
manufacturing, packing and holding dietary supplements, also known as
good manufacturing practices ("GMP" or "GMPs"). The FDA is accepting
public comments on the proposed GMPs until June 11, 2003; final GMPs
will be promulgated after the FDA has reviewed the public comments.
Once final GMP regulations become effective, the Company's manufacturer
will be required to adhere to them. The FDA will most likely institute
an effective date for the GMPs which will allow the Company's
manufacturer a reasonable amount of time to conduct

9

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
(UNAUDITED)

this review and, if necessary, revise its manufacturing operations to
comply with the final GMP regulations.

The Company's certificate of incorporation and bylaws provide
that the Company will indemnify its directors and officers to the
fullest extent permitted by the Oklahoma General Corporation Act. Under
such provisions, any director or officer, who in his capacity as such,
is made or threatened to be made, a party to any suit or proceeding,
may be indemnified if the Company's board of directors determines such
director or officer acted in good faith and in a manner he reasonably
believed to be in or not opposed to its best interests.

The Company's certificate of incorporation and bylaws and the
Oklahoma General Corporation Act further provide that such
indemnification is not exclusive of any other rights to which such
individuals may be entitled under its certificate, its bylaws, an
agreement, vote of shareholders or disinterested directors or
otherwise. Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to the Company's directors and
officers pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy and
is, therefore, unenforceable.

PRODUCT LIABILITY - The Company, like other marketers of
products that are intended to be ingested, faces the inherent risk of
exposure to product liability claims in the event that the use of its
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
$2,000,000 in the aggregate. Products containing ephedra, which
represented approximately 45.0% of the Company's first quarter 2003 net
revenue, are not covered by the Company's product liability insurance.
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. A product liability claim could result in a
material loss.

LEGAL PROCEEDINGS - The Company is currently involved in two
products liability suits related to the ingestion of its ephedra-based
products. Answers have been filed to both of these petitions denying
any wrongdoing. The Company intends to vigorously defend the claims.
The amounts of damages sought are unknown, but include compensatory and
punitive damages.

******

10

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 March 31, 2003, and the
related condensed consolidated statements of operations and cash flows for the
three-month periods ended March 31, 2003 and 2002. These financial statements
are the responsibility of the Company's management.

We conducted our reviews 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 and
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 reviews, we are not aware of any material modifications that
should be made to the condensed consolidated financial statements, as of and for
the periods ended March 31, 2003 and 2002, 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,
2002 and the consolidated statements of operations, stockholders' equity and
cash flows for the year then ended (not presented herein) and, in our report
dated February 22, 2003, 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, 2002 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.

GRANT THORNTON LLP

Oklahoma City, Oklahoma
April 28, 2003

11

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.

We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States, which require us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the year. Actual results could differ from those estimates. We consider the
following policies to be most critical in understanding the judgments that are
involved in preparing our financial statements and the uncertainties that could
impact our results of operations, financial condition and cash flows.

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 billing
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:

o 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;

o 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

o Cost of shipping, consisting of costs related to shipments, duties
and tariffs, freight expenses relating to shipment of products to
associates, and similar expenses.

We recognize revenue upon shipment of products, training aids and
promotional material to the independent associates. All of our customers pay for
sales in advance of shipment. As such, we have no trade receivables. Loans to
associates are repayable in five years or less; are secured by commissions
controlled by us; and are no longer allowed. Interest rates on loans are
typically two percent or more above the Prime rate and are fixed. All loans and
receivables are secured by guaranteed payment sources that are within our
control. As such, we believe there is no need for an allowance for doubtful
accounts.

We write down our inventory to provide for estimated obsolete or unsalable
inventory based on assumptions about future demand for our products and market
conditions. If future demand and market conditions are less favorable than
management's assumptions, additional inventory write-downs could be required.
Likewise, favorable future demand and market conditions could positively impact
future operating results if written-off inventory is sold.

We account for contingencies in accordance with SFAS No. 5, "Accounting
for Contingencies". SFAS 5 requires that we record an estimated loss from a loss
contingency when information available prior to issuance of our financial
statements indicates that it is probable than an asset has been impaired or a
liability has been incurred at the date of the financial statements and the
amount of the loss can be reasonable estimated. Accounting for contingencies
such as legal and income tax matters requires us to use our judgment. Many legal
and tax contingencies can take years to resolve. Generally, as the time period
increases over which the uncertainties are resolved, the likelihood of changes
to the estimate of the ultimate outcome increases. However, an adverse outcome
in these matters could have a material impact on our results of operations,
financial condition and cash flows.

12

RESULTS OF OPERATIONS

The following table sets forth, as a percentage of our net sales, selected
results of operations for the three months ended March 31, 2003 and 2002. 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.

COMPARISON OF THE THREE MONTH PERIODS ENDED MARCH 31, 2003 AND 2002

Our net sales during the three months ended March 31, 2003, decreased by
$1,667,220, or 26.5%, to $4,614,153 from $6,281,373 during the three months
ended March 31, 2002. The sales decrease is due to the decrease in recruiting of
new independent associates experienced by us in 2002. We are currently
implementing a new marketing strategy to reverse the downward recruiting trend
and to increase sales.

Our cost of sales during the three months ended March 31, 2003, decreased
by $1,063,586, or 24.8%, to $3,226,525 from $4,290,111 during the same period in
2002. Total cost of sales, as a percentage of net sales, increased to 69.9%
during the three months ended March 31, 2003 from 68.3% during the same period
in 2002. The decrease in cost of sales was attributable to:

o A decrease of $559,810 in associate commissions and bonuses due to
the decreased level of sales;

o A decrease of $471,841 in the cost of products sold due to the
decreased level of sales; and

o A decrease of $31,935 in shipping costs primarily due to decreased
sales.

The factors discussed above resulted in a decrease in gross profit of
$603,634, or 30.3%, to $1,387,628 for the three months ended March 31, 2003 from
$1,991,262 for the same period in 2002.

Marketing, distribution and administrative expenses decreased $60,131, or
3.3%, to $1,787,474 during the three months ended March 31, 2003, from
$1,847,605 during the same period in 2002. This decrease was primarily
attributable to:

o A decrease in promotion costs of approximately $53,000;

13

o An increase in staffing and related payroll costs of approximately
$80,000 to supplement our technical staff during implementation of
our new marketing strategy;

o A decrease in insurance costs of approximately $20,000 related to
better rates for liability insurance; and

o A decrease of approximately $72,000 in other variable costs such as
postage, telephone, bank service charges and supplies.

The marketing, distribution and administrative expenses as a percentage of
net sales increased to 38.7% during the three months ended March 31, 2003 from
29.4% during the same period in 2002. Management expects marketing, distribution
and administrative expenses to continue at the current level.

Our net other income (reduced by other expense) decreased by $50,315 to
net other expense of $43,990 at March 31, 2003, from a net other income of
$6,325 during the same period in 2002. This decrease was primarily due to:

o A loss on sale of marketable securities of approximately $15,000;
and

o An increase in loss on sale of assets of approximately $34,000.

RECENTLY ISSUED ACCOUNTING STANDARDS

In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", or FIN 46. Subject to certain criteria defined
in the Interpretation, FIN 46 will require consolidation by business enterprises
of variable interest entities if the enterprise has a variable interest that
will absorb the majority of the entity's expected losses, receive the majority
of its expected returns, or both. The provisions of FIN 46 are effective
immediately for interests acquired in variable interest entities after January
31, 2003, and at the beginning of the first interim or annual period beginning
after June 15, 2003, for interests acquired in variable interest entities before
February 1, 2003. We will adopt FIN 46 in the third quarter of 2003. Certain
disclosures concerning variable interest entities are required in financial
statements initially issued after January 31, 2003. We are evaluating the effect
of FIN 46 but do not believe FIN 46 will have a material impact on our financial
statements.

SEASONALITY

No pattern of seasonal fluctuations presently exists. 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 sales of our
marketable securities and our operating activities. At March 31, 2003, we had
working capital of $2,851,920, compared to $3,186,584 at December 31, 2002. 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
next twelve months. During the three months ended March 31, 2003, net cash used
in operating activities was $1,684, net cash used in investing activities was
$235,946 and net cash used in financing activities was $152,938. This
represented a net decrease in cash during this period of $390,568. 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 the prime rate less .5% floating, with a floor of 2.5%.

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;

14

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 loan is secured by a first lien on all our marketable securities.

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 $800,000 are subject to interest risk only. We have
approximately $800,000 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 March 31, 2003 and December 31, 2002:

(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 quarter ended March 31, 2003 decreased .20%
from December 31, 2002 due to the redemption of 100,000 units of 6.25% U.S.
Treasury Notes, which represented 80% of our total fixed-income marketable
securities at December 31, 2002.

Fair value of the cash equivalents and fixed-income marketable securities
decreased $22,466 during the quarter ended March 31, 2003 to $797,081 from
$819,547 at December 31, 2002. This decrease was due to the reduction of
approximately $100,000 relating to the redemption of 6.25% U.S. Treasury Notes,
partially offset by the purchase, net of sales, of fixed-income mutual funds of
approximately $73,000.

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 March 31, 2003, our equity investments had a
value of $802,720 compared to $801,595 at December 31, 2002, primarily due to a
net purchase of mutual funds of approximately $28,000, offset by decreased fund
prices in the first quarter of 2003.

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.

15

ITEM 4. CONTROLS AND PROCEDURES

Within the 90-day period prior to filing of this report, an evaluation was
carried out under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes were made in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.

16

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are currently involved in two products liability suits related to
the ingestion of our ephedra-based products. Answers have been filed to
both of these petitions denying any wrongdoing. We intend to vigorously
defend the claims. The amounts of damages sought are unknown, but
include compensatory and punitive damages.

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.

99.1 Chief Executive Officer Certification, filed herewith.

99.2 Chief Financial Officer Certification, filed herewith

(b) Form 8-K

We filed the following Form 8-Ks during the first quarter of 2003:

o February 7, 2003 - Item 9 filing disclosing the text of John Hail's
power point presentation at the Southern California Investors
Association meeting on February 8, 2003.

17

SIGNATURES

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

REGISTRANT:
ADVANTAGE MARKETING SYSTEMS, INC.

Dated: May 12, 2003
By: /s/ REGGIE B. COOK
---------------------------------------
Reggie B. Cook, Vice President and
Chief Financial Officer

(Duly Authorized Officer of Registrant
and Principal Financial Officer)

18

I, John W. Hail, Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advantage
Marketing Systems, Inc. (the "registrant");

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 by 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 officers 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 the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

(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.

Advantage Marketing Systems, Inc.

Date: May 12, 2003 By: /s/ JOHN W. HAIL
------------ --------------------------------------
John W. Hail
Chairman and Chief Executive Officer

19

I, Reggie Cook, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advantage
Marketing Systems, Inc. (the "registrant");

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 by 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 officers 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 the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

(d) 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

(e) 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.

Advantage Marketing Systems, Inc.

Date: May 12, 2003 By: /s/ REGGIE B. COOK
------------ ------------------
Reggie B. Cook
Chief Financial Officer

20

INDEX OF EXHIBITS