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, 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
(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
----- -----

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 July 29, 2003, we had outstanding 4,454,314 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, 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 .................... 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 ............ 16
Item 4. Controls and Procedures ............................................... 17
Part II - Other Information ................................................... 18
Item 1. Legal Proceedings ..................................................... 18
Item 2. Changes in Securities and Use of Proceeds ............................. 18
Item 3. Defaults Upon Senior Securities ....................................... 18
Item 4. Submission of Matters to a Vote of Security Holders ................... 18
Item 5. Other Information ..................................................... 18
Item 6. Exhibits and Reports on Form 8-K ...................................... 18

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
JUNE 30, 2003 AND DECEMBER 31, 2002

3

SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIODS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 SIX MONTHS ENDED JUNE 30, 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 2.73 and 2.74 percent; no
dividend yield or assumed forfeitures; an expected life of five years;
and volatility of 59.7 and 62.0 percent. The pro forma amounts above
are not likely to be representative of future years because there is no
assurance that additional awards

6

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

will be made each year. In January 2003, the Company adopted a new
stock incentive plan, under which shares were issued in the first and
second quarters of 2003. This plan was approved at the 2003 annual
meeting of shareholders.

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. As of June 30, 2003, the Company
had no variable interest entities.

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 gains, net of tax, of approximately $97,000 and
$89,000 were included in accumulated other comprehensive gain/loss for
the three and six months ended June 30, 2003 and net unrealized losses,
net of tax of approximately $17,000 and $16,000 were included in other
comprehensive gain/loss for the three and six months ended June 30,
2002. Total comprehensive loss for the three and six months ended June
30, 2003 was approximately $19,000 and $303,000, and total
comprehensive income for the three and six months ended June 30, 2002
was approximately $50,000 and $143,000.

4. NOTES PAYABLE

Notes payable consists of the following:

7

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

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:

8

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

Options to purchase 1,767,013 shares of common stock at exercise
prices ranging from $1.45 to $6.13 per share and 1,755,475 shares of
common stock at exercise prices ranging from $1.45 to $6.13 per share
were outstanding for the three and six months ended June 30, 2003,
respectively, but were not included in the computation of earnings
(loss) per common share - assuming dilution for the three or six months
ended because such inclusion would not be dilutive.

Options to purchase 693,376 shares of common stock at exercise
prices ranging from $2.60 to $6.13 per share were outstanding at June
30, 2002, but were not included in the computation of earnings per
common share - assuming dilution for the three or six months ended
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 June
30, 2003 and 2002 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
three or six months ended June 30, 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 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 $2,077,638 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 41.5% and 44.6%
of net sales for the six months ended June 30, 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.

9

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

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 accepted 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 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
aggregate. Products containing ephedra, which represented approximately

10

ADVANTAGE MARKETING SYSTEMS, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(UNAUDITED)

42.4% of the Company's net revenue for the first half of 2003, 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 material
losses.

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 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.

******

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, 2003, and the
related condensed consolidated statements of operations for the three- and
six-month periods ended June 30, 2003 and 2002, and the statements of cash flows
for the six months ended June 30, 2003 and 2002. 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, as of and for
the periods ended June 30, 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
July 21, 2003

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.

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 materials 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 that 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 reasonably 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

13

in these matters could have a material impact on our results of operations,
financial condition and cash flows. No amounts were accrued for such
uncertainties as of June 30, 2003.

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, 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 MONTHS ENDED JUNE 30, 2003 AND 2002

Our net sales during the three months ended June 30, 2003 decreased by
$1,179,066, or 20.1%, to $4,686,784 from $5,865,850 during the three months
ended June 30, 2002. The sales decrease is due to the decrease in recruiting of
new independent associates experienced by us in 2002. We have implemented a new
marketing strategy to reverse the downward recruiting trend and to increase
sales, and have begun to see the effects. We expect to see the true effects in
the fourth quarter and into the first quarter of 2004.

Our cost of sales during the three months ended June 30, 2002 decreased by
$645,214, or 17.1%, to $3,129,965 from $3,775,179 during the same period in
2002. Total cost of sales, as a percentage of net sales, increased to 66.8%
during the three months ended June 30, 2003 from 64.4% during the same period in
2002. The decrease in cost of sales was attributable to:

o A decrease of $357,093 in associate commissions and bonuses due to the
decreased level of sales;

o A decrease of $225,955 in the cost of products sold due to the
decreased level of sales; and

14

o A decrease of $62,166 in shipping costs primarily due to decreased
sales.

The factors discussed above resulted in a decrease in gross profit of
$553,852, or 25.5%, to $1,556,819 for the three months ended June 30, 2003 from
$2,090,671 for the same period in 2002.

Marketing, distribution and administrative expenses decreased $120,243, or
6.3%, to $1,787,951 during the three months ended June 30, 2003, from $1,908,194
during the same period in 2002. This decrease was primarily attributable to:

o A decrease in insurance costs of approximately $39,000 related to
better rates for liability insurance;

o A decrease in promotion costs of approximately $27,000;

o A decrease in travel costs of approximately $24,000 related to lower
airfare and hotel expense due to the purchase of a motor home for use
by our herbalist; and

o A decrease in staffing costs of approximately $20,000 due to lower
staffing levels.

The marketing, distribution and administrative expenses as a percentage of
net sales increased to 38.1% during the three months ended June 30, 2003 from
32.5% during the same period in 2002. Management expects marketing, distribution
and administrative expenses to continue at or near the current dollar level.

Our net other income (reduced by other expense) increased by $839 to net
other expense of $54,709 at June 30, 2003, from a net other expense of $55,548
during the same period in 2002.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002

Our net sales during the six months ended June 30, 2003 decreased by
$2,846,286, or 23.4%, to $9,300,937 from $12,147,223 during the six months ended
June 30, 2002. The sales decrease is due to the decrease in recruiting of new
independent associates experienced by us in 2002. We have implemented a new
marketing strategy to reverse the downward recruiting trend and to increase
sales , and have begun to see the effects. We expect to see the true effects in
the fourth quarter and into the first quarter of 2004.

Our cost of sales during the six months ended June 30, 2003 decreased by
$1,708,800, or 21.2%, to $6,356,490 from $8,065,290 during the same period in
2002. Total cost of sales, as a percentage of net sales increased to 68.3%
during the six months ended June 30, 2003, from 66.4% during the same period in
2002. The decrease in cost of sales was attributed to:

o A decrease of $916,903 in distributor commissions and bonuses due to
the decreased level of sales;

o A decrease of $697,796 in the cost of products sold due to the
decreased level of sales; and

o A decrease of $94,101 in shipping expenses primarily due to decreased
sales.

The factors discussed above resulted in a decrease in gross profit of
$1,137,486, or 27.9%, to $2,944,447 for the six months ended June 30, 2003 from
$4,081,933 for the same period in 2002.

Marketing, distribution and administrative expenses decreased $180,375, or
4.8%, to $3,575,425 during the six months ended June 30, 2003, from $3,755,800
during the same period in 2002. This decrease was primarily attributable to:

o A decrease in promotion costs of approximately $80,000;

o A decrease in insurance costs of approximately $60,000 related to
better rates for liability insurance; and

o A decrease in travel costs of approximately $40,000 related to lower
airfare and hotel expense due to the purchase of a motor home for use
by our herbalist.

15

The marketing, distribution and administrative expenses as a percentage of
net sales increased to 38.5% during the six months ended June 30, 2003 from
31.0% during the same period in 2002. Management expects marketing, distribution
and administrative expenses to continue at or near the current dollar level.

Our net other income (reduced by other expense) decreased by $49,475 to net
other expense of $98,698 at June 30, 2003, from a net other expense of $49,223
during the same period in 2002, primarily due to a loss on sale of marketable
securities of approximately $44,000.

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. As of June 30, 2003, we had no variable interest entities.

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 sales of our
marketable securities and our operating activities. At June 30, 2003, we had
working capital of $2,444,984, 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 six months ended June 30, 2003, net cash used in
operating activities was $170,760, net cash used in investing activities was
$430,928 and net cash used in financing activities was $261,798. This
represented a net decrease in cash during this period of $863,487. Our working
capital needs over the next 12 months consist primarily of marketing,
distribution and administrative expenses, and will be provided by our operating
activities. We expect our cash to trend up in the third and fourth quarters.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

16

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 $900,000 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, 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.

At June 30, 2003 all of our fixed income securities were in mutual funds,
creating no average interest rates for fixed income securities, due to the
redemption of 10,000 shares of our 5.75% Bell Atlantic securities during the
second quarter of 2003.

Fair value of the cash equivalents and fixed-income marketable securities
decreased $16,777 during the six months ended June 30, 2003 to $802,770 from
$819,547 at December 31, 2002. This decrease was primarily due to a net
redemption of fixed-income securities resulting in a reduction of $15,000.

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, 2003, our equity investments had a value
of $928,083 compared to $801,595 at December 31, 2002, primarily due to the
purchase of mutual fund equity investments in 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.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by 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-15(e) under the Securities Exchange Act of
1934) as required by Rule 13a-15(b). 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.

17

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 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, filed herewith.

31.1 Rule 13a-14(a) Certification by our Chairman and Chief Executive
Officer, filed herewith.

31.2 Rule 13a-14(a) Certification by our Chief Financial Officer, filed
herewith.

32.1 Section 1350 Certification of our Chief Executive Officer, filed
herewith.

32.2 Section 1350 Certification of our Chief Financial Officer, filed
herewith.

(b) Form 8-K

None

18

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: August 1, 2003
By:/s/ REGGIE B. COOK
--------------------------------
Reggie B. Cook, Vice President and
Chief Financial Officer
(Duly Authorized Officer of Registrant
and Principal Financial Officer)

19

Index of 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, filed herewith.

31.1 Rule 13a-14(a) Certification by our Chairman and Chief Executive
Officer, filed herewith.

31.2 Rule 13a-14(a) Certification by our Chief Financial Officer, filed
herewith.

32.1 Section 1350 Certification of our Chief Executive Officer, filed
herewith.

32.2 Section 1350 Certification of our Chief Financial Officer, filed
herewith.

(b) Form 8-K

None