##### Table of Contents



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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q

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

For the quarter ended December 29, 2001

Commission File Number: 0-16002

ADVANCED MARKETING SERVICES, INC.

(Exact name of registrant as specified in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 95-3768341
(I.R.S. Employer
Identification No.)

5880 Oberlin Drive
San Diego, California 92121
(Address of principal executive offices)
(Zip Code)

(858) 457-2500
(Registrants telephone number, including area code)

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

YES (X)      
NO ( )

The number of shares
of the Registrants Common Stock outstanding as of January 30, 2002, net of treasury
shares of 3,733,875, was 19,214,633.



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TABLE OF CONTENTS



|                              |                                                                                               |                                            |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                              |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF INCOME         
|                              |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEMS 2-4. NOT APPLICABLE                                                                    
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   



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##### Table of Contents



ADVANCED MARKETING SERVICES, INC.

Index to Form 10-Q
December 29, 2001

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|ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS                                                     |                                                        |                               |                            |       
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|                                                                                              | Consolidated Balance Sheets (Unaudited)                |                               |                            | 3      |     
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|                                                                                              | Consolidated Statements of Income (Unaudited)          |                               |                            | 4      |     
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|                                                                                              | Consolidated Statements of Cash Flows (Unaudited)      |                               |                            | 5      |     
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|                                                                                              | Notes to Consolidated Financial Statements (Unaudited) |                               |                            | 6 - 16 |     
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|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |                                                        |                               | 17 - 21                    |       
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|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK                            |                                                        |                               | 22                         |       
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|                                                                                              |                                                        |                               | PART II. OTHER INFORMATION |        |      |  | 
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|ITEM 1. LEGAL PROCEEDINGS                                                                     |                                                        |                               | 23                         |       
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|ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |                                                        |                               | 23                         |       
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|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                       |                                                        |                               | 23                         |       
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|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |                                                        |                               | 23                         |       
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|ITEM 5. OTHER INFORMATION                                                                     |                                                        |                               | 23                         |       
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|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                      |                                                        |                               | 24                         |       
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|SIGNATURES                                                                                    |                                                        |                               | 24                         |       

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##### Table of Contents









PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS(See Note 1 for Basis of Presentation)




ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Data)

|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------- | --------- |  | -------- | ------- | ----------- |  | - | ------- | -
|                                                                                                                                                                                            |  | Dec. 29,    |         | March 31, |  | Dec. 30,
|                                                                                                                                                                                            |  | 2001        |         | 2001      |  | 2000    
|                                                                                                                                                                                            |  |             |         |           |  |         
|                                                                                                                                                                                            |  | (Unaudited) |         |           |  |          |         | (Unaudited)
|ASSETS                                                                                                                                                                                      |  |             |         |           |  |          |         |             |  |   |         |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Current Assets:                                                                                                                                                                             |  |             |         |           |  |          |         |             |  |   |         |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Cash and cash equivalents                                                                                                                                                                   |  | $           | 28,256  |           |  | $        | 29,774  |             |  | $ | 58,790  |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Investments, available-for-sale                                                                                                                                                             |  |             | 2,116   |           |  |          | 4,395   |             |  |   | 6,336   |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Accounts receivable, net of allowances for uncollectible accounts
and
sales returns of $7,061 at December 29, 2001, $5,622 at March 31,
2001 and $6,014 at December 30, 2000                |  |             | 160,149 |           |  |          | 105,621 |             |  |   | 125,880 |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Inventories, net                                                                                                                                                                            |  |             | 136,636 |           |  |          | 119,845 |             |  |   | 134,395 |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Deferred income taxes                                                                                                                                                                       |  |             | 6,486   |           |  |          | 7,197   |             |  |   | 8,380   |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Prepaid expenses                                                                                                                                                                            |  |             | 2,552   |           |  |          | 2,527   |             |  |   | 2,861   |  
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|Total Current Assets                                                                                                                                                                        |  |             | 336,195 |           |  |          | 269,359 |             |  |   | 336,642 |  
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|Property and equipment, net                                                                                                                                                                 |  |             | 26,350  |           |  |          | 17,798  |             |  |   | 13,644  |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Investments, available-for-sale                                                                                                                                                             |  |             | 3,145   |           |  |          | 4       |             |  |   | 6       |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Goodwill and other assets                                                                                                                                                                   |  |             | 15,515  |           |  |          | 13,887  |             |  |   | 13,998  |  
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|TOTAL ASSETS                                                                                                                                                                                |  | $           | 381,205 |           |  | $        | 301,048 |             |  | $ | 364,290 |  
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                        |  |             |         |           |  |          |         |             |  |   |         |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Current Liabilities:                                                                                                                                                                        |  |             |         |           |  |          |         |             |  |   |         |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Accounts payable                                                                                                                                                                            |  | $           | 229,327 |           |  | $        | 175,385 |             |  | $ | 236,653 |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Accrued liabilities                                                                                                                                                                         |  |             | 18,418  |           |  |          | 14,208  |             |  |   | 15,006  |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Income taxes payable                                                                                                                                                                        |  |             | 5,417   |           |  |          | 3,137   |             |  |   | 6,708   |  
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|Total Current Liabilities                                                                                                                                                                   |  |             | 253,162 |           |  |          | 192,730 |             |  |   | 258,367 |  
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|Commitments and Contingencies                                                                                                                                                               |  |             |         |           |  |          |         |             |  |   |         |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Stockholders Equity:                                                                                                                                                                       |  |             |         |           |  |          |         |             |  |   |         |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Common stock, $.001 par value, Authorized 100,000,000 shares,
Issued
22,907,000 shares at December 29, 2001, 22,663,000 shares at
March
31, 2001 and 22,455,000 shares at December 30, 2000 |  |             | 23      |           |  |          | 23      |             |  |   | 22      |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Additional paid-in capital                                                                                                                                                                  |  |             | 35,392  |           |  |          | 33,993  |             |  |   | 33,777  |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Deferred compensation                                                                                                                                                                       |  |             | (664    | )         |  |          | (830    | )           |  |   | (885    | )
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Retained earnings                                                                                                                                                                           |  |             | 111,247 |           |  |          | 91,177  |             |  |   | 88,653  |  
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Cumulative other comprehensive (loss)/income                                                                                                                                                |  |             | (1,764  | )         |  |          | (842    | )           |  |   | (460    | )
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|                                                                                                                                                                                           
|Less treasury stock at cost: 3,734,000 shares at December 29, 2001,
3,669,000 shares at March 31, 2001 and 3,668,000 shares at
December 30, 2000                                            |  |             | (16,191 | )         |  |          | (15,203 | )           |  |   | (15,184 | )
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|Total Stockholders Equity                                                                                                                                                                  |  |             | 128,043 |           |  |          | 108,318 |             |  |   | 105,923 |  
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                  |  | $           | 381,205 |           |  | $        | 301,048 |             |  | $ | 364,290 |  
|                                                                                                                                                                                            |  |             |         |           |  |          |         |             |  |   |         |  

The accompanying notes are an integral part of these consolidated statements.

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##### Table of Contents






ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited  Amounts in Thousands, Except Per Share Data)

|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |         | 
|-------------------------------------------- | ---------------------------------------- | - | ------------------ | ------- | ----------------- | - | ------- | ------- | ------- | - | ------- | ------- |  | - | ------- | ------- | 
|                                             |                                          |   | Three Months Ended |         | Nine Months Ended
|                                             |                                          |   |                    |         |                  
|                                             |                                          |   | Dec 29,            |         | Dec 30,           |   | Dec 29, |         | Dec 30,
|                                             |                                          |   | 2001               |         | 2000              |   | 2001    |         | 2000   
|                                             |                                          |   |                    |         |                   |   |         |         |        
|Net sales                                    |                                          | $ | 267,105            |         |                   | $ | 246,144 |         |         | $ | 578,286 |         |  | $ | 571,463 |        
|                                            
|                                            
|                                            
|                                            
|                                             | Cost of goods sold                       |   |                    | 223,384 |                   |   |         | 208,328 |         |   |         | 487,951 |  |   |         | 492,277 | 
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|Gross profit                                 |                                          |   | 43,721             |         |                   |   | 37,816  |         |         |   | 90,335  |         |  |   | 79,186  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Distribution and administrative expenses |   |                    | 22,361  |                   |   |         | 19,990  |         |   |         | 58,426  |  |   |         | 51,503  | 
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|Income from operations                       |                                          |   | 21,360             |         |                   |   | 17,826  |         |         |   | 31,909  |         |  |   | 27,683  |        
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|                                             | Interest income, net                     |   |                    | 164     |                   |   |         | 710     |         |   |         | 853     |  |   |         | 1,519   | 
|                                            
|                                            
|                                            
|                                            
|                                             | Equity in net income of affiliates       |   |                    | 319     |                   |   |         | 256     |         |   |         | 274     |  |   |         | 560     | 
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|Income before provision for income taxes     |                                          |   | 21,843             |         |                   |   | 18,792  |         |         |   | 33,036  |         |  |   | 29,762  |        
|                                            
|                                            
|                                            
|                                            
|                                             | Provision for income taxes               |   |                    | 8,573   |                   |   |         | 7,376   |         |   |         | 12,966  |  |   |         | 11,682  | 
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|Net income                                   |                                          | $ | 13,270             |         |                   | $ | 11,416  |         |         | $ | 20,070  |         |  | $ | 18,080  |        
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|Net income per share:                        |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|                                            
|                                            
|                                            
|                                            
|                                             | Basic                                    |   | $                  | .69     |                   |   | $       | .60     |         |   | $       | 1.05    |  |   | $       | .94     | 
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|                                             | Diluted                                  |   | $                  | .67     |                   |   | $       | .58     |         |   | $       | 1.01    |  |   | $       | .91     | 
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|Weighted average shares used in calculation: |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|                                            
|                                            
|                                            
|                                            
|                                             | Basic                                    |   |                    | 19,130  |                   |   |         | 19,093  |         |   |         | 19,098  |  |   |         | 19,140  | 
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        
|                                             | Diluted                                  |   |                    | 19,887  |                   |   |         | 19,707  |         |   |         | 19,851  |  |   |         | 19,781  | 
|                                             |                                          |   |                    |         |                   |   |         |         |         |   |         |         |  |   |         |        

The accompanying notes are an integral part of these consolidated
statements.

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##### Table of Contents






ADVANCED MARKETING SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited  Amounts in Thousands)

|                                                     |                                                                                              |                         |                      |         |                   |         |         |        |   |         |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------- | -------------------- | ------- | ----------------- | ------- | ------- | ------ | - | ------- | -
|                                                     |                                                                                              |                         |                      |         | Nine Months Ended
|                                                     |                                                                                              |                         |                      |         |                  
|                                                     |                                                                                              |                         |                      |         | Dec 29,           |         | Dec 30,
|                                                     |                                                                                              |                         |                      |         | 2001              |         | 2000   
|                                                     |                                                                                              |                         |                      |         |                   |         |        
|                                                     | Net income                                                                                   |                         | $                    | 20,070  |                   |         | $       | 18,080 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income to net cash provided by
operating
activities:            |                         |                      |         |                   |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Equity in net income of affiliates                                                           |                         |                      | (274    | )                 |         |         | (560   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Depreciation and amortization                                                                |                         |                      | 3,241   |                   |         |         | 2,886  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Provision for uncollectible accounts and sales returns                                       |                         |                      | 1,439   |                   |         |         | (940   | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Provision for markdown of inventories                                                        |                         |                      | 751     |                   |         |         | 2,445  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Deferred income taxes                                                                        |                         |                      | 711     |                   |         |         | (1,595 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Amortization of deferred compensation                                                        |                         |                      | 166     |                   |         |         | 221    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Changes
in working capital components, net of effects of acquisition
(Increase) decrease in: |                         |                      |         |                   |         |         |        |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                              |                         | Accounts receivable  |         |                   | (52,877 | )       |        |   | (46,937 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                              |                         | Inventories          |         |                   | (16,009 | )       |        |   | (4,719  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                              |                         | Other assets         |         |                   | (1,356  | )       |        |   | (5,712  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                              | Increase (decrease) in: |                      |         |                   |         |         |        |   |        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                              |                         | Accounts payable     |         |                   | 50,976  |         |        |   | 71,137  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                              |                         | Accrued liabilities  |         |                   | 3,667   |         |        |   | 3,941   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                              |                         | Income taxes payable |         |                   | 2,256   |         |        |   | 3,907   |  
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       
|Net cash provided by operating activities            |                                                                                              |                         | 12,761               |         |                   |         | 42,154  |       
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       
|                                                     | Purchase of property and equipment                                                           |                         |                      | (11,523 | )                 |         |         | (5,068 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Investment in equity of affiliate                                                            |                         |                      | (1,383  | )                 |         |         |       |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of investments, available-for-sale                                                  |                         |                      | (5,483  | )                 |         |         | (5,902 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Sale and redemption of investments, available-for-sale                                       |                         |                      | 4,621   |                   |         |         | 4,897  |  
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       
|Net cash used in investing activities                |                                                                                              |                         | (13,768              | )       |                   |         | (6,073  | )     
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       
|                                                     | Proceeds from exercise of options and related tax benefits                                   |                         |                      | 1,399   |                   |         |         | 1,616  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of treasury stock                                                                   |                         |                      | (988    | )                 |         |         | (9,137 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Dividends paid                                                                               |                         |                      |        |                   |         |         | (499   | )
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       
|Net cash provided by (used in) financing activities  |                                                                                              |                         | 411                  |         |                   |         | (8,020  | )     
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       
|Effect of exchange rate changes on cash              |                                                                                              |                         | (922                 | )       |                   |         | (406    | )     
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       
|Net (decrease) increase in cash and cash equivalents |                                                                                              |                         | (1,518               | )       |                   |         | 27,655  |       
|                                                    
|                                                    
|                                                    
|                                                    
|CASH AND CASH EQUIVALENTS,Beginning of period        |                                                                                              |                         | 29,774               |         |                   |         | 31,135  |       
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       
|CASH AND CASH EQUIVALENTS,End of period              |                                                                                              | $                       | 28,256               |         |                   | $       | 58,790  |       
|                                                     |                                                                                              |                         |                      |         |                   |         |         |       

The accompanying notes are an integral part of these consolidated statements.

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ADVANCED MARKETING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     BASIS OF PRESENTATION

The accompanying interim consolidated financial statements as of and for the
three and nine month periods ended December 29, 2001 and December 30, 2000 have
been prepared in accordance with accounting principles generally accepted in
the United States and with instructions to Form 10-Q, without an audit by our
independent public accountants, and therefore, do not necessarily include all
the information and footnotes necessary for a fair presentation of consolidated
financial position, results of operations and cash flows in accordance with
accounting principles generally accepted in the United States. Reference should
be made to the annual financial statements, including footnotes thereto,
included in the Advanced Marketing Services, Inc. (AMS, we, us and our) Annual
Report on Form 10-K, as amended on Form 10-K/A, for the fiscal year ended March
31, 2001. The accompanying unaudited consolidated financial statements include
all adjustments, consisting of normal recurring adjustments, which, in our
managements opinion, are necessary for a fair presentation. Our management
believes that the disclosures included in the accompanying consolidated
financial statements and footnotes are adequate so that the information is not
misleading.

Operating results for interim periods are not necessarily indicative of
operating results to be expected for an entire fiscal year. Our net sales in
the third fiscal quarter have historically been, and we expect them to continue
to be, significantly greater than in any other quarter of our fiscal year due
to increased demand during the holiday season.

Financial statements prepared in conformity with accounting principles
generally accepted in the United States require management to make estimates
and assumptions that affect amounts reported as assets and liabilities; the
disclosure of contingent assets and liabilities at the date of the financial
statements and amounts reported as revenues and expenses during the reporting
period. Actual results could differ from those estimates. Certain prior year
amounts have been reclassified to conform to the current year presentation.

The accompanying consolidated financial statements include our accounts and
those of our wholly owned subsidiaries. Our policy is to include the operating
results of our foreign subsidiaries in our consolidated statements of income
one-month in arrears. We have eliminated all significant intercompany accounts
and transactions.

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##### Table of Contents



2.     KEY ACCOUNTING POLICIES

Revenue Recognition

We recognize sales and related cost of sales upon delivery of merchandise to
customer locations. We record expenses related to our co-op advertising activities,
offset by reimbursements from publishers within Distribution and Administrative
Expenses in the accompanying consolidated statements of income. Net
distribution fees, resulting from fulfillment activities, are included with net
sales in the accompanying consolidated statements of income. Net distribution
fees represent less than 1% of total net sales for each of the three and nine
months ended December 29, 2001. There were no distribution fees recorded for
the three and nine months ended December 30, 2000.

Accounts Receivable

Consistent with industry practice, a significant portion of our sales are made
to customers with the right of return. We have provided allowances of $4.2
million as of December 29, 2001, $3.1 million as of March 31, 2001, and $3.5
million as of December 30, 2000 for the gross profit effect of estimated future
sales returns after considering historical results and evaluating current
conditions. We also have provided allowances for uncollectible trade accounts
receivable of $2.8 million as of December 29, 2001, $2.6 million as of March
31, 2001 and $2.5 million as of December 30, 2000, respectively.

Inventories

Our inventories consist primarily of books and, to a lesser extent, music CDs,
CD-ROMs and prerecorded audiocassettes purchased for resale. Inventories are
stated at the lower of cost (first-in, first-out) or market. A majority of our
inventories carry the right of return to publishers. For the portion of our
inventories that do not have the right of return, we estimate, based upon
historical results and our evaluation of current conditions, a provision for
the markdown of inventories.

Interim Accounting Periods

Consistent with wholesale distribution industry practice, our net sales and
cost of goods sold for interim periods are cut off on the Saturday nearest to
the end of the calendar month. The cut-off for the fourth fiscal quarter is
always March 31. This practice may result in differences in the number of
business days for which our sales and cost of goods sold are recorded both as
to quarter-to-quarter comparisons, and as to comparisons of quarters between
years.

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3.     COMPREHENSIVE INCOME (LOSS)

Total comprehensive income for the three months ended December 29, 2001 and
December 30, 2000 amounted to approximately $13.2 million and $10.9 million,
respectively. The adjustments to net income to arrive at total comprehensive
income for the three months ended December 29, 2001 and December 30, 2000
amounted to approximately $(0.6) million and $(0.5) million, respectively, and
represent foreign currency translation adjustments and unrealized gains and
losses on investments.

Total comprehensive income for the nine months ended December 29, 2001 and
December 30, 2000 amounted to approximately $19.1 million and $17.7 million,
respectively. The adjustments to income to arrive at total comprehensive income
for the nine months ended December 29, 2001 and December 30, 2000 amounted to
approximately $(0.9) million and $(0.4) million respectively, and
represent foreign currency translation adjustments and unrealized gains and
losses on investments.

4.     COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS

Investments, available-for-sale

Investments, available-for-sale consist principally of debt securities issued
by the federal government of the United States and state and local
municipalities. Available-for-sale securities are stated at fair value as
determined by the most recently traded price of each security at the balance
sheet date. The cost and estimated fair market value of investments at December
29, 2001, March 31, 2001 and December 30, 2000 are as follows (in thousands):

|                  |  |           |       |            |  |            |    |            |  |   |    |  |  |   |       | 
|----------------- |  | --------- | ----- | ---------- |  | ---------- | -- | ---------- |  | - | -- |  |  | - | ----- | 
|                  |  |           |       |            |  | Gross      |    | Gross      |  |   |    | 
|                  |  | Amortized |       | Unrealized |  | Unrealized |    | Estimated 
|                  |  | Cost      |       | Gains      |  | Losses     |    | Fair Value
|                  |  |           |       |            |  |            |    |           
|December 29, 2001 |  | $         | 5,249 |            |  | $          | 33 |            |  | $ | 21 |  |  | $ | 5,261 | 
|                  |  |           |       |            |  |            |    |            |  |   |    |  |  |   |       | 
|March 31, 2001    |  | $         | 4,416 |            |  | $          |   |            |  | $ | 17 |  |  | $ | 4,399 | 
|                  |  |           |       |            |  |            |    |            |  |   |    |  |  |   |       | 
|December 30, 2000 |  | $         | 6,346 |            |  | $          |   |            |  | $ | 4  |  |  | $ | 6,342 | 
|                  |  |           |       |            |  |            |    |            |  |   |    |  |  |   |       | 

As of December 29, 2001, we had investments in debt securities amounting to
approximately $2.1 million that were scheduled to mature within one year and
approximately $3.1 million that were scheduled to mature within two years. For
the quarter ended December 29, 2001, we sold no investment prior to its
maturity date. We had investment maturities of approximately $0.7 million for
the quarter ended December 29, 2001. We sold no investment prior to its maturity date during the same
period of the previous year. We use the specific identification method in
determining cost on these investments.

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##### Table of Contents



4.     COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS (continued)

Property and Equipment

A summary of property and equipment is as follows (in thousands):

|                                         |                               |   |              |         |                |   |              |         |   |   |        |         |  
|---------------------------------------- | ----------------------------- | - | ------------ | ------- | -------------- | - | ------------ | ------- | - | - | ------ | ------- | -
|                                         |                               |   | As of       
|                                         |                               |   |             
|                                         |                               |   | Dec 29, 2001 |         | March 31, 2001 |   | Dec 30, 2000
|                                         |                               |   |              |         |                |   |             
|Leasehold improvements                   |                               | $ | 4,795        |         |                | $ | 1,658        |         |   | $ | 1,630  |        
|                                        
|                                        
|                                        
|                                        
|Office furniture, equipment and software |                               |   | 13,401       |         |                |   | 11,968       |         |   |   | 12,064 |        
|                                        
|                                        
|                                        
|                                        
|Warehouse equipment                      |                               |   | 10,550       |         |                |   | 9,756        |         |   |   | 9,532  |        
|                                         |                               |   |              |         |                |   |              |         |   |   |        |        
|                                         |                               |   | 28,746       |         |                |   | 23,382       |         |   |   | 23,226 |        
|                                        
|                                        
|                                        
|                                        
|                                         | Less accumulated depreciation |   |              | (14,953 | )              |   |              | (12,223 | ) |   |        | (11,873 | )
|                                         |                               |   |              |         |                |   |              |         |   |   |        |        
|                                         |                               |   | 13,793       |         |                |   | 11,159       |         |   |   | 11,353 |        
|                                        
|                                        
|                                        
|                                        
|Assets not yet placed in service         |                               |   | 12,557       |         |                |   | 6,639        |         |   |   | 2,291  |        
|                                         |                               |   |              |         |                |   |              |         |   |   |        |        
|Property & equipment, net                |                               | $ | 26,350       |         |                | $ | 17,798       |         |   | $ | 13,644 |        
|                                         |                               |   |              |         |                |   |              |         |   |   |        |        

Assets not yet placed in service consist primarily of computer hardware,
software and internal costs related to the enhancement of our management
information systems. Once these systems are placed in service, all costs that
have accumulated will begin depreciation on a straight-line basis over a
seven-year period. These upgraded systems are expected to be placed in
service by September 2002.

We account for our internal-use software in accordance with Statement of
Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires capitalization of certain costs
incurred in the development of internal-use software, including external direct
material and service costs, employee payroll and payroll-related costs. We
have capitalized costs of approximately $6.9 million,
$5.5 million and $1.8 million at December 29, 2001, March 31, 2001, and December 30, 2000, respectively.

Depreciation of property and equipment is provided using the straight-line
method over the estimated useful lives of the assets, ranging from three to
seven years. Leasehold improvements are amortized over the lesser of the lease
term or the remaining useful lives of the underlying assets. Maintenance,
repairs and minor renewals are charged to earnings when they are incurred. Upon
the disposition of an asset, its accumulated depreciation is deducted from the
original cost, and any gain or loss is reflected in current earnings.

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4.     COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS (continued)

Equity in Net Income of Affiliates

We make strategic investments in companies that help to promote the worldwide
publishing and distribution of books and related products. We use the equity
method to account for investments in entities in which we hold a voting
interest of 20% to 50% or in which we otherwise have the ability to exercise
significant influence. We regularly monitor and evaluate the realizable value
of our investments. If events and circumstances indicate that a decline in
the value of these assets has occurred and is other than temporary, we record a
charge to Equity in net income of affiliates. Our investments in affiliates
are included as part of goodwill and other assets in the accompanying
consolidated balance sheets.

In June 2001, we acquired a 25% equity interest in The Templar Company, PLC
(Templar) for approximately $1.4 million. Located in the United Kingdom,
Templar is a producer of childrens books that incorporates sophisticated
pop-up pictures using high-quality art which includes the award-winning Maurice
Pledger wildlife series. Templar markets and sells these books to the
international market. We accounted for the investment under the equity method
of accounting. Our portion of Templars operating results for the three and
nine month periods ended December 29, 2001 was $(0.03) million and $0.08
million, respectively, in the accompanying consolidated statements of income.

In September 1999, we acquired a 25% equity interest in Raincoast Book
Distribution, Limited (Raincoast), a leading Canadian book distributor. We
accounted for the investment under the equity method of accounting and included
income of $0.3 million and $0.2 million, our portion of Raincoasts operating
results, for the three and nine month periods ended December 29, 2001,
respectively, in the accompanying consolidated statements of income. Our
portion of Raincoasts operating results amounted to income of $0.3 million and
$0.6 million in the three and nine month periods ended December 30, 2000,
respectively, and is included in the accompanying consolidated statements of
income.

Goodwill

Goodwill, representing the excess of the cost over the net tangible and
identifiable intangible assets recorded in connection with our acquisitions, is
amortized on a straight-line basis over the estimated lives of between 20 and
25 years. Goodwill totaled $8.6 million, $9.9 million and $9.8 million, net of
accumulated amortization of $1.1 million, $0.9 million and $0.8 million, as of
December 29, 2001, March 31, 2001, and December 30, 2000, respectively.
Amortization of goodwill will cease effective April 1, 2002, in accordance with
Statement of Financial Accounting Standards (SFAS)
No. 142. Refer to Note 8.

Line of Credit

We had available $12 million at December 29, 2001 on an unsecured bank line of
credit. The interest rate on bank borrowings is based on the prime rate and
LIBOR rates. The line of credit expires on August 31, 2002. As of and during
the respective periods ended December 29, 2001, March 31, 2001 and December 30,
2000, we had no borrowings outstanding on the bank line of credit. The line
was amended subsequent to December 29, 2001. Refer to Note 9.

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4.     COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS (continued)

Income Taxes

We currently provide for taxes on income regardless of when such taxes are
payable in accordance with SFAS No. 109, Accounting for Income Taxes.
Deferred income taxes result from temporary differences in the recognition of
income and expense for tax and financial reporting purposes. We paid income
taxes in the nine months ended December 29, 2001 totaling $9.1 million. We
paid income taxes during the same period of the previous year of $8.4 million.

Equity Transactions

On July 22, 1999, we adopted a stock repurchase program pursuant to which we
may repurchase in the open market or private transactions, from time to time,
based upon existing market conditions, shares of our Common Stock not to exceed
450,000 shares. On March 16, 2000, we announced that our Board of Directors had
approved an increase in the repurchase program of 525,000 shares. On July 27,
2000, our Board of Directors approved an additional 525,000 share increase in
the repurchase program and on May 25, 2001, our Board of Directors approved an
additional 350,000 share increase in our stock repurchase program. Under the
plan, we have repurchased a total of approximately 1,312,275 shares through
December 29, 2001 at an average market price of approximately $10.71. The
repurchase program has no expiration date and will be financed through internal
cash flows.

We recognize deferred compensation for certain stock options granted under our
Stock Option Plan. The compensation is being amortized to expense over the
vesting period of the options and we have expensed approximately $55,000 and
$166,000 for the three and nine months ended December 29, 2001. Expense for
the three and nine months ended December 30, 2000 amounted to approximately
$55,000 and $221,000, respectively. The net balance of the remaining deferred
compensation has been recorded as a separate component of stockholders equity
in the accompanying consolidated balance sheets.

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5.     PER SHARE INFORMATION

On February 15, 1999, we effected a three-for-two stock split to stockholders
of record on February 1, 1999. On January 17, 2000, we effected a
three-for-two stock split to stockholders of record on January 3, 2000. On May
11, 2001, we effected an additional three-for-two stock split to stockholders
of record on April 27, 2001. Accordingly, all references to shares, options to
acquire shares and earnings per share amounts included in these accompanying
consolidated financial statements have been restated to reflect the stock
splits.

The following financial data summarizes information relating to the per share
computations (in thousands, except per share data):

|                                             |  |                    |        |                   |  |         |        |         |  |   |        |  |  |   |        | 
|-------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ------- | ------ | ------- |  | - | ------ |  |  | - | ------ | 
|                                             |  | Three Months Ended |        | Nine Months Ended
|                                             |  |                    |        |                  
|                                             |  | Dec 29,            |        | Dec 30,           |  | Dec 29, |        | Dec 30,
|                                             |  | 2001               |        | 2000              |  | 2001    |        | 2000   
|                                             |  |                    |        |                   |  |         |        |        
|Net Income                                   |  | $                  | 13,270 |                   |  | $       | 11,416 |         |  | $ | 20,070 |  |  | $ | 18,080 | 
|                                             |  |                    |        |                   |  |         |        |         |  |   |        |  |  |   |        | 
|Weighted Average Common
Shares Outstanding   |  |                    | 19,130 |                   |  |         | 19,093 |         |  |   | 19,098 |  |  |   | 19,140 | 
|                                            
|                                            
|                                            
|                                            
|Basic Earnings Per Share                     |  | $                  | .69    |                   |  | $       | .60    |         |  | $ | 1.05   |  |  | $ | .94    | 
|                                             |  |                    |        |                   |  |         |        |         |  |   |        |  |  |   |        | 
|Weighted Average Common
Shares Outstanding   |  |                    | 19,130 |                   |  |         | 19,093 |         |  |   | 19,098 |  |  |   | 19,140 | 
|                                            
|                                            
|                                            
|                                            
|Dilutive Common Stock Options                |  |                    | 757    |                   |  |         | 614    |         |  |   | 753    |  |  |   | 641    | 
|                                             |  |                    |        |                   |  |         |        |         |  |   |        |  |  |   |        | 
|Total Diluted Weighted
Average Common Shares |  |                    | 19,887 |                   |  |         | 19,707 |         |  |   | 19,851 |  |  |   | 19,781 | 
|                                             |  |                    |        |                   |  |         |        |         |  |   |        |  |  |   |        | 
|Diluted Earnings Per Share                   |  | $                  | .67    |                   |  | $       | .58    |         |  | $ | 1.01   |  |  | $ | .91    | 
|                                             |  |                    |        |                   |  |         |        |         |  |   |        |  |  |   |        | 

6.COMMITMENTS AND CONTINGENCIES

Operating leases

We lease facilities and certain equipment under non-cancelable operating
leases. Rent expense for the three and nine months ended December 29, 2001 and
December 30, 2000 amounted to approximately $2.0 million and $5.5 million and
$1.3 million and $3.6 million, respectively. The leases have initial expiration
dates ranging from 2004 to 2012. Some of the leases contain renewal options,
termination options and periodic adjustments of the minimum monthly rental
payments.

Litigation

We are involved in various claims and lawsuits incidental to our business and
management believes that the outcome of any of those matters will not have a
material adverse effect on our consolidated financial statements or results of
operations.

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7.     INDUSTRY SEGMENT AND GEOGRAPHICAL DATA

We operate in one industry segment. For the purposes of analyzing and
understanding the financial statements, our continuing operations have been
classified according to the geographic regions in which we operate. Net sales
by geographic region are as follows (in thousands):

|               |  |                    |         |                   |  |              |         |              |  |   |         |  |  |   |         | 
|-------------- |  | ------------------ | ------- | ----------------- |  | ------------ | ------- | ------------ |  | - | ------- |  |  | - | ------- | 
|               |  | Three Months Ended |         | Nine Months Ended
|               |  |                    |         |                  
|               |  | Dec 29, 2001       |         | Dec 30, 2000      |  | Dec 29, 2001 |         | Dec 30, 2000
|               |  |                    |         |                   |  |              |         |             
|United States  |  | $                  | 245,195 |                   |  | $            | 226,431 |              |  | $ | 528,860 |  |  | $ | 532,319 | 
|              
|              
|              
|              
|United Kingdom |  |                    | 18,849  |                   |  |              | 17,256  |              |  |   | 40,889  |  |  |   | 32,960  | 
|              
|              
|              
|              
|Mexico         |  |                    | 1,780   |                   |  |              | 1,482   |              |  |   | 5,321   |  |  |   | 3,914   | 
|              
|              
|              
|              
|Australia      |  |                    | 1,228   |                   |  |              | 975     |              |  |   | 3,163   |  |  |   | 2,270   | 
|              
|              
|              
|              
|Singapore      |  |                    | 53      |                   |  |              |        |              |  |   | 53      |  |  |   |        | 
|               |  |                    |         |                   |  |              |         |              |  |   |         |  |  |   |         | 
|               |  | $                  | 267,105 |                   |  | $            | 246,144 |              |  | $ | 578,286 |  |  | $ | 571,463 | 
|               |  |                    |         |                   |  |              |         |              |  |   |         |  |  |   |         | 

Net identifiable assets of our operations in different geographic areas are as
follows
(in thousands):

|               |  |              |         |                |  |              |         |  |  |   |         | 
|-------------- |  | ------------ | ------- | -------------- |  | ------------ | ------- |  |  | - | ------- | 
|               |  | As of       
|               |  |             
|               |  | Dec 29, 2001 |         | March 31, 2001 |  | Dec 30, 2000
|               |  |              |         |                |  |             
|United States  |  | $            | 339,281 |                |  | $            | 252,378 |  |  | $ | 323,052 | 
|              
|              
|              
|              
|United Kingdom |  |              | 31,708  |                |  |              | 41,728  |  |  |   | 33,458  | 
|              
|              
|              
|              
|Mexico         |  |              | 4,542   |                |  |              | 3,271   |  |  |   | 3,912   | 
|              
|              
|              
|              
|Australia      |  |              | 5,513   |                |  |              | 3,671   |  |  |   | 3,868   | 
|              
|              
|              
|              
|Singapore      |  |              | 161     |                |  |              |        |  |  |   |        | 
|               |  |              |         |                |  |              |         |  |  |   |         | 
|               |  | $            | 381,205 |                |  | $            | 301,048 |  |  | $ | 364,290 | 
|               |  |              |         |                |  |              |         |  |  |   |         | 

8.     RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, Business Combinations.
SFAS No. 141 addresses financial accounting and reporting for business
combinations and supersedes APB Opinion No. 16, Business Combinations,and SFAS
No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises.
All business combinations within the scope of SFAS No. 141are to be accounted
for using the purchase method of accounting. We adopted the provisions of SFAS
No. 141 for business combinations initiated after June 30,
2001 (see Note 9).
The adoption of SFAS No. 141 had no effect on our consolidated financial
statements.

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8.     RECENT ACCOUNTING PRONOUNCEMENTS (continued)

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No.
17, Intangible Assets.SFAS No. 142 addresses how intangible assets that are
acquired individually or with a group of other assets (but not those acquired
in a business combination) should be accounted for in financial statements upon
their acquisition. SFAS No. 142 also addresses how goodwill and other
intangible assets should be accounted for after they have been initially
recognized in the financial statements. Upon adoption of SFAS No. 142, goodwill
is no longer subject to amortization over its estimated useful life. Rather,
goodwill will be subject to at least an annual assessment for impairment by
applying a fair value test. We will adopt this standard for our fiscal year
beginning April 1, 2002 and based on acquisitions completed as of June 30,
2001, application of the goodwill non-amortization provisions of SFAS No. 142
is expected to result in an increase to net income of approximately $365,000
for the fiscal year 2003.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. It applies to (a) all entities and (b)
legal obligations associated with the retirement of long-lived assets that
result from acquisition, construction, development and/or normal operation of a
long-lived asset, except for certain obligations of lessees. SFAS No. 143
amends SFAS No. 19,  Financial Accounting and Reporting by Oil and Gas
Producing Companies, and is effective for financial statements issued for
fiscal years beginning after June 15, 2002. We will adopt SFAS No. 143 for our
fiscal year beginning April 1, 2003. We do not expect the impact of the
adoption of SFAS No. 143 to have a significant impact on our consolidated
financial position or results of operations.

In August 2001, The FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. SFAS No.
144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and
reporting provisions of APB Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that
Opinion). The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001, with
early application encouraged and generally are to be applied prospectively. We
do not expect the impact of the adoption of SFAS 144 to have a significant
impact on our consolidated financial position or results of operations.

The FASB has issued final minutes of the EITFs consensus on Issue 01-10. EITF
No. 01-10 prohibits companies from reporting costs, losses and any recoveries
related to the terrorist acts of September 11 as extraordinary items. Application of this
standard has no impact on our consolidated statements of
income.

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9.     SUBSEQUENT EVENTS

Publishers Group West

On January 31, 2002, we acquired all of the outstanding capital stock of
Publishers Group West Incorporated (PGW), located in Berkeley, California,
for cash consideration of approximately $38.0 million, subject to customary post-closing
adjustments. The transaction was structured as a merger of Nautilus Merger
Sub, Inc., a wholly owned subsidiary of the Company, with and into Publishers
Group Incorporated (PGI). PGW is a wholly owned subsidiary of PGI.
Approximately $25.0 million of the purchase price was provided from borrowings
under bank credit facilities.

The total purchase price of $38.0 million, subject to
the completion of valuation and
acquisition-related costs, was allocated as follows: $7.6 million representing the net
assets of PGW, $3.4 million in intangible assets consisting of
the fair values assigned to publishers' lists and tradename, and the
remaining $27.0 million representing goodwill. We intend that the assets of PGW will be used in a manner
generally consistent with the use of such assets by PGW prior to the
consummation of the acquisition.

The purchase price was the result of our arms-length negotiations with PGI,
based on our evaluation of the value of PGIs business. PGI is a holding
company which, through its wholly owned subsidiary PGW, is engaged in the
business of marketing and distributing books primarily for independent
publishers. Immediately prior to our acquisition of PGW, PGI divested
itself of its Avalon Publishing Group Incorporated subsidiary (Avalon), a
book publisher, and PGW entered into a five-year distribution agreement with
Avalon. Concurrently with the Avalon divestiture, PGW sold its Canadian
distribution business (PGC)to a subsidiary of Raincoast Book Distribution Ltd., a
Canadian book distributor in which we own a 25% interest, for $0.2
million, and PGW entered into a sales and marketing agreement with PGC for which PGW received $0.5 million. The $0.7 million
purchase price was paid $0.1 million in cash at closing with the $0.6 million balance
represented by unsecured promissory notes payable over five years at a market
interest rate which begins at a date defined in the agreement.
The purchase price is subject to customary post-closing adjustments and may be reduced in the event of the loss of certain distribution rights within one year. For
five years commencing March 31, 2003, PGW is entitled to receive royalty payments from PGC equal to 1% of net sales which exceed a specified growth margin, as defined in the agreement. Concurrent with the transaction, we issued 30,000 warrants to
principals of Raincoast. These warrants vest 20% per year on the
anniversary of issuance and expire ten years from the issue date. The
warrants are exercisable for cash equal to the excess of the fair
market value of an equivalent share of common stock on the date of
exercise over the exercise price, which was defined as $17.74 per
share on the date of issue. The fair value of the warrants will be
included in the purchase price of PGW.

On April 1, 2002, we intend to adopt the guidance under the newly issued SFAS
No. 142. Our initial evaluation of the impairment of goodwill,
if such impairment exists, will result in a charge to the cumulative
effect of change in accounting method. The carrying value of the goodwill will then be reviewed, at least
annually, for impairment and written down and charged to the results of
operations if and when the impairment recognition criteria is met and the
recorded value of the asset exceeds its measured fair value. We intend to
have the evaluation of fair value, and therefrom, the
purchase price allocation completed by March 31, 2002.

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9.     SUBSEQUENT EVENTS (continued)

Revolving Credit Facilities

In connection with the Publishers Group West transaction, in January 2002 we
amended our existing line of credit and entered into a new revolving credit
agreement with the same financial institution.

On January 11, 2002, our existing, unsecured $12.0 million line of credit was
amended, principally to revise certain financial covenants to make them
consistent with the new revolving credit agreement described below.

The new revolving credit agreement, as amended on
January 31, 2002, provides for a secured line of credit of up to $23.0 million
through March 31, 2002 and $13.0 million thereafter through its August 31, 2002
maturity date. Borrowings under the new revolving credit agreement bear
interest at the banks prime rate or at LIBOR based interest
rates, at our selection. We are required to pay an
unused loan fee of 1/4 of 1% on any portion of the loan that is available but
undrawn. The facilities contain certain covenants which, among other things,
require the maintenance of certain financial ratios on a quarterly and annual
basis. The key ratios include tangible net worth, senior debt to EBITDA,
leverage and current ratios. Eligible accounts receivable must be in excess of
the loan. Borrowings under the revolving credit agreement are secured by all
of our accounts receivable.

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

Certain statements contained in this Managements Discussion and Analysis that
are not related to historical results are forward-looking statements. Actual
results may differ materially from those projected or implied in the
forward-looking statements. Further, certain forward-looking statements are
based upon assumptions of future events, which may not prove to be accurate.
These forward-looking statements involve risks and uncertainties including but
not limited to those referred to in Item 2(c) below, entitled Statement of
Purpose of the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995.

This information should be read in conjunction with the financial statements
and notes thereto included in Item 1 of this report for the quarters ended
December 29, 2001 and December 30, 2000. Additionally, the financial
statements and notes thereto and Managements Discussion and Analysis in the
Companys Annual Report on Form 10-K, as amended on Form 10-K/A, for the year
ended March 31, 2001 will provide additional information.

OVERVIEW

We provide global customized services to book retailers and publishers. We are
a leading distributor of general interest books to the membership warehouse
clubs and certain specialty retailers, certain e-commerce companies and
traditional bookstores. General interest books include bestsellers; basic
reference books, including computer and medical books; books regarding business
and management; cookbooks; gift books, including art and coffee table books;
calendars; travel books; regional books; mass market paperbacks; childrens
books; and Spanish-language books. In addition, to a lesser extent, we sell
pre-recorded audiocassettes (books on tape). We provide product selection
advice, vendor managed inventory (VMI) services, specialized merchandising and
product development services, and distribution and handling services to
membership warehouse clubs and other retailers operating in the United States,
Canada, Mexico, the United Kingdom, Australia, and certain Pacific Rim
countries.

A. RESULTS OF OPERATIONS
Three Months Ended December 29, 2001 and December 30, 2000:

Net sales for the three months ended December 29, 2001 increased approximately
9% to $267.1 million from $246.1 million for the comparable period last year.
Third quarter net sales lagged initially due to the general economic condition,
but closed strong in the final few weeks of the holiday season. The growth in
net sales can be attributed primarily to the establishment of an extended
business relationship with The Borders Group, increases from international
divisions, and the continued sales strength at the our membership warehouse
customers. Our current period domestic net sales increased approximately 8%,
and international net sales increased 11%. The increase in current period net
sales can also be attributed to lower customer return rates which decreased to
16% in the third quarter of fiscal 2002 from 17% for the corresponding quarter
last year.

During the third quarter of fiscal 2002, gross profit increased 16% to $43.7
million from $37.8 million in the same period of the previous fiscal year.
Gross profit as a percentage of net sales increased to 16.4% from 15.4% in the
same period of last fiscal year. This increase was primarily attributable to
increased sales volume in the higher margin gift, mass-market and local
categories, growth in our diversified higher margin businesses and increased

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international sales, which historically contribute higher gross margins than
domestic sales. In addition, we
experienced higher contributions from publisher incentive programs as well as
lower inventory markdown expense. The improvement in inventory markdown
expense was driven primarily by better inventory management.

Distribution and administrative expenses for the three months ended December
29, 2001 increased 11.9% to $22.3 million and represented 8.3% of net sales as
compared to $19.9 million or 8.2% of net sales in the same period of the
previous fiscal year. The increase in distribution and administrative expenses
resulted primarily from increased business activities of our higher margin
operations, customer diversification, and related ongoing occupancy costs due
to our expanded operations.

Interest and dividend income decreased to $0.2 million in the third quarter of
fiscal 2002 from $0.7 million in the same period of the previous fiscal year
due to lower cash and investment balances as a result of the timing of
inventory purchases and capital investment, as well as lower investment yields.

Provision for income taxes increased to $8.6 million in the current quarter
from $7.4 million in the same period of the previous fiscal year. The increase
reflects our increased pre-tax income, while our effective tax rate remained
constant between the periods at 39.25%.

Net income for the three months ended December 29, 2001 increased 16% to $13.3
million, or $0.67 per diluted common share, compared with net income of $11.4
million, or $0.58 per diluted common share, for the three months ended December
30, 2000. The increase in net income was a result of growth in our diversified
higher margin businesses and improved international results.

Nine Month Periods Ended December 29, 2001 and December 30, 2000:

Net sales for the nine months ended December 29, 2001 increased 1% to $578.3
million from $571.5 million for the comparable period last year. The overall increase in net sales can be primarily attributed to the
26% growth in our international divisions, offset by a 1% decrease in
domestic net sales, which was a result of the general economic
deadline.

During the first nine months of fiscal 2002, gross profit increased 14% to
$90.3 million from $79.2 million in the first nine months of the previous
fiscal year. Gross profit as a percentage of net sales increased to 15.6% from
13.9% in the same period of last fiscal year. This increase was primarily
attributable to increased sales volume in the higher margin gift, mass-market
and local categories, growth in our diversified higher margin businesses and
increased international sales, which historically contribute higher gross
margins than domestic sales. In addition, we experienced higher contributions
from publisher incentive programs as well as lower inventory markdown expense.
The improvement in inventory markdown expense was driven primarily by better
inventory management.

Distribution and administrative expenses for the nine months ended December 29,
2001 increased 13.4% to $58.4 million compared to the same quarter of the
previous year, and represented 10.1% of net sales compared to $51.5 million, or
9.0% of net sales, in the same period of the previous fiscal year. The
increase resulted primarily from distribution center labor associated with the
growth in our Pic N Pak business, one-time relocation expenses for our two
distribution center expansions which occurred during our second quarter this
fiscal year, and related ongoing facilities occupancy costs due to our expanded
operations.

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Interest and dividend income decreased to $0.9 million in the first nine months
of fiscal 2002 from $1.5 million in the same period of the previous fiscal year
due to lower cash and investment balances as a result of the timing of
inventory purchases and capital investment, as well as lower investment yields.

Provision for income taxes increased to $13.0 million in the current nine
months from $11.7 million in the same period of the previous fiscal year. The
increase reflects our increased pre-tax income, while our effective tax rate
remained constant between the periods at 39.25%.

Net income for the nine months ended December 29, 2001 increased 11% to $20.1
million, or $1.01 per diluted common share, compared with net income of $18.1
million, or $0.91 per diluted common share, for the first nine months of the
prior fiscal year. The increase in net income from the prior year period was a
result of growth in our diversified higher margin businesses and improved
international results.

B.     LIQUIDITY AND SOURCES OF CAPITAL

Our working capital requirements are seasonal with cash balances peaking in the
third fiscal quarter and the greatest utilization of cash occurring in our
second fiscal quarter.Cash and cash equivalents and short-term investments
available-for-sale amounted to $30.4 million at December 29, 2001, $34.2
million at March 31, 2001 and $65.1 million at December 30, 2000. Working
capital was $83.0 million as of December 29, 2001, an increase compared to the
levels at March 31, 2001 of $76.6 million and December 30, 2000 of $78.3
million.

For the nine months ended December 29, 2001, operating activities provided
$12.8 million in cash. During the prior fiscal year period, operating
activities provided $42.2 million of cash. The decrease in operating cash flow
was primarily driven by a reduction in the use of accounts payable to finance
our operating activities, while maintaining relatively
consistent inventory levels with the December 30, 2000 period. Trade accounts
receivable increased to $52.9 million for the nine months ended December 29,
2001, an increase of $6.0 million over the $46.9 million increase in trade
accounts receivable for the nine month period ended December 30, 2000. The
primary reason for the increase was sales, which peaked in December
due to deferral of consumer purchases to later in the holiday season
than had occurred historically. Inventory levels at December 29, 2001 were $136.6 million, an
increase of $16.0 million from March 31, 2001 and $4.7 million for the nine
months ended December 30, 2000. This increase was primarily due to increases in
inventory levels in each of the nine month periods to meet anticipated seasonal
customer demand, offset by a small decrease in inventory reserves over the same
period a year ago, which was the result of our continuing improvement
in selling through slow-moving books and improved buying decisions on
non-returnable inventory purchases.

Income taxes payable at December 29, 2001 increased $2.3 million from March 31,
2001 as compared to an increase of $3.9 million at December 30, 2000. The
decrease of $1.6 million period-over-period was due to timing differences.

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Net cash used in investing activities during the nine-month period ended
December 29, 2001 amounted to $13.8 million and was used primarily to fund
capital investments related to our efforts to expand our distribution capacity
and efficiency, to upgrade our management information systems, and the
acquisition of an international equity interest as part of our strategic plan
to grow in diversified higher margin businesses. For the nine months ended
December 30, 2000, investing activities used $6.0 million, the majority of
which was used to purchase capital assets.

Financing activities provided net cash of $0.4 million for the nine months
ended December 29, 2001 that resulted primarily from the proceeds from the
exercise of options offset by stock repurchases. For the nine months ended
December 30, 2000, financing activities used net cash of $8.0 million which was
primarily the result of the stock repurchases and dividends paid, offset only
slightly by the proceeds from the exercise of options.

We had $12.0 million available at December 29, 2001 on an unsecured bank line
of credit. The line of credit expires on August 31, 2002. As of and during the
periods ended December 29, 2001, March 31, 2001 and December 29, 2001, we had
no borrowings outstanding on our bank line of credit. Refer to Note 9.

On January 31, 2002, we utilized $13.0 million in available cash flow and
borrowed $25.0 million available under our bank credit facilities in connection
with our acquisition of PGW. Refer to Note 9.

We have initiated a strategic growth plan designed to capitalize upon our core
competency of book wholesaling that will allow us to grow our business into
market segments that historically have higher margins and reduce our reliance
on a concentration of a few large customers. This strategic plan requires us
to upgrade and realign our existing facility capacity and management
information systems, which will be funded through current cash reserves and
anticipated future operating cash flows.

In the first nine months of fiscal 2002, distribution and administrative costs
increased by 13% as compared to the same period one-year ago. The increase in
our distribution and administrative costs was primarily a result of increased
payroll expenses due to additional headcount and facilities costs related to
our distribution center expansion in order to meet the requirements of our
initiative to expand our higher margin business.

For the nine months ended December 29, 2001, we made capital investments of
approximately $11.5 million that related to our efforts to expand our
distribution capacity and efficiency, and also to upgrade our management
information systems. During the same period of our prior fiscal year we made
capital investments related to these projects of approximately $5.0 million.
These capital assets consist mainly of computer hardware and software and
internal costs related to the enhancement of our management information
systems, distribution equipment, and leasehold improvements. Of the $11.5
million spent in the nine months ended December 29, 2001,
$6.0 million is related
to the management information systems enhancement. Cumulative expenditures
related to this project amounted to $12.6 million at
December 29, 2001. All accumulated costs related to these assets not yet
placed in service will begin depreciation on a straight-line basis over a seven
year period when placed in service, which is expected to occur by
September 2002.

As announced April 18, 2001, the Board of Directors
approved an annual dividend payment of $0.04 per share to
shareholders of record on March 1, 2002 which will be payable on March 15, 2002.

We believe that our existing working capital, cash flows from operations, trade
credit traditionally available from our vendors, and our availability under
existing credit facilities or other sources of credit will provide sufficient
liquidity to cover debt service costs and any reasonably foreseeable future
working capital and capital expenditure requirements associated with our
existing operations. Although we have no acquisition commitments at the present
time, other than the acquisition of Publishers Group West, we continue to
consider additional strategic acquisitions where deemed appropriate. Such
acquisitions, if any, could materially affect our future liquidity and capital
resources.

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C.     STATEMENT OF PURPOSE OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

In December 1995, the Private Securities Litigation Reform Act of 1995 (the
Act) was enacted. The Act contains amendments to the Securities Act of 1933
and the Securities Exchange Act of 1934 (The 1934 Act), which provide
protection from liability in private lawsuits for forward-looking statements,
made by persons specified in the Act. We desire to take advantage of the safe
harbor provisions of the Act and the 1934 Act.

We wish to caution readers that, with the exception of historical matters, the
matters discussed in this Form 10-Q are forward-looking statements within the
meaning of the Act and the Exchange Act. These forward-looking statements are
not based on historical facts, but rather reflect our current expectations
concerning future results and events. These forward-looking statements
generally can be identified by the use of statements and include phrases such
as believe, expect, anticipate, intend, plan, foresee, likely,
will or other similar words or phrases. Similarly, statements describing our
objectives, plans or goals are forward-looking statements. All of these
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual result, performance or achievements to
be different from any future results, performance and achievements expressed or
implied by these statements. These risks, uncertainties and other factors
include, but are not limited to, factors related to the highly competitive
nature of the publishing industry as well as the warehouse club and retail
industries and their sensitivity to changes in general economic conditions, our
concentration of sales and credit risk with two customers, our ability to
impact customer return rates, continued successful results from the Vendor
Managed Inventory (VMI) program, changes in technology affecting the book
publishing, wholesaling and distribution business, currency and other risks
related to foreign operations, expansion plans, the management of our growth,
including the effectiveness of our integration of acquired
businesses, the results of financing efforts and other factors discussed in our other
filings with the Securities and Exchange Commission. These factors are not
necessarily all of the important factors that could affect our actual results
during Fiscal 2002 and beyond. Other unknown or unpredictable factors could
also have material adverse effects on our future results.

The forward-looking statements are made only as to the date hereof and we do
not have any obligation to publicly update any forward-looking statements to
reflect subsequent events or circumstances.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to changes in interest rates primarily from securities held in
our investment portfolio. Fluctuations in interest rates may affect the ending
fair value of our investments, anticipated future cash flows, and the
realization of earnings from such investments. Our cash and cash equivalents
consist primarily of highly liquid short-term investments that are typically
held for the duration of the respective instrument. Due to the short-term
nature of our investments, we believe that any change in interest rates would
not have a material impact on our cash equivalents. As of December 29, 2001,
our investments of approximately $2.1 million are scheduled to mature within
one year and approximately $2.6 million are scheduled to mature within two
years. We do not utilize derivative financial instruments or other market risk
sensitive instruments, positions or transactions to manage exposure to interest
rate changes. Accordingly, we believe that, while the securities we hold are
subject to changes in the financial standing of the issuer of such securities,
we are not subject to any material risks arising from changes in interest rates
or other market changes that affect market risk sensitive instruments.

We are subject to foreign currency exposure due to the operation of our foreign
subsidiaries, which generally enter into transactions denominated in their
respective functional currencies. Our primary foreign currency exposure arises
from foreign denominated revenues and profits translated into U.S. dollars. The
primary currencies to which we have foreign currency exposure are the British
pound, Mexican peso, and the Australian and Canadian dollar. We generally view
as long term our investments in our wholly owned foreign subsidiaries with a
functional currency other than the U.S. dollar. As a result, we do not utilize
any hedging transactions against these net investments. Our foreign operations
are not a significant part of our overall activities and we believe that the
risk associated with our foreign currency exposure is not material on a
consolidated basis.

In June 1998, the FASB issued SFAS No. 133 Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 was amended in June 1999 by
SFAS No. 137 Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133, and in June 2000 by
SFAS No. 138 for Accounting for Certain Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133. These statements establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities. They require that an
entity recognize all derivatives as either assets or liabilities and measure
those instruments at fair value with changes form fair value reflected in
operations. We adopted the provisions of SFAS No.133, as amended by SFAS No.
137 and SFAS No. 138, in April 2001, and the effect of the adoption was
immaterial to our consolidated financial statements.

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PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

We are involved in various claims and lawsuits
incidental to our business, and management believes that the outcome
of any of those matters will not have a material adverse effect on
our consolidated financial statements or results of operations.




ITEMS 2-4. NOT APPLICABLE




ITEM 5. OTHER INFORMATION

On July 22, 1999, we adopted a stock repurchase program pursuant to which we
may repurchase in the open market or private transactions, from time to time,
based upon existing market conditions, shares of our Common Stock not to exceed
450,000 shares. On March 16, 2000, we announced that our Board of Directors had
approved an increase in the repurchase program of 525,000 shares. On July 27,
2000, our Board of Directors approved an additional 525,000 share increase in
the repurchase program and on May 25, 2001; our Board of Directors approved an
additional 350,000 share increase in our stock repurchase program. Under the
plan, we have repurchased a total of approximately 1,312,275 shares through
December 29, 2001, at an average market price of approximately $10.71. The
repurchase program has no expiration date and will be financed through internal
cash flows.

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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits  none

(b)  Report on Form 8-K  none




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.

|                  |  |                                             |  |                                                                                                                
|----------------- |  | ------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------
|                  |  | ADVANCED MARKETING SERVICES, INC.Registrant
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|February 12, 2002 |  | By:                                         |  | /s/ Michael M. Nicita                                                                                          
|                  |  |                                             |  |                                                                                                                
|Date              |  |                                             |  | Michael M. Nicita
Chief Executive Officer and Director
(Principal Executive Officer)                           
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|February 12, 2002 |  | By:                                         |  | /s/ Edward J. Leonard                                                                                          
|                  |  |                                             |  |                                                                                                                
|Date              |  |                                             |  | Edward J. Leonard
Chief Financial Officer
Executive Vice President
(Principal Financial and Accounting Officer)

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