Edgar Filing: AMS HEALTH SCIENCES INC

Form 10-QSB 3-31-2006

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

(X)QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

For the quarterly period ended March 31, 2006

( )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

AMS HEALTH SCIENCES, INC.

(Exact name of Small Business Issuer as specified in its charter)

Oklahoma

(State or other jurisdiction of incorporation or organization)

73-1323256

(I.R.S. Employer Identification No.)

711 NE 39^th Street

Oklahoma City, Oklahoma 73105

(Address of principal executive offices)

(405) 842-0131

(Issuer’s telephone number, including area code)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 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

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

On May 10, 2006, we had outstanding 7,775,824 shares of our common stock, $.0001 par value.

AMS HEALTH SCIENCES, INC.

QUARTERLY REPORT ON FORM 10-QSB

FOR THE THREE MONTHS ENDED MARCH 31, 2006

Table of Contents

Part I - Financial Information	3
Item 1. Financial Statements	3
Consolidated Balance Sheets	3
Consolidated Statements of Operations	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6
Report of Independent Registered Public Accounting Firm	17
Item 2. Management’s Discussion and Analysis or Plan of Operation	18
Item 3. Controls and Procedures	25
Part II - Other Information	25
Item 1. Legal Proceedings	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3. Defaults Upon Senior Securities	26
Item 4. Submission of Matters to a Vote of Security Holders	26
Item 5. Other Information	26
Item 6. Exhibits	26

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. 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. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made.

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_____________________PART I -FINANCIAL INFORMATION______________________

Item 1. FINANCIAL STATEMENTS

AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2006 AND DECEMBER 31, 2005

	March 31,			December 31,
ASSETS		2006			2005
		(Unuadited)
CURRENT ASSETS:
Cash and cash equivalents	$	73,318		$	118,805
Marketable securities, available for sale, at fair value		154,882			278,131
Receivables		85,238			59,846
Inventory		645,300			860,540
Other assets		24,044			24,542
Current assets of discontinued operations		376,977			507,831
Total current assets		1,359,759			1,849,695
RESTRICTED SECURITIES		75,958			75,477
RECEIVABLES		34,909			44,016
PROPERTY AND EQUIPMENT, net		3,268,106			3,131,092
COVENANTS NOT TO COMPETE and other intangibles, net		382,916			402,370
OTHER ASSETS		29,476			26,793
NONCURRENT ASSETS OF DISCONTINUED OPERATIONS		1,348,448			1,375,792
TOTAL	$	6,499,572		$	6,905,235
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:
Accounts payable	$	266,999		$	391,615
Bank overdraft		-			203,500
Accrued commissions and bonuses		263,737			254,828
Accrued other expenses		405,683			355,938
Accrued sales tax liability		53,640			40,980
Capital lease obligations		123,336			76,650
Current liabilities of discontinued operations		702,315			592,317
Total current liabilities		1,815,710			1,915,288
LONG-TERM LIABILITIES:
Capital lease obligations		186,369			74,320
Deferred compensation		591,707			615,301
Lease abandonment liability		92,277			110,249
Liabilities of discontinued operations		1,607,626			1,670,688
Total liabilities		4,293,689			4,385,846
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS’ EQUITY
Common stock - $.0001 par value; authorized 495,000,000 shares; issued
8,354,053 and 8,344,803 shares, outstanding 7,775,824 and 7,766,574 shares, respectively		835			835
Paid-in capital		21,873,809			21,870,872
Notes receivable for exercise of options		(31,000	)		(31,000	)
Accumulated deficit		(16,990,767	)		(16,674,324	)
Accumulated other comprehensive income, net of tax		(14,215	)		(14,215	)
Total capital and accumulated deficit		4,838,662			5,152,168
Less cost of treasury stock (591,595 shares)		(2,632,779	)		(2,632,779	)
Total stockholders’ equity		2,205,883			2,519,389
TOTAL	$	6,499,572		$	6,905,235

See notes to consolidated financial statements.

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE PERIODS ENDED MARCH 31, 2006 AND 2005

(UNAUDITED)

	Three Months Ended
	March 31,
		2006			2005
Net sales	$	2,351,713		$	4,020,758
Cost of sales		1,565,154			3,542,133
Gross profit		786,559			478,625
Marketing and administrative expenses:
Marketing		141,144			312,121
Administrative		689,520			1,509,508
Total marketing and administrative expenses		830,664			1,821,629
Loss from operations		(44,105	)		(1,343,004	)
Other income (expense):
Interest and dividends, net		3,842			7,659
Other, net		59,664			20,830
Total other income		63,506			28,399
Income (loss) from continuing operations before taxes		19,401			(1,314,605	)
Income tax expense		-			23,818
Income (loss) from continuing operations		19,401			(1,338,423	)
Discontinued Operations (Note 11)
Loss from discontinued operations, net of tax		(335,715	)		-
Net loss	$	(316,314	)	$	(1,338,423	)

Net income (loss) per share:
Basic:
Income (loss) from continuing operations	$	-		$	(0.19	)
Loss from discontinued operations, net of tax		(0.04	)		-
Net loss per share	$	(0.04	)	$	(0.19	)
Diluted:
Income (loss) from continuing operations	$	-		$	(0.19	)
Loss from discontinued operations, net of tax		(0.04	)		-
Net loss per share	$	(0.04	)	$	(0.19	)

Shares used in computing net loss per share:
Basic		7,766,574			6,991,470
Diluted		7,781,035			6,991,470

See notes to consolidated financial statements.

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE PERIODS ENDED MARCH 31, 2006 AND 2005

(UNAUDITED)

	Three Months Ended
	March 31,
		2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(316,314	)	$	(1,338,423	)

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Net loss from discontinued operations		335,715			-
Depreciation and amortization		164,859			204,666
Allowance for doubtful accounts		(11,319	)		-
Employee compensation recognized upon exercise or grant of stock options		2,937			66,602
Gain on sale of assets		(46,617	)		-
Realized (gain) loss on sale of marketable securities		(234	)		(16,890	)
Deferred taxes		-			23,818
Changes in operating assets and liabilities :
Receivables		(15,379	)		242,399
Inventory		215,240			305,258
Other assets		850			(42,401	)
Accounts payable and accrued expenses		(53,730	)		(279,356	)
Lease abandonment liability		(17,007	)		(5,215	)
Deferred compensation		(23,594	)		10,975
Net operating activities of discontinued operations		(95,899	)		-
Net cash provided by (used in) operating activities		139,508			(828,567	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(97,822	)		(82,477	)
Sales of property and equipment		47,950			58,587
Receipts of notes receivable		10,412			8,198
Purchases of marketable securities, available for sale		(281,450	)		(1,324,883	)
Sales of marketable securities, available for sale		404,452			2,087,306
Net investing activities of discontinued operations		-			-
Net cash provided by investing activities		83,542			746,731

CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft		(203,500	)		(395,936	)
Proceeds from issuance of common stock		-			303,637
Principal payment on capital lease obligations		(30,228	)		(105,040	)
Net financing activities of discontinued operations		(34,809	)		-
Net cash used in financing activities		(268,537	)		(197,339	)

NET DECREASE IN CASH AND CASH EQUIVALENTS		(45,487	)		(279,175	)
CASH AND CASH EQUIVALENTS, BEGINNING		118,805			588,909
CASH AND CASH EQUIVALENTS, ENDING	$	73,318		$	309,734

See notes to consolidated financial statements.

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005

(UNAUDITED)

UNAUDITED INTERIM FINANCIAL STATEMENTS

The unaudited consolidated financial statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). 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 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, 2005.

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, 2006.

SHARE-BASED COMPENSATION

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (“SFAS 123R”) which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors, including employee stock options. SFAS 123R supersedes the Company’s previous accounting under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning in 2006. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123R. The Company has utilized the guidance of SAB 107 in its adoption of SFAS 123R.

SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the results of operations at their grant-date fair values. The Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standards as of January 1, 2006, the first day of the Company’s 2006 fiscal year. Under this transition method, compensation cost recognized in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to but not yet vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified prospective method of adoption, the Company’s results of operations and financial position for prior periods have not been restated.

Equity Compensation Plans

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

compensation expense. The stock appreciation right is not separable from the underlying stock option or incentive stock option originally granted and can only be exercised in tandem with the stock option. No stock appreciation rights are attached to any options outstanding. At March 31, 2006, no shares were available for future grants under the 1995 Stock Option Plan. Options granted under the Plan have an exercise price equal to the fair market value on the date of grant, are fully vested at March 31, 2006, and generally expire ten years after grant date.

During 2003, the Company approved the 2003 Stock Incentive Plan, or 2003 Plan. Under the 2003 Plan, options available for grant can consist of (i) nonqualified stock options, (ii) incentive stock options and (iii) restricted stock. The Company has reserved 2,000,000 shares of the Company's common stock $.0001 par value for the 2003 Plan. The Plan limits participation to employees, independent contractors, and consultants. The option price for shares of stock subject to this Plan is set by the Compensation Committee of the Board of Directors at a price not less than market value of the common stock on the date of grant. No stock options may be exercised within six months from the date of grant, unless under a Plan exception, nor more than ten years after the date of grant. At March 31, 2006, there were 387,000 shares available for future grants under the 2003 Stock Incentive Plan. Options granted under the Plan have an exercise price equal to the fair market value on the date of grant, are fully vested at March 31, 2006, and generally expire ten years after grant date.

Grant-Date Fair Value

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair value of options granted during the first quarter of 2006 and 2005 were calculated using the following estimated weighted average assumptions:

	Three Months Ended March 31,
	2006	2005
Expected volatility	74.49%	57.50%
Expected term (in years)	5	5
Risk-free interest rate	4.80%	2.72%
Expected dividend yield	0%	0%

Expected volatility is based on historical volatility. The expected term of the options is based on management’s best estimate. The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term assumption. The Company has not historically issued any dividends and does not expect to in the future.

Share-Based Compensation Expense

The Company uses the straight-line attribution method to recognize expense for unvested options. The amount of share-based compensation recognized during a period is based on the value of the awards that are ultimately expected to vest. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company will re-evaluate the forfeiture rate annually and adjust as necessary.

Share-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2006 was $2,937, allocated as follows:

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

		Three Months Ended
		March 31, 2006
Distribution and administrative expenses	$	4,815
Income tax effect		1,878
Total share-based compensation	$	2,937

There was no share-based compensation expense related to employee stock options recognized during the three months ended March 31, 2005. Prior to January 1, 2006, the Company accounted for its share-based compensation under the recognition and measurement principles of APB 25 and related interpretations, the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and the disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. In accordance with APB 25, no share-based compensation cost was reflected in the Company’s net income for grants of stock options to employees because the Company granted stock options with an exercise price equal to the market value of the stock on the date of grant. Had the Company used the fair value based accounting method for share-based compensation expense prescribed by SFAS Nos. 123 and 148 for the period ended March 31, 2005, the Company’s consolidated net loss and net loss per share would have been increased to the pro-forma amounts illustrated as follows:

		Three Months Ended
		March 31, 2005
Basic and diluted:
Net loss as reported	$	(1,338,423	)
Deduct: share-based employee compensation, net of income tax		18,182
Pro forma net loss	$	(1,356,605	)

Net loss per share:
Basic - as reported	$	(0.19	)
Basic - pro forma	$	(0.19	)
Diluted - as reported	$	(0.19	)
Diluted - pro forma	$	(0.19	)

Shares outstanding - basic		6,991,470
Shares outstanding - diluted		6,991,470

Option Activity

A summary of the activity under the Company’s stock options plans for the three-month period ended March 31, 2006 is presented below:

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)


				Weighted
				Average
			Weighted	Remaining		Aggregate
			Average	Contractual		Intrinsic
	Shares		Exercise Price	Term (Years)		Value
Options outstanding at December 31, 2005	1,950,009	$	3.13
Granted	250,000		0.62		$	5,000
Exercised	-		-		$	-
Canceled	-		-
Options outstanding at March 31, 2006	2,200,009	$	2.84	5.31	$	5,000
Options exercisable at March 31, 2006	1,950,009	$	3.13	5.24	$	-
Options vested and options expected to vest at March 31, 2006	1,950,009	$	3.13	5.24	$	-

There were no stock options that became fully vested during the three months ended March 31, 2006. As of March 31, 2006, there was $91,486 of total unrecognized compensation cost, net estimated forfeitures, related to unvested share-based awards, which is expected to be recognized over a period of 4.75 years.

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.

For the three months ended March 31, 2006, there were no unrealized gains or losses, as all securities are in cash or cash equivalents. Net unrealized losses, net of tax, of approximately $39,000, including approximately $20,000 reclassified to loss, were included in accumulated other comprehensive income for the three months ended March 31, 2005. Total comprehensive loss for the three months ended March 31, 2006 was $316,314, and total comprehensive loss for the three months ended March 31, 2005 was $1,529,177.

RESTRICTED SECURITIES

In connection with the Heartland acquisition, the Company has pledged marketable securities in the amount of $75,958 as restricted cash against one of the notes payable.

ACQUISITION

On September 9, 2005, the Company entered into a definitive Stock Purchase Agreement with Heartland Cup, Inc. (“Heartland Cup”) and its principal shareholder for the purchase of all of the

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

principal shareholder’s stock in Heartland Cup. Upon closing of the Stock Purchase Agreement, the Company acquired 2,000,000 shares, or approximately 83% of the outstanding capital stock of Heartland Cup, for 200,000 shares of the Company’s common stock. In addition, the Company paid approximately $200,000 to acquire the remaining shares of Heartland Cup.

The Heartland Cup acquisition was accounted for as a purchase under Statement of Financial Accounting Standards No. 141 (“SFAS No. 141”). In accordance with SFAS No. 141, the Company allocated the purchase price of the acquisition based on the fair value of the assets acquired and liabilities assumed. Goodwill resulting from the Heartland Cup acquisition was reserved for impairment.

LOSS PER SHARE

Loss per common share - basic is computed based upon net loss divided by the weighted average number of common shares outstanding during each period. Loss per common share - assuming dilution is computed based upon net 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 loss per common share - basic and loss per common share - assuming dilution:

		Income (Loss)		Shares		Per Share
		(Numerator)		(Denominator)		Amount
Weighted average common shares outstanding:
For the three months ended March 31, 2006:
Loss per common share:
Loss available to common stockholders	$	(316,314	)	7,766,574	$	(0.04	)
Loss per common share - assuming dilution:
Options		-		14,461
Loss available to common stockholders plus assumed conversions	$	(316,314	)	7,781,035	$	(0.04	)

For the three months ended March 31, 2005:
Loss per common share:
Loss available to common stockholders	$	(1,338,423	)	6,991,470	$	(0.19	)
Loss per common share - assuming dilution:
Options		-		-
Loss available to common stockholders plus assumed conversion	$	(1,338,423	)	6,991,470	$	(0.19	)

Options to purchase 2,200,009 shares of common stock at exercise prices ranging from $0.62 to $6.00 per share were outstanding for the three months ended March 31, 2006, but were not included

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

in the computation of income (loss) per common share - assuming dilution because there was a net loss for the period then ended.

Options to purchase 2,580,658 shares of common stock at exercise prices ranging from $1.30 to $6.00 per share were outstanding for the three months ended March 31, 2005, but were not included in the computation of income (loss) per common share - assuming dilution because there was a net loss for the period then ended.

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. Valuation allowances have been established for certain operating loss and credit carryforwards that reduce deferred tax assets to an amount that will, more likely than not, be realized. Uncertainties that may affect the realization of these assets include tax law changes and the future level of product prices and costs. The outlook for determination of this allowance is calculated on the Company’s historical taxable income, its expectations for the future based on a rolling twelve quarters, and available tax-planning strategies. Based on this determination, management does not expect that the net deferred tax assets will be realized as offsets to reversing deferred tax liabilities and as offsets to the tax consequences of future taxable income. As such, a valuation allowance was provided for the entire deferred tax asset of approximately $5,400,000 at March 31, 2006. The Company’s effective tax rate differs from its statutory tax rate for 2006 due to the tax valuation allowance. The Company has net operating loss carryforwards of approximately $11,000,000 available to reduce future taxable income, which will begin to expire in 2021.

COMMITMENTS AND CONTINGENCIES

Recent Regulatory Developments - As a marketer of products that are ingested by consumers, the Company is subject to the risk that one or more of the ingredients in its products may become the subject of adverse regulatory action. For example, one of the ingredients in the Company’s prior AM-300 product was ephedra, an herb that contains naturally-occurring ephedrine alkaloids. The Company’s manufacturer used a powdered extract of that herb when manufacturing AM-300. The Company marketed AM-300 principally as an aid in weight management. The extract was an 8% extract, which means that every 100 milligrams of the powdered extract contains approximately eight milligrams of naturally occurring ephedrine alkaloids.

On February 11, 2004, the FDA issued and published in the Federal Register its final rule on ephedrine-containing supplements, stating that since an “unreasonable risk” had been determined, such supplements would be considered “adulterated” under the FFDCA, and thus may not be sold. In essence, this final rule (or regulation) imposed a national ban on ephedrine supplements. The effective date of this regulation was April 12, 2004. The Company complied with the new regulation and ceased all sales and advertisement of AM-300 and any other ephedra-containing supplement as of April 12, 2004. The FDA has continuously and vigilantly enforced this total ban on ephedra-containing supplements. As recently as December 6, 2005, the FDA seized yet another shipment of such supplements distributed by companies in Gainesville, Texas and Eugene, Oregon.

For the future, the FDA and also Congress have indicated that they will consider whether alternatives to ephedra, other weight loss and energy stimulants (such as bitter orange), similarly carry an unreasonable risk to the central nervous system, and thus to human health. These proposals to limit stimulant ingredients, if finalized, may necessitate reformulations of some of the Company’s weight loss products.

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

Also, in the aftermath of the ephedra ban, on April 22, 2004, in comments before a scientific meeting, then Acting FDA Commissioner, Lester Crawford (and for some months during 2005, FDA Commissioner), outlined what an FDA press release termed a “science-based plan for dietary supplement enforcement”. The press release went on to say that the agency “would soon provide further details about its plan to ensure that the consumer protection provisions of DSHEA are used effectively and appropriately”. Referring to its recent rulemaking on ephedra, the FDA also stated that it “expects to evaluate the available pharmacology, published literature …, evidence-based reviews, and adverse event information” of “individual dietary supplements”. Soon afterwards, this promised FDA document was issued, with the title “Regulatory Strategy for the Further Implementation and Enforcement of the Dietary Supplement Health and Education Act of 1994”. No new regulations or proposed rules pursuant to this strategy have yet been issued, except that the FDA has recently welcomed and received comments from the industry for a better procedure for the FDA to review a company’s safety information as to a new dietary ingredient, or NDI, in an NDI Notification. The final Guidance document concerning NDI Notifications has not yet been issued by the FDA. At this time, NDI Notifications are not required for any AMS products.

Anti-DSHEA Proposed Legislation. Finally, as the press, the FDA, and members of Congress and of the supplement industry have all predicted, the very issuance of the final rule on ephedra has caused Congress to rethink DSHEA, specifically as to how safety in supplements may be ensured, and also as to whether specific categories of dietary ingredients should not be permitted at all. In particular, there is growing sentiment (including from one herbal trade association) to make Adverse Event Reporting (AERs) mandatory for all manufacturers and marketers of dietary supplements, so that the FDA may take action more quickly than it did on ephedra, when a harmful herb or other ingredient is suspected. Since February 2003, there have been several bills proposed in Congress that would amend DSHEA, make safety safeguards stricter, even approaching the rigor and reporting required for FDA-regulated drugs. Some examples are as follows:

S. 722 - The Dietary Supplement Safety Act was introduced by Senator Richard Durbin in March 2003, and would greatly undermine DSHEA, especially Section 4 regarding safety, giving the FDA new powers of oversight and blanket authority over whole categories of supplements, including stimulants. Stimulants are used in many weight loss products, including some of our supplements. To the best of our knowledge, this bill and the bill described below (though perhaps under different numbers) are still pending.

H.R. 3377: Beginning on October 28, 2003, Senator McCain chaired Senate Hearings on whether DSHEA adequately protects consumers. Also on October 28, Cong. Susan Davis and Cong. Henry Waxman introduced The Dietary Supplement Access and Awareness Act, H.R. 3377, purporting to be about safety and access for consumers to supplements, but actually recommending severe restrictions and dramatic redefinitions of what constitutes a dietary supplement. This bill would impose several requirements for supplements, including unprecedented FDA pre-approval as well as strict AER reporting, and excludes only vitamins and minerals from such new requirements. Like S. 722, this bill would reverse the safety burden of proof in Section 4 of DSHEA (one of the industry’s victories in 1994), and instead require the manufacturer to demonstrate safety, rather than the burden being on the FDA to show “imminent hazard” or “unreasonable risk”.

So far, neither of the bills above, nor any other proposed legislation that would undermine DSHEA or impose additional requirements on supplements, have passed. With the help of its regulatory attorney, the Company will continue to monitor these anti-DSHEA bills, and determine if any of them become a serious threat to its business. In addition, the two major trade associations of the dietary supplement industry—the American Herbal Products Association, or AHPA, and the National

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

Natural Foods Association, or NNFA—have both been actively lobbying against any bills that would require or lead to unreasonable restraints on the manufacture, labeling, and marketing of dietary supplements.

Product Liability - The Company, like other marketers of products that are intended to be ingested, faces an inherent risk of exposure to product liability claims in the event that the use of its products results in injury. The Company has evaluated the risk associated with consumption of its current products and, based on the indemnification given by its manufacturers and the current product mix, the Company cancelled its product liability insurance in August 2005. Products containing ephedra, which represented 31.0% of the Company’s first quarter 2004 net revenues, were not covered by the Company’s product liability insurance. Substantially all of the Company’s product manufacturers carry product liability insurance, which covers its products. Such product claims against the Company could adversely affect product sales, results of operations, financial condition and the value of the Company’s common stock.

Legal Proceedings - The Company is currently involved in asserted and unasserted claims, which arise in the ordinary course of business. The Company routinely evaluates whether a loss is probable, and if so, whether it can be estimated. Estimates are based on similar case law matters, consultation with subject matter experts and information obtained through negotiations with counter-parties. As such, accurately depicting the outcome of pending litigation requires considerable judgment and is subject to material differences on final settlement. Accruals for probable losses are recorded in accrued expenses. If the Company’s assessment of the probability is inaccurate, the Company may need to record additional accruals or reduce recorded accruals later. In addition, the Company may need to adjust its estimates of the probable loss amounts as further information is obtained or the Company considers settlements. See “Part II, Item 1. Legal Proceedings” for a description of the most significant claims by or against the Company.

Employment Agreements - In January 2006, the Company entered into a written employment agreement with Jerry W. Grizzle, the Company’s Chairman of the Board, President and Chief Executive Officer. The contract is for a two-year term, commencing January 25, 2006, for an initial term of two years, followed by two successive one-year terms unless either party elects not to renew the Agreement. Mr. Grizzle’s base salary is $150,000 per year for the first year of the Initial Term, $200,000 for the second year of the Initial Term and $250,000 for each year after the Initial Term. Additionally, Mr. Grizzle will be eligible to receive certain performance-based incentive bonuses. The Company granted Mr. Grizzle options to purchase 250,000 shares of the Company’s common stock on February 15, 2006, with an exercise price of $0.62 per share. The options vest in five equal annual installments beginning February 15, 2007 and expire February 15, 2016. In the event the Company terminates Mr. Grizzle without cause, he will receive certain severance pay based upon his length of employment with the Company.

In April 2006, the Company entered into a written employment agreement with Robin L. Jacob, the Company’s Vice President, Secretary, Treasurer and Chief Financial Officer. The contract is for a two-year term, commencing February 12, 2006, followed by two successive one-year terms unless either party elects not to renew the Agreement. Ms. Jacob’s base salary is $100,000 per year for the first year of the Initial Term, $112,500 for the second year of the Initial Term and $125,000 for each year after the Initial Term. Additionally, she is eligible to receive certain performance-based incentive bonuses. The Company granted Ms. Jacob options to purchase 150,000 shares of the Company’s common stock at an exercise price of $.64 per share, which was the closing price of the Company’s common stock on March 31, 2006, the last trading day prior to the date the options were granted. The options vest in five equal annual installments beginning April 1, 2007 and expire April 1, 2016. In the event the Company terminates Ms. Jacob without cause, she will receive certain severance pay based upon her length of employment with the Company.

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

DEFERRED COMPENSATION AND CONSULTING AGREEMENTS

On November 4, 2003, the Company entered into a written employment agreement with John W. Hail. The contract was for an initial two-year term, commencing November 4, 2003, and extended for up to five successive one-year terms if the Company and Mr. Hail agree in writing. The agreement was extended on November 4, 2005. The contract calls for a base salary of $249,600 per year, a monthly variable salary equal to one percent (1%) of the Company’s gross revenues, and a discretionary year-end bonus determined by a majority vote of the Board of Directors. On November 4, 2005, the Company extended Mr. Hail’s employment agreement to November 4, 2006. In connection with the extension, Mr. Hail’s monthly variable salary ceased and was replaced by a fixed supplemental payment to Mr. Hail, which was the gross amount necessary to cover all federal, state and local taxes and all employment taxes, and pay a net amount of $7,000 per month. Mr. Hail retired as the Company’s Chief Executive Officer and Chairman of the Board effective February 12, 2006. At such time, the Company’s obligations under his employment agreement terminated. In April 2006, the Company signed a consulting agreement with TVC Marketing, Inc., regarding the services of Mr. Hail. The agreement is for an initial six-month term, commencing March 1, 2006, with the renewal option of any number of additional successive six-month terms by mutual agreement between the parties. Such renewal(s) must be in writing signed by both parties. The consulting fee is $5,000 per month for the entire term of the agreement, plus reimbursement of reasonable travel expenses.

10.

LEASE ABANDONMENT

In January 2004, the Company commenced a relocation of its corporate headquarters from 2601 NW Expressway (the Oil Center), Oklahoma City, Oklahoma to its warehouse and distribution facility. A portion of the Oil Center was maintained for storage, a portion was maintained for possible relocation of Company personnel due to expansion of the business and a portion was subleased to a third party under a short-term lease. In September 2004, Company management determined the existing spacce was sufficient to meet expansion needs, and as such, abandoned the Oil Center location. In determining lease abandonment, management assumed the continuation of the existing sublease at the current rate. In addition, a discount rate of 6.5% was used to calculate the present value of current lease payments less sublease revenue. At March 31, 2006, the lease abandonment accrual was approximately $171,000.

11.

DISCONTINUED OPERATIONS

On March 31, 2006, the Company adopted a plan to discontinue the operations of its Heartland Cup subsidiary. The Company has actively marketed Heartland Cup to prospective buyers. At March 31, 2006, Heartland Cup had reduced employee count to only those necessary to show the plant to prospects. As of May 10, 2006, the Company was in negotiations with a prospective buyer to purchase the plant, equipment and current customer contracts. Management believes this purchase will conclude within one year from March 31, 2006.

The results of operations of discontinued operations are summarized below:

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

		Three Months
		Ended
		March 31, 2006
Revenues	$	513,445

Loss from operations of discontinued operations	$	(315,715	)
Estimated costs to sell		( 20,000	)
Income tax effect		-
Loss from discontinued operations, net of tax	$	(335,715	)

The Company expects to incur attorney fees, in connection with the sale of the Heartland Cup operations, to draft the sales contracts, and complete the transaction. As such, the Company has included an estimate of $20,000 in the discontinued operations accrual at March 31, 2006.

The components of assets and liabilities of discontinued operations in the accompanying consolidated balance sheets are as follows:

		March 31, 2006
Current assets of discontinued operations:
Cash	$	1,113
Accounts receivable, net		171,933
Inventory		203,931
Total	$	376,977
Noncurrent assets of discontinued operations:
Property and equipment, net	$	1,347,977
Net other assets		471
Total	$	1,348,448

Current liabilities of discontinued operations:
Accounts payable	$	227,225
Current portion of long-term debt		444,434
Other current liabilities		30,656
Total	$	702,315

Long-term liabilities of discontinued operations:
Long-term debt	$	1,607,626

12.

GOING CONCERN

The accompanying financial statements have been prepared based upon the Company's belief that it will continue as a going concern. Several factors have contributed to the Company’s current financial condition:

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AMS HEALTH SCIENCES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004

(UNAUDITED)

The impact of several material non-recurring events, including the one-time impairment of goodwill, the accrual of deferred compensation related to the employment contract of the Company’s founder and then CEO, the implementation of a free trial program, the write off of the Company’s deferred tax asset, and a lease abandonment charge related to the abandonment of the executive offices;

Excessive expenses incurred in the Heartland operations, resulting from expenditures over and above what was represented, and a continuing excess of monthly operating expenses over revenues; and

Recurring losses, due to the FDA’s ban on ephedra products, and the replacement of new products.

The Company has taken the following steps to significantly reduce its cost of sales and marketing, distribution and administrative costs:

· Reductions in force, encompassing all departments within the Company;

· The termination of a discount sales program, designed to give customers a cash discount after purchasing a certain dollar amount of product; and

The termination of several extra employee benefits, including vehicle allowances and social and country-club privileges.

On March 31, 2006, the Company adopted a plan to discontinue the operations of its Heartland Cup subsidiary. The Company has actively marketed Heartland Cup to prospective buyers. At March 31, 2006, Heartland Cup had reduced employee count to only those necessary to show the plant to prospects. As of May 10, 2006, the Company was in negotiations with a prospective buyer to purchase the plant, equipment and current customer contracts. Management is also actively working with several investment firms to raise equity capital, not only for equity purposes, but also for cash flow purposes. Finally, the Company is exploring strategic acquisitions of network marketing companies with profitable, sustained operations.

The Company is seeing positive upswings and trends in associate recruiting, as well as continued reductions in costs of goods sold and administrative expenses. At March 31, 2006, the Company’s ratios compared to net sales are trending toward the levels that existed in the Company’s last profitable year. Finally, the Company is exploring a new product offering that management believes will be the replacement for the ephedra product banned in 2004.

The Company believes that without the drain on resources from the Heartland operations, and based on the results in the first quarter of 2006, it will generate sufficient working capital to sustain operating activities for the next twelve months.

******

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Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

AMS Health Sciences, Inc. and Subsidiaries

We have reviewed the accompanying consolidated balance sheet of AMS Health Sciences, Inc. and Subsidiaries as of March 31, 2006, and the related consolidated statements of operations and cash flows for the three months ended March 31, 2006. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board (United States), 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 consolidated financial statements, as of and for the period ended March 31, 2006, for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of AMS Health Sciences, Inc. and Subsidiaries as of December 31, 2005 and the consolidated statements of operations, stockholders’ equity and cash flows for the year then ended (not presented herein) and, in our report dated March 28, 2006, we expressed an unqualified opinion on those statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2005 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/S/ COLE & REED P.C.

Oklahoma City, Oklahoma

May 12, 2006

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

General

We market a product line consisting of approximately sixty 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 September 9, 2005, we entered into a definitive Stock Purchase Agreement with Heartland and its principal shareholder for the purchase of all of the principal shareholder’s stock in Heartland. Upon closing of the Stock Purchase Agreement, we acquired 2,000,000 shares, or approximately 83% of the outstanding capital stock of Heartland, for 200,000 shares of our common stock. In addition, we paid approximately $200,000 to acquire the remaining shares of Heartland. Heartland is a manufacturer of foam cups, distributed through a number of contracts. Heartland has exclusive contracts with the State of Oklahoma and the Department of Defense, as well as a number of restaurants.

As described in Footnote 11 to the Financial Statements, we have made the decision to sell or cease operations at Heartland Cup. As such, our consolidated financial statements reflect Heartland Cup as a discontinued operation. As described in Part II, Item 1. Legal Proceedings, we have filed suit against Truett McCarty with the District Court of Oklahoma County, State of Oklahoma relating to our acquisition of Heartland. We believe that Mr. McCarty has both defrauded us regarding the financial conditions and results of operations of Heartland, as well as breached certain representations and warranties in the stock purchase agreement relating to the Heartland acquisition. It is our belief that, had we been aware of the true facts and circumstances regarding Heartland’s financial condition and historical results of operations, we would not have purchased Heartland. We presently believe that the dedication of our time and attention to Heartland is neither in our or our stockholders’ best interests. As a result, we have discontinued the Heartland operations, and are in negotiations with a prospective buyer to purchase the plant, equipment and existing customer contracts. Due to the above reasons, any further discussion of Heartland and its operations in this report will be limited to the discussions included in Item 2. Management’s Discussion and Analysis or Plan of Operation and Part II, Item 1. Legal Proceedings. Since the purchase offer for Heartland Cup is not finalized, we cannot determine the ultimate impact of the sale on our financial condition or results of operations.

Critical Accounting Policies. 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 and sales returns. 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:

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;

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

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

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We recognize revenue upon shipment of products, training aids and promotional material to our independent associates. All of our customers pay for sales in advance of shipment. As such, we have no trade receivables. We used to make loans to associates, which were repayable in five years or less, and which were secured by commissions controlled by us. Associate loans are no longer allowed. Interest rates on loans were typically two percent or more above the Prime rate and were fixed. All loans were secured by guaranteed payment sources that were within our control, but subject to increases and decreases depending upon associate sales activity. Management determined that there was a possibility of default on the associate loans. As such, We have reserved an allowance for doubtful accounts in connection with the associate loans. At March 31, 2006, the allowance for doubtful accounts was approximately $136,000. Total associate loans still outstanding at March 31, 2006 totaled approximately $193,000.

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. Our intangible assets consist of non-compete covenants and other intangibles, which have a significant residual value. These intangible assets are being amortized over the life of the contracts. We evaluate all intangible assets annually for indicators of impairment.

We use an asset and liability approach to account for income taxes. Deferred income taxes are recognized for the tax consequences of temporary differences and carryforwards by applying enacted tax rates applicable to future years to differences between the financial statement amounts and the tax bases of existing assets and liabilities. A valuation allowance is established if, in management's opinion, it is more likely than not that some portion of the deferred tax asset will not be realized. All evidence, both positive and negative, is considered to determine whether a valuation allowance is needed for some or all of a deferred tax asset. Judgment must be used in considering the relative impact of negative and positive evidence. The more negative evidence that exists, (a) the more positive evidence is necessary and (b) the more difficult it is to support a conclusion that a valuation allowance is not needed. Based on the above factors and management’s evaluation, we determined that a valuation allowance should be established for the entire deferred tax asset. At March 31, 2006, our deferred tax asset was approximately $5,400,000.

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. At March 31, 2006, we have a marketing inventory obsolescence reserve of approximately $75,000 for estimated obsolete or unsalable inventory.

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.

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, 2006 and 2005. The selected results of operations are derived from our unaudited consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of our future operations.

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	For the Three Months Ended
	March 31,
	2006						2005
	Amount			Percent			Amount			Percent
Net sales	$	2,351,713			100.0	%	$	4,020,758			100.0	%
Cost of sales:
Commissions and bonuses		827,815			35.2			2,058,629			51.2
Cost of products		458,070			19.5			977,067			24.3
Cost of shipping		279,269			11.9			506,437			12.6
Total cost of sales		1,565,154			66.6			3,542,133			88.1
Gross profit		786,559			33.4			478,625			11.9
Marketing and administrative expense:
Marketing		141,144			6.0			312,121			7.8
Administrative		689,520			29.3			1,509,508			37.5
Total marketing, and administrative expense		830,664			35.3			1,821,629			45.3
Loss from operations		(44,105	)		(1.9	)		(1,343,004	)		(33.4	)
Other income (expense):
Interest, net		3,842			0.2			7,569			0.2
Other, net		59,664			2.5			20,830			0.5
Total other income		63,506			2.7			28,399			0.7
Income (loss) from continuing operations before taxes		19,401			0.8			(1,314,605	)		(32.7	)
Tax expense		-			-			23,818			0.6
Income (loss) from continuing operations	$	19,401			0.0		$	(1,338,423	)		(0.3	)
Discontinued operations:
Loss from operations of Heartland Cup		(335,715	)		(13.4	)		-			-
Income tax benefit		-			-			-			-
Total loss on discontinued operations		(335,715	)		(13.4	)		-			-
Net loss	$	(316,314	)		(12.5	)%	$	(1,338,423	)		(33.3	)%

Comparison of the Three Months ended March 31, 2006 and 2005

Our net sales during the three months ended March 31, 2006 decreased $1,699,045, or 41.5%, to $2,351,713 from $4,020,758 during the three months ended March 31, 2005. On April 5, 2005, we announced that we were ending the free trial program due to the lack of retention required to make the program profitable long term. In connection with the reduction in sales, on April 20, 2005, we announced the implementation of expense reductions designed to better align expenses with revenue. Due to the continued decrease in sales we implemented additional expense reductions and employee layoffs in August and December 2005, and January 2006.

Our cost of sales during the three months ended March 31, 2006 decreased $1,976,979, or 55.8%, to $1,565,154 from $3,542,133 during the same period in 2005. Total cost of sales, as a percentage of net sales, decreased to 66.6% during the three months ended March 31, 2006 from 88.1% during the same period in 2005. The decrease in cost of sales was attributable to the cancellation of our free trial program, resulting in:

A decrease of approximately $1,231,000 in associate commissions and bonuses;

A decrease of approximately $519,000 in the cost of products sold; and

A decrease of approximately $279,000 in shipping costs.

The factors discussed above resulted in an increase in gross profit of $307,934, or 62.3%, to $786,559 for the three months ended March 31, 2006 from $478,625 for the same period in 2005.

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Marketing expenses decreased $170,977, or 54.8%, to $141,144 during the three months ended March 31, 2006, from $312,121 during the same period in 2005. The decrease in expense was primarily attributable to:

· A decrease in employee costs of approximately $114,000, related to reduction in staff;

A decrease in travel costs of approximately $14,000 related to reduced outside travel of executives;

A decrease in professional services of approximately $37,000 related to maintenance of our websites; and

A decrease in miscellaneous expense of approximately $14,000 related to postage, printing, supplies and telephone expense.

The decrease in marketing expense was partially offset by an increase in promotion expense of approximately $7,000.

Administrative expense decreased $819,988, or 54.3%, to $689,520 during the three months ended March 31, 2006 from $1,509,508 during the same period of 2005. The decrease in expense was primarily attributable to:

A decrease in employee costs of approximately $497,000 related to reduction in staff;

A decrease in professional services of approximately $115,000 related to decreased consulting and legal fees and less use of temporary employees;

A decrease in rent and insurance expense of approximately $116,000 related to adjustments to our lease abandonment accrual and a change in insurance carriers resulting in better rates;

A decrease in repairs and maintenance expense of approximately $45,000;

A decrease in depreciation expense of approximately $15,000 due to the sale of the motorcoach and other assets in 2005; and

A decrease in general and administrative expense of approximately $25,000 related to bank charges, supplies, telephone, etc.

The marketing and administrative expenses as a percentage of net sales decreased to 35.3% during the three months ended March 31, 2006 from 45.3% during the same period in 2005. Management expects marketing and administrative expenses to remain at the current dollar level based on expense reductions implemented in 2005 and early 2006.

Our net other income (reduced by other expense) increased by $35,107 to net other income of $63,506 at March 31, 2006, from net other income of $28,399 during the same period in 2005, primarily due to:

An increase in other income of approximately $13,000 related to the collection of reserved notes receivable;

An increase in gain on sale of assets of approximately $46,000 related to the sale of the motorcoach and one of our vehicles; and

A decrease in gain on sale of marketable securities of approximately $20,000.

Our income (loss) from continuing operations before taxes increased $1,334,006 to income of $19,401 for the first three months of 2006, compared to a net loss of ($1,314,605) during the same period in 2005. Income (loss) from continuing operations before taxes as a percentage of net sales was 0.8% and (32.7%) for the three months ended March 31, 2006 and 2005, respectively. Income tax expense for the first quarter 2006 and 2005 was $0 and $23,818, respectively. Our net income (loss) from continuing operations increased $1,357,824, to net income of $19,401

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for the three months ended March 31, 2006, from a net loss of ($1,338,423) for the same period in 2005. This increase was attributable to:

The increase in gross profit to $786,559 during 2006 from $478,625 during 2005;

The decrease in marketing and administrative expense to $830,664 during 2006 from $1,821,629 during 2005; and

The increase in net other income to $63,506 during 2006 from $28,399 during 2005.

Net income (loss) from continuing operations as a percentage of net sales increased to 0.8% for the three months ended March 31, 2006, from (33.3%) during the same period in 2005.

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.

Recently Issued Accounting Standards

Equity Compensation Plans

During 1995, the Company approved the 1995 Stock Option Plan (the "Plan"). Under this Plan, options available for grant can consist of (i) nonqualified stock options, (ii) nonqualified stock options with stock appreciation rights attached, (iii) incentive stock options, and (iv) incentive stock options with stock appreciation rights attached. The Company has reserved 1,125,000 shares of the Company's common stock $.0001 par value, for the Plan. The Plan limits participation to employees, independent contractors and consultants. Non-employee directors are excluded from Plan participation. The option price for shares of stock subject to this Plan is set by the Stock Option Committee of the Board of Directors at a price not less than 85% of the market value of the stock on the date of grant. No stock options may be exercised within six months from the date of grant, unless under a Plan exception, nor more than ten years after the date of grant. The Plan provides for the grant of stock appreciation rights, which allow the holder to receive in cash, stock or combination thereof, the difference between the exercise price and the fair value of the stock at date of exercise. The fair value of stock appreciation rights is charged to compensation expense. The stock appreciation right is not separable from the underlying stock option or incentive stock option originally granted and can only be exercised in tandem with the stock option. No stock appreciation rights are attached to any options outstanding. At March 31, 2006, no shares were available for future grants under the 1995 Stock Option Plan. Options granted under the Plan have an exercise price equal to the fair market value on the date of grant, are fully vested at March 31, 2006, and generally expire ten years after grant date.

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Grant-Date Fair Value

	Three Months Ended March 31,
	2006	2005
Expected volatility	74.49%	57.50%
Expected term (in years)	5	5
Risk-free interest rate	4.80%	2.72%
Expected dividend yield	0%	0%

Share-Based Compensation Expense

Share-based compensation expense recognized under SFAS 123R for the three months ended March 31, 2006 was $2,937, allocated as follows:

		Three Months Ended
		March 31, 2006
Distribution and administrative expenses	$	4,815
Income tax effect		1,878
Total share-based compensation	$	2,937

There was no share-based compensation expense related to employee stock options recognized during the three months ended March 31, 2005. Prior to January 1, 2006, the Company accounted for its share-based compensation under the recognition and measurement principles of APB 25 and related interpretations, the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and the disclosures required by SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”. In accordance with APB 25, no share-based compensation cost was reflected in the Company’s net income for grants of stock options to employees because the Company granted stock options with an exercise price equal to the market value of the stock on the date of grant. Had the Company used the fair value based accounting method for share-based compensation expense prescribed by SFAS Nos. 123 and 148 for the periods ended March 31, 2005, the Company’s consolidated net loss and net loss per share would have been increased to the pro-forma amounts illustrated as follows:

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		Three Months Ended
		March 31, 2005
Basic and diluted:
Net loss as reported	$	(1,338,423	)
Deduct: share-based employee compensation, net of income tax		18,182
Pro forma net loss	$	(1,356,605	)

Net loss per share:
Basic - as reported	$	(0.19	)
Basic - pro forma	$	(0.19	)
Diluted - as reported	$	(0.19	)
Diluted - pro forma	$	(0.19	)

Shares outstanding - basic		6,991,470
Shares outstanding - diluted		6,991,470

Option Activity

A summary of the activity under the Company’s stock options plans for the three-month period ended March 31, 2006 is presented below:


				Weighted
				Average
			Weighted	Remaining		Aggregate
			Average	Contractual		Intrinsic
	Shares		Exercise Price	Term (Years)		Value
Options outstanding at December 31, 2005	1,950,009	$	3.13
Granted	250,000		0.62		$	5,000
Exercised	-		-		$	-
Canceled	-		-
Options outstanding at March 31, 2006	2,200,009	$	2.84	5.31	$	5,000
Options exercisable at March 31, 2006	1,950,009	$	3.13	5.24	$	-
Options vested and options expected to vest at March 31, 2006	1,950,009	$	3.13	5.24	$	-

There were no stock options that became fully vested during the three months ended March 31, 2006. As of March 31, 2006, there was $91,486 of total unrecognized compensation cost, net of estimated forfeitures, related to unvested share-based awards, which is expected to be recognized over a period of 4.75 years.

Liquidity and Capital Resources

Our primary source of liquidity has been cash provided by sales of our common stock, marketable securities and operating activities. At March 31, 2006, we had a working capital deficit of ($455,951), compared to ($65,593) at December 31, 2005. Our working capital needs over the next 12 months consist primarily of marketing and administrative expenses, and will be provided by our operating activities and existing cash and cash equivalents.

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During the three months ended March 31, 2006, net cash provided by operating activities was $139,508, net cash provided by investing activities was $83,542 and net cash used in financing activities was $268,537. This represented a net decrease in cash during the period of $45,487.

The financial statements have been prepared based upon our belief that we will continue as a going concern. Several factors have contributed to our current financial condition:

The impact of several material non-recurring events, including the one-time impairment of goodwill, the accrual of deferred compensation related to the employment contract of our founder and then CEO, the implementation of a free trial program, the write off of our deferred tax asset, and a lease abandonment charge related to the abandonment of the executive offices;

Excessive expenses incurred in the Heartland operations, resulting from expenditures over and above what was represented, and a continuing excess of monthly operating expenses over revenues; and

Recurring losses, due to the FDA’s ban on ephedra products, and the replacement of new products.

We have taken the following steps to significantly reduce our cost of sales and marketing, distribution and administrative costs:

Reductions in force, encompassing all departments within the Company;

The termination of a discount sales program, designed to give customers a cash discount after purchasing a certain dollar amount of product; and

The termination of several extra employee benefits, including vehicle allowances and social and country-club privileges.

On March 31, 2006, we adopted a plan to cease the Heartland operations. We have actively marketed the plant to prospective buyers, and have retained only those employees necessary to facilitate tours of the plant to interested parties. We have included an accrual for discontinued operations in the first quarter of 2006, and as of May 10, 2006, we were in negotiations with a prospective buyer to purchase the plant, equipment, and current customer contracts. We are also actively working with several investment firms to raise equity capital, not only for equity purposes, but also for cash flow purposes. Finally, we are exploring strategic acquisitions of network marketing companies with profitable, sustained operations.

We are seeing positive upswings and trends in associate recruiting, as well as continued reductions in costs of goods sold and administrative expenses. At March 31, 2006, our ratios compared to net sales are trending toward the levels that existed in our last profitable year. Finally, we are exploring a new product offering that we believe will be the replacement for the ephedra product banned in 2004.

We believe that without the drain on resources from the Heartland operations, and based on the results in the first quarter of 2006, we will generate sufficient working capital to sustain operating activities for the next twelve months.

Item 3. 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 these disclosure controls and procedures were effective. During the three months ended March 31, 2006, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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____________________PART II. OTHER INFORMATION____________________

Item 1. LEGAL PROCEEDINGS

The case of Ronald Potter et al v. Advantage Marketing Systems, Inc. et al, a products liability claim, was filed in the Oklahoma County District Court in March 2003. The Plaintiffs allege that the ingestion of ephedra included in AM-300 resulted in the death of Pamela Sue Potter. We have filed an answer to the petition. Written discovery and responses have been exchanged, and a limited number of depositions have been taken. We have denied any wrongdoing and intend to vigorously defend the claim. The amount of damages sought is unknown, but includes compensatory and punitive damages. The loss of this case could have a material adverse effect on the financial condition of the Company.

On February 6, 2006, AMS Health Sciences, Inc. and AMS Manufacturing, Inc. filed a lawsuit against Truett McCarty. AMS Health Sciences, Inc. and AMS Manufacturing, Inc. v. Truett McCarty, District Court of Oklahoma County, State of Oklahoma, Case No. CJ-2006-981. We allege that Mr. McCarty defrauded us in the sale of his stock in Heartland Cup, Inc. by failing to disclose the true amount of Heartland Cup, Inc.'s accounts payable. In addition, we allege that this failure was a breach of the stock purchase agreement Mr. McCarty signed. Mr. McCarty has filed an answer denying our allegations. In addition, Mr. McCarty has alleged several counterclaims against us. Mr. McCarty has alleged we defrauded him with regard to the value of the stock he received in exchange for his interest in Heartland Cup, Inc., that we breached the terms of the stock purchase agreement by failing to take steps to remove Mr. McCarty as guarantor of a certain promissory note, that we tortiously interfered with a promissory note between Mr. McCarty and Heartland Cup, Inc. and that we tortiously interfered with an employment agreement between Mr. McCarty and Heartland Cup, Inc. In addition, Mr. McCarty has brought claims against Heartland Cup, Inc. for breach of the promissory note and employment agreement. We deny liability to Mr. McCarty and will vigorously defend these counterclaims.

On November 22, 2005, we filed a declaratory judgment action against Vaughn Feather in the Oklahoma County District Court. The case was removed to federal court on December 29, 2005 and is now styled as, AMS Heath Sciences, Inc. v. Vaughn Feather, Western District of Oklahoma, Case no. CIV-05-1522. The action is a request by us for a judicial declaration that we are no longer bound to pay royalties to Feather under the terms of the previous Royalty Agreement between us and Feather pursuant to which we were paying royalties for proprietary products and formulas that we believed to no longer be proprietary. We are not seeking damages or any return of previous royalties; however, a favorable outcome would result in an end to our obligation to pay royalties to Feather, which typically exceed $10,000 per month. We are awaiting a ruling on Feather's motion to dismiss the action for lack of personal jurisdiction or to transfer the action to California federal court.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In January 2006, we entered into a written employment agreement with Jerry W. Grizzle, the Company's Chairman of the Board, President and Chief Executive Officer. Pursuant to the employment agreement, on February 15, 2006, we granted Mr. Grizzle 250,000 stock options , with an exercise price of $0.62 per share. Neither the options granted to Mr. Grizzle nor the stock underlying such options have been registered under the Securities Act. The options vest in five equal annual installments beginning February 15, 2007 and expire February 15, 2016. The options were issued relying upon the exemption from registration provided by Section 4(2) of the Securities Act for "transactions by the issuer not involving a public offering,". The options were issued to Mr. Grizzle without shareholder approval pursuant to Section 711(a) of the AMEX Company Guide.

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

(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.

10.1	Stock Option Agreement of Advantage Marketing Systems dated January 3, 2001, incorporated by reference to Form 8-K filed with the Commission on January 8, 2001.

10.2*

The Advantage Marketing Systems, Inc. 1995 Stock Option Plan, incorporated by reference to Form SB-2 Registration Statement (No. 33-80629), filed with the Commission on November 20, 1996.

10.3*

Employment Agreement by and between David D’Arcangelo and Registrant dated effective as of November 25, 2002, incorporated by reference to Form 10-K/A filed with the Commission on March 31, 2003.

10.4*

Non-qualified Stock Option Agreement by and between David D’Arcangelo and Registrant dated effective as of December 2, 2002, incorporated by reference to Form 10-K/A filed with the Commission on March 31, 2003.

10.5*

The Advantage Marketing Systems, Inc. 2003 Stock Incentive Plan, incorporated by reference to Form S-8 Registration Statement (No. 333-109093), filed with the Commission on September 24, 2003.

10.6	Fulfillment Services Agreement with Vita Sales & Distribution Multi-Country, dated

January 19, 2004, incorporated by reference to Form 10-K filed with the Commission on March 29, 2004.

10.7*

Employment Agreement by and between John W. Hail and Registrant dated effective as of

November 4, 2003, incorporated by reference to Form 10-K filed with the Commission on

March 29, 2004.

10.8 Commercial Industrial Real Estate Purchase Contract dated August 12, 2004 by and

between Registrant and Keltronics Corporation, incorporated by reference to Form 10-Q, filed with the commission on November 12, 2004.

10.9*

Employment Agreement by and between Steven G. Kochen and Registrant dated effective as of

August 9, 2005, incorporated by reference to Form 8-K filed with the Commission on August 12,

2005.

10.10*

Employment Agreement by and between Jerry W. Grizzle and Registrant dated effective as of

January 25, 2006, by reference to Form 10-KSB filed with the Commission on April 3, 2006.

10.11*

Employment Agreement by and between Robin L. Jacob and Registrant dated effective as of February 12, 2006, incorporated by reference to Form 8-K filed with the Commission on April 12, 2006.

10.12

Consulting Agreement by and between TVC Consulting and Registrant dated effective as of March 1, 2006, filed herewith.

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

31.1	Chief Executive Officer Certification, filed herewith.

31.2	Chief Financial Officer Certification, 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.

* Designates a compensatory plan.

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:
	AMS HEALTH SCIENCES, INC.



	By: /S/ ROBIN L. JACOB
Dated: May 15, 2006	Robin L. Jacob, Vice President and Chief Financial Officer
	(Duly Authorized Officer of Registrant and Principal Financial Officer)

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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.

10.1	Stock Option Agreement of Advantage Marketing Systems dated January 3, 2001, incorporated by reference to Form 8-K filed with the Commission on January 8, 2001.

10.2*

The Advantage Marketing Systems, Inc. 1995 Stock Option Plan, incorporated by reference to Form SB-2 Registration Statement (No. 33-80629), filed with the Commission on November 20, 1996.

10.3*

Employment Agreement by and between David D’Arcangelo and Registrant dated effective as of November 25, 2002, incorporated by reference to Form 10-K/A filed with the Commission on March 31, 2003.

10.4*

10.5*

The Advantage Marketing Systems, Inc. 2003 Stock Incentive Plan, incorporated by reference to Form S-8 Registration Statement (No. 333-109093), filed with the Commission on September 24, 2003.

10.6	Fulfillment Services Agreement with Vita Sales & Distribution Multi-Country, dated

January 19, 2004, incorporated by reference to Form 10-K filed with the Commission on March 29, 2004.

10.7*

Employment Agreement by and between John W. Hail and Registrant dated effective as of

November 4, 2003, incorporated by reference to Form 10-K filed with the Commission on

March 29, 2004.

10.8 Commercial Industrial Real Estate Purchase Contract dated August 12, 2004 by and

between Registrant and Keltronics Corporation, incorporated by reference to Form 10-Q, filed with the commission on November 12, 2004.

10.9*

Employment Agreement by and between Steven G. Kochen and Registrant dated effective as of

August 9, 2005, incorporated by reference to Form 8-K filed with the Commission on August 12,

2005.

10.10*

Employment Agreement by and between Jerry W. Grizzle and Registrant dated effective as of

January 25, 2006, by reference to Form 10-KSB filed with the Commission on April 3, 2006.

10.11*

Employment Agreement by and between Robin L. Jacob and Registrant dated effective as of February 12, 2006, incorporated by reference to Form 8-K filed with the Commission on April 12, 2006.

10.12

Consulting Agreement by and between TVC Consulting and Registrant dated effective as of March 1, 2006, filed herewith.

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

31.1 Chief Executive Officer Certification, filed herewith.

31.2	Chief Financial Officer Certification, 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.

* Designates a compensatory plan.