##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarter ended September 28, 2002

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
November 1, 2002 was 18,965,054, net of treasury shares of 4,096,975.





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TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                         
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED 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                          
|                              | ITEM 4.  CONTROLS AND PROCEDURES                                                             
|PART II.  OTHER INFORMATION  
|                              | ITEM 5.  OTHER INFORMATION                                                                   
|                              | ITEM 6.  EXHIBITS AND REPORTS                                                                
|SIGNATURES                   
|EXHIBIT 10.1                 
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



ADVANCED MARKETING SERVICES, INC.

Index to Form 10-Q
September 28, 2002

|                                                                                               |                                                                  |  |         |        | 
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  | ------- | ------ | 
|                                                                                               |                                                                  |  | Page   
|PART I.  FINANCIAL INFORMATION                                                                
|ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                           |                                                                  |  |         |       
|                                                                                               | Condensed Consolidated Balance Sheets (Unaudited)                |  |         | 3      | 
|                                                                                               | Condensed Consolidated Statements of Income (Unaudited)          |  |         | 4      | 
|                                                                                               | Condensed Consolidated Statements of Cash Flows (Unaudited)      |  |         | 5      | 
|                                                                                               | Notes to Condensed Consolidated Financial Statements (Unaudited) |  |         | 6 - 14 | 
|ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |                                                                  |  | 15 - 22 |       
|ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |                                                                  |  | 23      |       
|ITEM 4.  CONTROLS AND PROCEDURES                                                               |                                                                  |  | 23      |       
|PART II.  OTHER INFORMATION                                                                   
|ITEM 1.  LEGAL PROCEEDINGS                                                                     |                                                                  |  | 24      |       
|ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |                                                                  |  | 24      |       
|ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                       |                                                                  |  | 24      |       
|ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |                                                                  |  | 24      |       
|ITEM 5.  OTHER INFORMATION                                                                     |                                                                  |  | 24      |       
|ITEM 6.  EXHIBITS AND REPORTS                                                                  |                                                                  |  | 25      |       
|SIGNATURES                                                                                     |                                                                  |  | 25 - 27 |       

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PART I.  FINANCIAL INFORMATION




ITEM 1.  CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (See Note 1 for Basis of Presentation)




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

|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------- | ------- | --------- |  | --------- | ------- | - |  | - | ------- | -
|                                                                                                                                                                                               |  | Sept. 28, |         | March 31, |  | Sept. 29,
|                                                                                                                                                                                               |  | 2002      |         | 2002      |  | 2001     
|                                                                                                                                                                                               |  |           |         |           |  |          
|ASSETS                                                                                                                                                                                         |  |           |         |           |  |           |         |   |  |   |         |  
|Current Assets:                                                                                                                                                                                |  |           |         |           |  |           |         |   |  |   |         |  
|Cash and Cash Equivalents                                                                                                                                                                      |  | $         | 4,221   |           |  | $         | 21,115  |   |  | $ | 23,160  |  
|Investments, Available-for-Sale (Note 3)                                                                                                                                                       |  |           | 1,411   |           |  |           | 2,010   |   |  |   | 2,271   |  
|Accounts Receivable, Net of Allowances for Uncollectible
Accounts and Sales Returns of $8,837 at
September 28, 2002, $9,239 at
March 31, 2002 and $6,639 at September 29, 2001                 |  |           | 178,111 |           |  |           | 156,193 |   |  |   | 119,819 |  
|Vendor and Other Receivables                                                                                                                                                                   |  |           | 5,696   |           |  |           | 6,485   |   |  |   | 2,597   |  
|Inventories                                                                                                                                                                                    |  |           | 199,416 |           |  |           | 123,904 |   |  |   | 176,295 |  
|Deferred Income Taxes                                                                                                                                                                          |  |           | 7,737   |           |  |           | 7,242   |   |  |   | 8,151   |  
|Prepaid Expenses                                                                                                                                                                               |  |           | 3,585   |           |  |           | 3,439   |   |  |   | 1,912   |  
|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  
|Total Current Assets                                                                                                                                                                           |  |           | 400,177 |           |  |           | 320,388 |   |  |   | 334,205 |  
|Goodwill (Note 3)                                                                                                                                                                              |  |           | 38,189  |           |  |           | 37,444  |   |  |   | 8,880   |  
|Property and Equipment, Net (Note 3)                                                                                                                                                           |  |           | 34,090  |           |  |           | 30,983  |   |  |   | 24,854  |  
|Investments, Available-for-Sale (Note 3)                                                                                                                                                       |  |           | 2,547   |           |  |           | 3,631   |   |  |   | 2,617   |  
|Other Assets                                                                                                                                                                                   |  |           | 10,319  |           |  |           | 10,406  |   |  |   | 6,701   |  
|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  
|TOTAL ASSETS                                                                                                                                                                                   |  | $         | 485,322 |           |  | $         | 402,852 |   |  | $ | 377,257 |  
|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                           |  |           |         |           |  |           |         |   |  |   |         |  
|Current Liabilities:                                                                                                                                                                           |  |           |         |           |  |           |         |   |  |   |         |  
|Lines of Credit                                                                                                                                                                                |  | $         | 45,000  |           |  | $         | 25,000  |   |  | $ |        |  
|Accounts Payable                                                                                                                                                                               |  |           | 280,129 |           |  |           | 223,960 |   |  |   | 243,856 |  
|Accrued Liabilities                                                                                                                                                                            |  |           | 23,314  |           |  |           | 20,046  |   |  |   | 16,548  |  
|Income Taxes Payable                                                                                                                                                                           |  |           | 1,687   |           |  |           | 1,522   |   |  |   | 3,302   |  
|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  
|Total Current Liabilities                                                                                                                                                                      |  |           | 350,130 |           |  |           | 270,528 |   |  |   | 263,706 |  
|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  
|Commitments and Contingencies (Note 7)                                                                                                                                                         |  |           |         |           |  |           |         |   |  |   |         |  
|Stockholders Equity:                                                                                                                                                                          |  |           |         |           |  |           |         |   |  |   |         |  
|Common Stock, $0.001 Par Value, Authorized 100,000,000 Shares,
Issued 23,049,000 Shares at September 28, 2002, 23,009,000
Shares at March 31, 2002 and 22,824,000 Shares at
September 29, 2001 |  |           | 23      |           |  |           | 23      |   |  |   | 23      |  
|Additional Paid-In Capital                                                                                                                                                                     |  |           | 37,715  |           |  |           | 37,551  |   |  |   | 34,165  |  
|Deferred Compensation                                                                                                                                                                          |  |           | (498    | )         |  |           | (609    | ) |  |   | (719    | )
|Retained Earnings, net of common stock dividends                                                                                                                                               |  |           | 120,341 |           |  |           | 113,503 |   |  |   | 97,978  |  
|Cumulative
Other Comprehensive Loss (Note 2)                                                                                                                                                   |  |           | (926    | )         |  |           | (1,953  | ) |  |   | (1,705  | )
|Less: Treasury Stock, 4,097,000 Shares at
September 28, 2002, 3,734,000 Shares at
March 31, 2002 and September 29, 2001, at Cost                                                               |  |           | (21,463 | )         |  |           | (16,191 | ) |  |   | (16,191 | )
|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  
|Total Stockholders Equity                                                                                                                                                                     |  |           | 135,192 |           |  |           | 132,324 |   |  |   | 113,551 |  
|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                     |  | $         | 485,322 |           |  | $         | 402,852 |   |  | $ | 377,257 |  
|                                                                                                                                                                                               |  |           |         |           |  |           |         |   |  |   |         |  

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

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

|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |         |  
|-------------------------------------------- | ----------------------------------------- | - | ------------------ | ------- | ---------------- | - | --------- | ------- | --------- | - | ------ | ------- | - | - | ------ | ------- | -
|                                             |                                           |   | Three Months Ended |         | Six Months Ended
|                                             |                                           |   |                    |         |                 
|                                             |                                           |   | Sept. 28,          |         | Sept. 29,        |   | Sept. 28, |         | Sept. 29,
|                                             |                                           |   | 2002               |         | 2001             |   | 2002      |         | 2001     
|                                             |                                           |   |                    |         |                  |   |           |         |          
|                                             | Net Sales                                 |   | $                  | 219,157 |                  |   | $         | 164,203 |           |   | $      | 411,033 |   |   | $      | 311,181 |  
|                                             | Cost of Goods Sold                        |   |                    | 182,764 |                  |   |           | 138,887 |           |   |        | 345,248 |   |   |        | 264,567 |  
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|Gross Profit                                 |                                           |   | 36,393             |         |                  |   | 25,316    |         |           |   | 65,785 |         |   |   | 46,614 |        
|                                             | Distribution and
Administrative Expenses  |   |                    | 29,359  |                  |   |           | 19,665  |           |   |        | 55,165  |   |   |        | 36,065  |  
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|Income From Operations                       |                                           |   | 7,034              |         |                  |   | 5,651     |         |           |   | 10,620 |         |   |   | 10,549 |        
|                                             | Interest Income                           |   |                    | 194     |                  |   |           | 280     |           |   |        | 415     |   |   |        | 742     |  
|                                             | Equity in Net Income (Loss) of
Affiliates |   |                    | 128     |                  |   |           | 195     |           |   |        | (8      | ) |   |        | (46     | )
|                                             | Interest Expense and Other, Net           |   |                    | (31     | )                |   |           | (13     | )         |   |        | 229     |   |   |        | (52     | )
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|Income Before Provision For
Income Taxes     |                                           |   | 7,325              |         |                  |   | 6,113     |         |           |   | 11,256 |         |   |   | 11,193 |        
|                                             | Provision for Income Taxes                |   |                    | 2,875   |                  |   |           | 2,399   |           |   |        | 4,418   |   |   |        | 4,393   |  
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|Net Income                                   |                                           | $ | 4,450              |         |                  | $ | 3,714     |         |           | $ | 6,838  |         |   | $ | 6,800  |        
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|Net Income Per Share:                        |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|                                             | Basic                                     |   | $                  | 0.23    |                  |   | $         | 0.19    |           |   | $      | 0.36    |   |   | $      | 0.36    |  
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|                                             | Diluted                                   |   | $                  | 0.23    |                  |   | $         | 0.19    |           |   | $      | 0.34    |   |   | $      | 0.34    |  
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|Weighted Average Shares Used
in Calculation: |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|                                             | Basic                                     |   |                    | 19,110  |                  |   |           | 19,111  |           |   |        | 19,197  |   |   |        | 19,082  |  
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        
|                                             | Diluted                                   |   |                    | 19,602  |                  |   |           | 19,836  |           |   |        | 19,927  |   |   |        | 19,833  |  
|                                             |                                           |   |                    |         |                  |   |           |         |           |   |        |         |   |   |        |        

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

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

|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |           |       |         |       | 
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------- | ------------------------------------------------------ | -------------------- | ------------ | ----- | ---------------- | ------- | --------- | ----- | ------- | ----- | 
|                                                             |                                                                                             |                                                        |                      |              |       | Six Months Ended
|                                                             |                                                                                             |                                                        |                      |              |       |                 
|                                                             |                                                                                             |                                                        |                      |              |       | Sept. 28,        |         | Sept. 29,
|                                                             |                                                                                             |                                                        |                      |              |       | 2002             |         | 2001     
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|                                                             | Net income                                                                                  |                                                        | $                    | 6,838        |       |                  | $       | 6,800     |      
|                                                             | Adjustments to reconcile net income to net cash (used in)
provided by operating activities: |                                                        |                      |              |       |                  |         |           |      
|                                                             |                                                                                             | Equity in net loss of affiliates                       |                      |              | 8     |                  |         |           | 46    |        
|                                                             |                                                                                             | Depreciation and amortization                          |                      |              | 3,069 |                  |         |           | 2,028 |        
|                                                             |                                                                                             | Loss on sale of equipment                              |                      |              | 71    |                  |         |           |      |        
|                                                             |                                                                                             | Provision for uncollectible accounts and sales returns |                      |              | (402  | )                |         |           | 1,361 |        
|                                                             |                                                                                             | Markdown of inventories                                |                      |              | 656   |                  |         |           | 998   |        
|                                                             |                                                                                             | Deferred income taxes                                  |                      |              | (495  | )                |         |           | (954  | )      
|                                                             |                                                                                             | Amortization of deferred compensation                  |                      |              | 111   |                  |         |           | 111   |        
|                                                             | Changes in working capital components:                                                      |                                                        |                      |              |       |                  |         |           |      
|                                                             |                                                                                             | (Increase) decrease in:                                |                      |              |       |                  |         |           |       |        
|                                                             |                                                                                             |                                                        | Accounts receivable  |              |       | (20,458          | )       |           |       | (18,156 | )    
|                                                             |                                                                                             |                                                        | Inventories          |              |       | (75,612          | )       |           |       | (57,448 | )    
|                                                             |                                                                                             |                                                        | Other assets         |              |       | (1,575           | )       |           |       | 25      |      
|                                                             |                                                                                             | Increase in:                                           |                      |              |       |                  |         |           |       |        
|                                                             |                                                                                             |                                                        | Accounts payable     |              |       | 56,140           |         |           |       | 68,471  |      
|                                                             |                                                                                             |                                                        | Accrued liabilities  |              |       | 3,007            |         |           |       | 2,340   |      
|                                                             |                                                                                             |                                                        | Income taxes payable |              |       | 146              |         |           |       | 165     |      
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|Net cash (used in) provided by operating activities          |                                                                                             |                                                        | (28,496              | )            |       |                  | 5,787   |          
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|                                                             | Purchase of property and equipment                                                          |                                                        |                      | (6,677       | )     |                  |         | (8,878    | )    
|                                                             | Investment in equity of affiliate                                                           |                                                        |                      |             |       |                  |         | (1,383    | )    
|                                                             | Purchase of investments, available-for-sale                                                 |                                                        |                      | (1,457       | )     |                  |         | (4,364    | )    
|                                                             | Sale and redemption of investments, available-for-sale                                      |                                                        |                      | 3,184        |       |                  |         | 3,875     |      
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|Net cash used in investing activities                        |                                                                                             |                                                        | (4,950               | )            |       |                  | (10,750 | )        
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|                                                             | Borrowings on lines of credit                                                               |                                                        |                      | 20,000       |       |                  |         |          |      
|                                                             | Proceeds from exercise of options                                                           |                                                        |                      | 164          |       |                  |         | 173       |      
|                                                             | Purchase of treasury stock                                                                  |                                                        |                      | (5,272       | )     |                  |         | (988      | )    
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|Net cash provided by (used in) financing activities          |                                                                                             |                                                        | 14,892               |              |       |                  | (815    | )        
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|Effect of exchange rate changes on Cash and Cash Equivalents |                                                                                             |                                                        | 1,660                |              |       |                  | (836    | )        
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|Net Decrease in Cash and Cash Equivalents                    |                                                                                             |                                                        | (16,894              | )            |       |                  | (6,614  | )        
|CASH AND CASH EQUIVALENTS,Beginning of period                |                                                                                             |                                                        | 21,115               |              |       |                  | 29,774  |          
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|CASH AND CASH EQUIVALENTS,End of period                      |                                                                                             | $                                                      | 4,221                |              |       | $                | 23,160  |          
|                                                             |                                                                                             |                                                        |                      |              |       |                  |         |          
|Supplemental Disclosures of Cash Flow Information:           |                                                                                             |                                                        |                      |              |       |                  |         |          
|                                                             |                                                                                             |                                                        | Cash Paid For:       |              |       |                  |         |           |       |         |      
|                                                             |                                                                                             |                                                        |                      | Income Taxes |       | $                | 4,873   |           |       | $       | 4,946 | 
|                                                             |                                                                                             |                                                        |                      | Interest     |       | $                | 381     |           |       | $       |      | 

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

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



|1. |  | BASIS OF PRESENTATION
|-- |  | ---------------------

The accompanying interim Condensed Consolidated Financial Statements as of and
for the three and six month periods ended September 28, 2002 and September 29,
2001 have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements and
with instructions to Form 10-Q, without an audit by our independent public
accountants, and therefore, do not 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 of America. 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, for the fiscal year ended March 31, 2002. The accompanying unaudited
Condensed 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 Condensed 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 our fiscal year ending March 31, 2003.
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.

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.

Financial statements prepared in conformity with accounting principles
generally accepted in the United States of America 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 period amounts have been reclassified to conform to the current
period presentation.

The accompanying Condensed 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 Condensed Consolidated
Statements of Income one-month in arrears. We have eliminated all significant
intercompany accounts and transactions.

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|2. |  | COMPREHENSIVE INCOME
|-- |  | --------------------

Comprehensive income is summarized as follows (in thousands):

|                     |                                          |   |                    |       |                  |   |           |      |           |   |       |     |  |   |       |      |  
|-------------------- | ---------------------------------------- | - | ------------------ | ----- | ---------------- | - | --------- | ---- | --------- | - | ----- | --- |  | - | ----- | ---- | -
|                     |                                          |   | Three Months Ended |       | Six Months Ended
|                     |                                          |   |                    |       |                 
|                     |                                          |   | Sept. 28,          |       | Sept. 29,        |   | Sept. 28, |      | Sept. 29,
|                     |                                          |   | 2002               |       | 2001             |   | 2002      |      | 2001     
|                     |                                          |   |                    |       |                  |   |           |      |          
|Net Income           |                                          | $ | 4,450              |       |                  | $ | 3,714     |      |           | $ | 6,838 |     |  | $ | 6,800 |     
|                     | Foreign Currency Translation Adjustment  |   |                    | 1,409 |                  |   |           | (718 | )         |   |       | 985 |  |   |       | (836 | )
|                     | Unrealized Gains/(Losses) on Investments |   |                    | 27    |                  |   |           | 2    |           |   |       | 42  |  |   |       | (27  | )
|                     |                                          |   |                    |       |                  |   |           |      |           |   |       |     |  |   |       |     
|Comprehensive Income |                                          | $ | 5,886              |       |                  | $ | 2,998     |      |           | $ | 7,865 |     |  | $ | 5,937 |     
|                     |                                          |   |                    |       |                  |   |           |      |           |   |       |     |  |   |       |     

We do not provide for US income taxes on foreign currency translation
adjustments because such amounts are considered to be invested indefinitely.



|3. |  | 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 of America and state and local
municipalities. Available-for-sale securities are stated at fair market 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 are as
follows (in thousands):

|                   |  |           |       |            |  |            |    |            |  |   |     |   |  |   |       | 
|------------------ |  | --------- | ----- | ---------- |  | ---------- | -- | ---------- |  | - | --- | - |  | - | ----- | 
|                   |  |           |       |            |  | Gross      |    | Gross      |  |   |     |  
|                   |  | Amortized |       | Unrealized |  | Unrealized |    | Estimated 
|                   |  | Cost      |       | Gains      |  | Losses     |    | Fair Value
|                   |  |           |       |            |  |            |    |           
|September 28, 2002 |  | $         | 3,923 |            |  | $          | 35 |            |  | $ |    |   |  | $ | 3,958 | 
|                   |  |           |       |            |  |            |    |            |  |   |     |   |  |   |       | 
|March 31, 2002     |  | $         | 5,648 |            |  | $          |   |            |  | $ | (7  | ) |  | $ | 5,641 | 
|                   |  |           |       |            |  |            |    |            |  |   |     |   |  |   |       | 
|September 29, 2001 |  | $         | 4,932 |            |  | $          |   |            |  | $ | (44 | ) |  | $ | 4,888 | 
|                   |  |           |       |            |  |            |    |            |  |   |     |   |  |   |       | 

As of September 28, 2002, we had investments in debt securities amounting to
approximately $1.4 million that were scheduled to mature within one year and
approximately $2.5 million that were scheduled to mature within two years. For
each of the periods presented, we sold no investment prior to its maturity
date. We use the specific identification method in determining cost on these
investments.

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|3. |  | COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS (continued)
|-- |  | --------------------------------------------------------

Property and Equipment

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

|                                         |                                                |   |                |         |                |   |                |         |   |   |        |         |  
|---------------------------------------- | ---------------------------------------------- | - | -------------- | ------- | -------------- | - | -------------- | ------- | - | - | ------ | ------- | -
|                                         |                                                |   | As of         
|                                         |                                                |   |               
|                                         |                                                |   | Sept. 28, 2002 |         | March 31, 2002 |   | Sept. 29, 2001
|                                         |                                                |   |                |         |                |   |               
|Leasehold improvements                   |                                                | $ | 5,235          |         |                | $ | 5,869          |         |   | $ | 2,237  |        
|Office furniture, equipment and software |                                                |   | 33,583         |         |                |   | 14,459         |         |   |   | 12,973 |        
|Warehouse equipment                      |                                                |   | 11,178         |         |                |   | 11,625         |         |   |   | 10,537 |        
|                                         |                                                |   |                |         |                |   |                |         |   |   |        |        
|                                         |                                                |   | 49,996         |         |                |   | 31,953         |         |   |   | 25,747 |        
|                                         | Less accumulated depreciation and
amortization |   |                | (17,799 | )              |   |                | (16,001 | ) |   |        | (13,993 | )
|                                         |                                                |   |                |         |                |   |                |         |   |   |        |        
|                                         |                                                |   | 32,197         |         |                |   | 15,952         |         |   |   | 11,754 |        
|Assets not yet placed in service         |                                                |   | 1,893          |         |                |   | 15,031         |         |   |   | 13,100 |        
|                                         |                                                |   |                |         |                |   |                |         |   |   |        |        
|Property and equipment, net              |                                                | $ | 34,090         |         |                | $ | 30,983         |         |   | $ | 24,854 |        
|                                         |                                                |   |                |         |                |   |                |         |   |   |        |        

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, internal employee payroll and payroll-related
costs.

Assets not yet placed in service consist primarily of computer hardware and
software related to the enhancement of our management information systems. The
cumulative balance in assets not yet placed in service relating to the
enhancement of our management information systems amounted to approximately
$1.8 million, $14.4 million and $11.1 million at September 28, 2002, March 31,
2002 and September 29, 2001, respectively. Significant components of these
systems were placed in service during the second quarter of Fiscal 2003 and the
related costs that have accumulated are being depreciated on a straight-line
basis over a seven-year period, the expected life of the assets.

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.

Goodwill

|                        |  |                |        |                |  |                |        |  |  |   |       | 
|----------------------- |  | -------------- | ------ | -------------- |  | -------------- | ------ |  |  | - | ----- | 
|                        |  | As of         
|                        |  |               
|                        |  | Sept. 28, 2002 |        | March 31, 2002 |  | Sept. 29, 2001
|                        |  |                |        |                |  |               
|Goodwill United States  |  | $              | 31,231 |                |  | $              | 31,041 |  |  | $ | 2,148 | 
|Goodwill United Kingdom |  |                | 5,515  |                |  |                | 5,052  |  |  |   | 5,304 | 
|Goodwill Australia      |  |                | 1,443  |                |  |                | 1,351  |  |  |   | 1,428 | 
|                        |  |                |        |                |  |                |        |  |  |   |       | 
|Goodwill                |  | $              | 38,189 |                |  | $              | 37,444 |  |  | $ | 8,880 | 
|                        |  |                |        |                |  |                |        |  |  |   |       | 

Goodwill increased by a net of approximately $0.7
million for the six months ended September 28, 2002 as a result
of additional capitalized expenses, settlement of the
purchase price relating to the acquisition of PGW and foreign exchange rate
fluctuations. Goodwill increased by a net of approximately $28.6 million for the six months ended March 31, 2002 as a result of the acquisition of PGW, amortization expense and
foreign exchange rate fluctuations.

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|3. |  | COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS (continued)
|-- |  | --------------------------------------------------------

Investments in Affiliates

From time to time we make strategic investments intended to promote our
worldwide business, which primarily consists of buying and/or selling books.
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 or circumstances indicate that
a decline in the value of these assets has occurred and is other than
temporary, we will record a charge to Equity in Net Income of Affiliates. Our
investments in affiliates are included as part of Other Assets in the
accompanying Condensed Consolidated Balance Sheets. Consistent with our policy
regarding international subsidiaries, we include our portion of the
investments operating results in our Condensed Consolidated Statements of
Income one-month in arrears.

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 designer of childrens books that incorporate sophisticated pop-up
pictures using high quality art, including the award-winning Maurice Pledger
wildlife series. Templar markets its products on a worldwide basis.

In September 1999, we acquired a 25% equity interest in Raincoast Book
Distribution, Limited (Raincoast Books), a leading Canadian book distributor,
for approximately $0.9 million. Headquartered in Vancouver, British Colombia,
Raincoast Books has the exclusive distribution rights for approximately 40
publishers in Canada. In addition, Raincoast Books, through its own
proprietary imprint label, publishes a wide variety of books.

During the three and six months ended September 28, 2002, we recognized
approximately $0.2 million and $0.5 million, respectively, of income related to
the change in fair value on stock appreciation rights issued in connection with
certain acquisitions. This amount was included with Interest Expense and Other
in the Condensed Consolidated Statements of Income. The liability for stock
appreciation rights is included with Accrued Liabilities in our accompanying
Condensed Consolidated Balance Sheets.

Lines of Credit

On July 10, 2002, our existing unsecured $12.0 million line of credit was
amended, principally to revise certain financial covenants and extend the
maturity date to March 31, 2003. On September 26, 2002, our secured line of
credit agreement was amended to provide for a temporary increase in the secured
line from $23.0 million to $33.0 million. Effective December 1, 2002, the
amount that we may borrow under the secured line will revert back to $23.0
million, with a maturity date of March 31, 2003. Borrowings under both
revolving credit agreements bear interest at the banks prime rate or LIBOR
+1.5% (3.3% at September 28, 2002 and 3.4% at March 31, 2002). We are required
to pay an unused loan fee of 1/4 of 1% on any portion of the secured credit
facility that is available but not drawn.

The credit 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. Accounts receivable balances must be in excess of
the outstanding balance on the secured line of credit. Borrowings under the
secured line of credit are collateralized by all of our accounts receivable.
We had outstanding borrowings of $45.0 million at September 28, 2002 under both
facilities. As of November 12, 2002, our borrowings total approximately $22.0
million under both facilities.

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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. The total
shares authorized for buyback under the plan amount to 1,850,000. In the
second quarter of Fiscal 2003, we repurchased a total of 363,100 shares with an
average market price of approximately $14.52, bringing our total repurchased
shares under the plan to 1,675,375 with an average market price of
approximately $11.54. The repurchase program has no expiration date.

We recognize deferred compensation for certain stock options granted under our
Stock Option Plan. The compensation is being amortized over the vesting period
of the options, and we have expensed approximately $55,000 and $56,000 for the
three months ended September 28, 2002 and September 29, 2001, respectively, and
approximately $111,000 for each of the six months ended September 28, 2002 and
September 29, 2001. The net balance of the remaining deferred compensation
amounted to approximately $498,000, $609,000 and $719,000 at September 28,
2002, March 31, 2002 and September 29, 2001, respectively, and has been
recorded as a separate component of Stockholders Equity in the accompanying
Condensed Consolidated Balance Sheets.



|4. |  | ACQUISITIONS
|-- |  | ------------

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 $38.7 million, subject to customary
post-closing adjustments. The acquisition of PGW was to further expand our
higher-margin contract distribution business consistent with our strategic
plan. The transaction was structured as a merger of Nautilus Merger Sub, Inc.,
our wholly owned subsidiary, with and into Publishers Group Incorporated
(PGI). PGW is a wholly owned subsidiary of PGI. The acquisition was
accounted for using the purchase method of accounting with approximately $25.0
million of the purchase price provided under borrowings from bank line of
credit facilities.

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 its acquisition by AMS, 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. Concurrent with the Avalon divestiture, PGW sold its
Canadian distribution business to a subsidiary of Raincoast Books, our
affiliate in which we own a 25% equity interest. The assets of PGW are being
used in a manner generally consistent with the use of such assets by PGW prior
to the consummation of the acquisition.

Intangible assets associated with the acquisition were accounted for in
accordance with Statement of Financial Accounting Standard (SFAS) No. 142,
Goodwill and Other Intangible Assets. The total amount of goodwill
capitalized in connection with this acquisition amounted to approximately $29.2
million. In accordance with SFAS No. 142, goodwill has an indefinite life and
is not amortized. Goodwill related to this acquisition will also not be
amortized for income tax purposes. Additionally, in connection with the
acquisition, we acquired $3.4 million in other intangible assets, consisting of
a publishers list and a trade name, which will be amortized over their
estimated useful lives, determined to be 20 years. Intangible assets amounted
to approximately $3.2 million and $3.3 million, net of accumulated amortization
of approximately $112,000 and $28,000, at September 28, 2002 and March 31,
2002, respectively. At September 29, 2001, we did not have any intangible
assets.

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|4. |  | ACQUISITIONS(continued)
|-- |  | -----------------------

UNCLE JOHNS BATHROOM READER

In August 2000, we acquired certain net assets and the publishing rights of
Uncle Johns Bathroom Reader for approximately $2.5 million. Uncle Johns
Bathroom Reader is a series of info-tainment books that is distributed
through a variety of mass-market outlets. We have integrated this product
series together with the assets acquired with our other publishing activities
from the date of acquisition. We accounted for the acquisition as a purchase
and, accordingly, the assets acquired and the publishing rights assumed from
Earthworks Press Inc. were recorded at their estimated fair value at the date
of acquisition. The excess of the purchase price over the net assets acquired
was $2.3 million and was amortized over 20 years until the effective date of
our adoption of SFAS No. 142, April 1, 2002, as of which date goodwill is no
longer amortized.

ASPEN BOOK MARKETING

In August 2000, we acquired certain net assets of the wholesale business of
Aspen Book Marketing for approximately $3.3 million. Aspen Book Marketing is a
wholesaler of specialty books to the Safeway store chain across the UK. We
accounted for the acquisition as a purchase and, accordingly, the assets
acquired from Aspen Book Marketing were recorded at their estimated fair value
at the date of acquisition. The excess of the purchase price over the net
assets acquired was $0.8 million and was amortized over 20 years until the
effective date of our adoption of SFAS No. 142, April 1, 2002, as of which date
goodwill is no longer amortized.

BOOKWISE INTERNATIONAL OF AUSTRALIA

In March 2000, we acquired certain assets and assumed certain liabilities of
the distribution business of Bookwise International of Australia (Bookwise)
for approximately $2.0 million. Bookwise is a distributor of specialty books
in a wide variety of subject areas. We accounted for the acquisition as a
purchase and, accordingly, the assets acquired and the liabilities assumed from
Bookwise were recorded at their estimated fair value at the date of
acquisition. The excess of the purchase price over the net assets acquired was
$1.3 million and was amortized over 20 years until the effective date of our
adoption of SFAS No. 142, April 1, 2002, as of which date goodwill is no longer
amortized.

VALUATION OF GOODWILL

Under SFAS No. 142, we are required to test all existing goodwill for
impairment on a reporting unit basis. A reporting unit is the operating
segment or one level below an operating segment (the component level), where
discrete financial information is prepared and regularly reviewed by
management, in which case such component is the reporting unit. Our reporting
units are defined as our geographic regions. We completed our initial
impairment test for goodwill during the quarter ended September 28, 2002. This
test confirmed that, with respect to the goodwill acquired in each acquisition
mentioned above, the fair value of the net assets of each of our reporting
units was equal to or greater than the carrying value and, accordingly, no
impairment loss existed at the date of adoption of SFAS No. 142, which was
April 1, 2002.



|5. |  | RELATED PARTY TRANSACTIONS
|-- |  | --------------------------

Our affiliate, Raincoast, purchased the Canadian distribution business of PGW
for $0.7 million in a transaction that occurred simultaneously with our
purchase of PGW (See Note 4). The $0.7 million purchase price was paid $0.1
million at closing with the $0.6 million balance represented by unsecured
promissory notes payable over five years at a market interest rate.

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|6. |  | 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
Condensed 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 |        | Six Months Ended
|                                                         |  |                    |        |                 
|                                                         |  | Sept. 28,          |        | Sept. 29,        |  | Sept. 28, |        | Sept. 29,
|                                                         |  | 2002               |        | 2001             |  | 2002      |        | 2001     
|                                                         |  |                    |        |                  |  |           |        |          
|Net Income                                               |  | $                  | 4,450  |                  |  | $         | 3,714  |           |  | $ | 6,838  |  |  | $ | 6,800  | 
|                                                         |  |                    |        |                  |  |           |        |           |  |   |        |  |  |   |        | 
|Weighted Average Common Shares Outstanding               |  |                    | 19,110 |                  |  |           | 19,111 |           |  |   | 19,197 |  |  |   | 19,082 | 
|Basic Earnings Per Share                                 |  | $                  | 0.23   |                  |  | $         | 0.19   |           |  | $ | 0.36   |  |  | $ | 0.36   | 
|                                                         |  |                    |        |                  |  |           |        |           |  |   |        |  |  |   |        | 
|Weighted Average Common Shares Outstanding               |  |                    | 19,110 |                  |  |           | 19,111 |           |  |   | 19,197 |  |  |   | 19,082 | 
|Dilutive Common Stock Options                            |  |                    | 492    |                  |  |           | 725    |           |  |   | 730    |  |  |   | 751    | 
|                                                         |  |                    |        |                  |  |           |        |           |  |   |        |  |  |   |        | 
|Total Diluted Weighted Average Common Shares Outstanding |  |                    | 19,602 |                  |  |           | 19,836 |           |  |   | 19,927 |  |  |   | 19,833 | 
|                                                         |  |                    |        |                  |  |           |        |           |  |   |        |  |  |   |        | 
|Diluted Earnings Per Share                               |  | $                  | 0.23   |                  |  | $         | 0.19   |           |  | $ | 0.34   |  |  | $ | 0.34   | 
|                                                         |  |                    |        |                  |  |           |        |           |  |   |        |  |  |   |        | 

Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period, while diluted
earnings per share also gives effect to all potential dilutive common shares
outstanding during each period, such as stock options.



|7. |  | COMMITMENTS AND CONTINGENCIES
|-- |  | -----------------------------

Operating leases

We lease facilities and certain equipment under non-cancelable operating
leases. Rent expense for the three months ended September 28, 2002 and
September 29, 2001 amounted to approximately $2.2 million and $2.0 million,
respectively. For the six months ended September 28, 2002 and September 29,
2001, rent expense amounted to approximately $4.4 million and $3.5 million,
respectively. The leases have initial expiration dates ranging from 2003 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 these matters, individually and in the
aggregate, will not have a material adverse effect on our consolidated
financial position or results of operations.

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|8. |  | SEGMENT AND GEOGRAPHICAL INFORMATION
|-- |  | ------------------------------------

Management has determined that our business, consisting of wholesale,
distribution and publishing activities, operates in a single 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 |         | Six months ended
|               |  |                    |         |                 
|               |  | September 28,      |         | September 29,    |  | September 28, |         | September 29,
|               |  | 2002               |         | 2001             |  | 2002          |         | 2001         
|               |  |                    |         |                  |  |               |         |              
|United States  |  | $                  | 203,337 |                  |  | $             | 150,110 |               |  | $ | 378,134 |  |  | $ | 283,665 | 
|United Kingdom |  |                    | 12,529  |                  |  |               | 10,963  |               |  |   | 26,417  |  |  |   | 22,040  | 
|Mexico         |  |                    | 1,718   |                  |  |               | 1,957   |               |  |   | 3,556   |  |  |   | 3,541   | 
|Australia      |  |                    | 1,489   |                  |  |               | 1,173   |               |  |   | 2,730   |  |  |   | 1,935   | 
|Singapore      |  |                    | 84      |                  |  |               |        |               |  |   | 196     |  |  |   |        | 
|               |  |                    |         |                  |  |               |         |               |  |   |         |  |  |   |         | 
|               |  | $                  | 219,157 |                  |  | $             | 164,203 |               |  | $ | 411,033 |  |  | $ | 311,181 | 
|               |  |                    |         |                  |  |               |         |               |  |   |         |  |  |   |         | 

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

|               |  |               |         |           |  |               |         |  |  |   |         | 
|-------------- |  | ------------- | ------- | --------- |  | ------------- | ------- |  |  | - | ------- | 
|               |  | As of        
|               |  |              
|               |  | September 28, |         | March 31, |  | September 29,
|               |  | 2002          |         | 2002      |  | 2001         
|               |  |               |         |           |  |              
|United States  |  | $             | 444,485 |           |  | $             | 367,187 |  |  | $ | 341,448 | 
|United Kingdom |  |               | 29,275  |           |  |               | 25,437  |  |  |   | 26,235  | 
|Mexico         |  |               | 4,776   |           |  |               | 4,760   |  |  |   | 4,346   | 
|Australia      |  |               | 6,199   |           |  |               | 5,165   |  |  |   | 5,228   | 
|Singapore      |  |               | 587     |           |  |               | 303     |  |  |   |        | 
|               |  |               |         |           |  |               |         |  |  |   |         | 
|               |  | $             | 485,322 |           |  | $             | 402,852 |  |  | $ | 377,257 | 
|               |  |               |         |           |  |               |         |  |  |   |         | 

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|9. |  | RECENT ACCOUNTING PRONOUNCEMENTS
|-- |  | --------------------------------

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,
Business Combinations. SFAS No. 141 addresses financial accounting and
reporting for business combinations and supersedes Accounting
Principles Board
(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. 141 are 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 4 of the Notes to
Condensed Consolidated Financial Statements).

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 is subject to at least an annual assessment for impairment by
applying a fair value test. We adopted this statement effective April 1, 2002
and ceased amortization of goodwill at that date. We completed our initial
impairment test for goodwill during the quarter ended September 28, 2002. This
test confirmed that, with respect to the goodwill acquired in each acquisition,
the fair value of the net assets of each of our reporting units was equal to or
greater than the carrying value and, accordingly, no impairment loss existed at
the date of adoption of SFAS No. 142, which was April 1, 2002. Goodwill
amortization expense for the three and six months ended September 29, 2001
amounted to approximately $86,000 and $206,000, respectively. The effect of
excluding such goodwill amortization from the first three and six months of
Fiscal 2002 would have increased our basic earnings per share by $0.01 in each
of the periods and would have increased diluted earnings per share by $0.01 for
the six month period. There would have been no effect on diluted earnings per
share for the three-month period.

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. We plan to adopt SFAS No. 143 for our fiscal year
beginning April 1, 2003. We do not expect 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). We adopted SFAS No. 144 effective April 1, 2002. The adoption of
SFAS No. 144 did not have a significant impact on our consolidated financial
position or results of operations.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
supersedes Emerging Issues Task Force Issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability for
an exit cost as defined in Issue 94-3 was recognized at the date of an entitys
commitment to an exit plan. SFAS No. 146 also establishes that the liability
should initially be measured and recorded at fair value. We plan to adopt the
provisions of SFAS No. 146 for exit or disposal activities that are initiated
after December 31, 2002.

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

Readers are cautioned not to place undue reliance on any forward-looking
statements. The forward-looking statements speak only as of the date on which
they are made, and except as required by applicable law, we undertake no
obligation to update such statements to reflect events that occur or
circumstances that exist after the date on which they are made.

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, although believed to be
reasonable, 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(d) 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 on Form 10-Q for the
periods ended September 28, 2002 and September 29, 2001, as well as the
financial statements and notes thereto and Managements Discussion and
Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2002.

OVERVIEW

We provide global customized services to book retailers and publishers. We are
a leading wholesaler 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). In conjunction with our product
sales, we provide product selection advice, vendor managed inventory (VMI)
services, specialized merchandising and product development services, and
logistical and handling services to membership warehouse clubs and other
retailers operating in the United States of America, Canada, Mexico, the United
Kingdom, Australia, Singapore and certain other Pacific Rim countries. With
our Fiscal 2002 acquisition of PGW, we are the largest independent contract
distributor for small-to-medium size publishers in North America. We
also engage in proprietary publishing, domestically and internationally, over
a wide spectrum of book categories. These titles are sold both to our
wholesale customers and to retail accounts with whom we may
have no wholesale relationship. While these books carry the potential for
increased margin, they also carry the risk of increased markdown expense,
as we own the books, and, unlike most wholesale purchases, they cannot be
returned for credit.



|A. |  | CRITICAL ACCOUNTING POLICIES
|-- |  | ----------------------------

Our significant accounting policies are disclosed in Note 1 of the Notes to our
Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended March 31, 2002. Certain of our policies require the
application of management judgement in making estimates and assumptions that
affect the amounts reported in the Condensed Consolidated Financial Statements
and disclosures made in the accompanying notes. Those estimates and
assumptions are based on historical experience and various other factors deemed
to be applicable and reasonable under the circumstances. The use of judgement
in determining such estimates and assumptions is by nature subject to a degree
of uncertainty. Accordingly, actual results could differ from estimates made.

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|A. |  | CRITICAL ACCOUNTING POLICIES(continued)
|-- |  | ---------------------------------------

Accounts Receivable Allowances

Consistent with industry practice, a significant portion of our sales are made
to customers with the right of return. The level of actual returns can be
influenced by many factors, including the quality of the title selection, the
strength and availability of the titles, as well as volatility of the ultimate
sell-through in the retail marketplace. In recording adjustments to sales for
estimated returns, we consider these factors as well as historical return
patterns of the titles, reports of the quantities of titles at our customer
locations from our VMI system, and industry trends. Actual product returns may
differ from our estimates. We have provided allowances of $6.3 million as of
September 28, 2002, $6.5 million as of March 31, 2002, and $3.9 million as of
September 29, 2001 for the gross profit effect of estimated future sales
returns after considering historical results and evaluating current conditions.

We record allowances for doubtful accounts for estimated losses resulting from
our customers inability to pay amounts owed. If the financial condition of
one or more of our customers were to deteriorate, we could be required to record
additional allowances or write-off all or a portion of the amounts due us. We
have also provided allowances for uncollectible trade accounts receivable of
$2.5 million as of September 28, 2002 and $2.7 million as of March 31, 2002 and
September 29, 2001.

Inventories

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 value. 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. Most of our contract distribution business
involves inventory that is held on consignment.

Long-Lived Assets

SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
requires that impairment losses be recognized when the carrying value of an
asset is not recoverable and exceeds its fair value. Our policy is to
evaluate, at each balance sheet date, the appropriateness of the carrying
values of long-lived assets on the basis of estimated undiscounted future cash
flows and other factors. If such an evaluation were to indicate an impairment
of these assets, such impairment would be recognized by a write-down of the
applicable asset to its estimated fair value.

Revenue Recognition

We recognize revenue upon delivery of merchandise to customer locations for our
wholesale distribution business and upon shipment to the customer for our
contract distribution business. Included in our net sales are primarily sales
of product, principally books, and to a lesser extent music CDs, CD-ROMs and
prerecorded audiocassettes. We also include in net sales the gross revenue
earned as part of our contract distribution business. Our net sales also
incorporate offsets for discounts, allowances, rebates, sales returns and sales
returns provisions. Effective April 1, 2002, we record revenues related to our
co-op advertising activities in net sales and include related expenses in cost
of goods sold. In prior periods, due to the insignificance of the amounts
involved, we recorded co-op advertising payments received from publishers,
offset by related expenses, within Distribution and Administrative expenses.

We recognize revenue from our contract distribution activities on a gross
basis, in accordance with Emerging Issues Task Force Issue No. 99-19,
Reporting Revenue Gross as a Principal Versus Net as an Agent. This
statement provides reporting standards for revenue and costs of sales depending
on a number of factors or characteristics. The characteristics indicative of
gross revenue reporting include whether a company is the primary obligor, has
latitude in establishing price, can determine product specification, and has
credit and physical loss inventory risk.

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|B. |  | RESULTS OF OPERATIONS
|-- |  | ---------------------

Three months ended September 28, 2002 and September 29, 2001:

Net income for the three months ended September 28, 2002 amounted to $4.5
million, or $0.23 per diluted share. Net income for the same period of the
prior fiscal year amounted to $3.7 million, or $0.19 per diluted share. The
increase in net income was attributable primarily to the addition of PGW and
increases in our core wholesale business, offset by increases in expenses
associated with our investment in infrastructure.

For the three months ended September 28, 2002, our net sales increased 33.5% to
$219.2 million, from $164.2 million for the same quarter of the prior fiscal
year. Net sales reflect the invoiced amounts of products shipped and related
fulfillment services provided, less reserves for estimated returns, actual
returns and discounts. The 33.5% or $55.0 million increase in net sales
generally can be attributed to the following factors: $34.8 million from the
inclusion of the operations of PGW, which was not part of the same quarter of
the prior fiscal year; $16.1 million related to increased shipments to our
domestic wholesale customers; $2.4 million related to advertising revenue as
part of our co-operative advertising programs; and $1.7 million related to an
increase in net sales at our international subsidiaries, primarily in the UK.
The increase in our UK division is due to continued growth in our wholesale
activities.

We experienced a worldwide return rate of 22.0% from customers during the
second quarter of Fiscal 2003, compared to a return rate of 24.0% during the
same period of the prior fiscal year. The 2.0 percentage point decrease was
primarily a result of better management of initial lay-downs and replenishments
with our core customers. A partial offset to the decrease can be attributed to
the inclusion of PGW, which historically has experienced higher return rates
than our wholesale activities. Consistent with historical practice, returns
reserves have been established based on managements best estimate of expected
future product returns. These return reserves are included in the
return figures.

Gross profit for the three-month period ended September 28, 2002 was $36.4
million, an increase of $11.1 million, or 43.8%, over the same period of Fiscal
2002. Gross profit as a percentage of net sales increased to 16.6% during the
second quarter of Fiscal 2003 from 15.4% during the same period in the prior
fiscal year. Gross profit as a percent of sales increased, primarily due to
the addition of PGW, stronger overall margin mix for domestic AMS sales and
increases from international subsidiaries which have historically carried
higher margins.

Distribution and administrative expenses increased to $29.4 million for the
three-month period ended September 28, 2002 from $19.7 million during the same
period of Fiscal 2002. As a percentage of net sales, these expenses rose to
13.4% from 12.0% in the same period of the prior fiscal year, a 1.4 percentage
point increase. This increase was primarily a result of the inclusion of PGWs
distribution and administrative expenses that are higher as a percentage of
sales than historical AMS levels and temporary elevated labor and freight
costs, temporary elevated systems support costs and depreciation expense
associated with our systems implementation.

Interest income decreased to $0.2 million during the second quarter of Fiscal
2003 from $0.3 million in the same period of the previous fiscal year due to
lower cash and investment balances as a result of the purchase of PGW and
capital investments in our infrastructure, as well as lower investment yields.

Interest expense and other amounted to approximately $31,000 for the
three-month period ended September 28, 2002 as compared to $13,000 during the
same period of the prior fiscal year. The $18,000 increase was primarily a
result of approximately $0.2 million of interest expense related to our lines
of credit offset by approximately $0.2 million in favorable changes in the fair
value of stock appreciation rights issued in connection with certain
acquisitions.

The provision for income taxes for the three months ended September 28, 2002
and September 29, 2001 amounted to approximately $2.9 million and $2.4 million,
respectively. The increase reflects the rise in our pre-tax income as compared
to the same quarter of the prior fiscal year, while our effective tax rate
remained constant between the periods at approximately 39.3%.

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|B. |  | RESULTS OF OPERATIONS(continued)
|-- |  | --------------------------------

Six months ended September 28, 2002 and September 29, 2001:

Net income for the six months ended September 28, 2002 and September 29, 2001,
amounted to $6.8 million, or $0.34 per diluted share. Net income increased
slightly from the same period of the prior fiscal year and was offset by labor,
freight and depreciation costs associated with our system implementation.

For the first six months of Fiscal 2003, our net sales increased 32.1% to
$411.0 million, from $311.2 million for the same period of the prior fiscal
year. Net sales reflect the invoiced amounts of products shipped and related
fulfillment services provided, less reserves for estimated returns, actual
returns and discounts. The 32.1% or $99.8 million increase in net sales
generally can be attributed to the following factors: $61.2 million as a result
of net sales contributed by the inclusion of the operations of our recent
acquisition, PGW, which was not part of the same period of the prior fiscal
year; $29.1 million related to increased shipments to our domestic wholesale
customers; $4.2 million related to advertising revenue as part of our
co-operative advertising programs; and $5.3 million related to an increase in
net sales at our international subsidiaries, primarily in the UK. The
increases in our UK division are due to continued growth in our wholesale
activities.

We experienced a worldwide return rate of 23.0% from customers during the first
six months of Fiscal 2003, compared to a return rate of 24.0% during the same
period of the prior fiscal year. The 1.0 percentage point decrease was
primarily a result of better management of initial lay-downs and replenishments
with our core customers. A partial offset to the decrease can be attributed to
the inclusion of PGW, which historically has experienced higher return rates
than our wholesale activities. Consistent with historical practice, returns
reserves have been established based on managements best estimate of expected
future product returns. These return reserves are included in the return figures.

Gross profit for the six-month period ended September 28, 2002 was $65.8
million, an increase of $19.2 million, or 41.2%, over the same period of Fiscal
2002. Gross profit as a percentage of net sales increased to 16.0% in the
first six months of Fiscal 2003 from 15.0% during the same period in the prior
fiscal year. Gross profit as a percent of sales increased, primarily due to
the addition of PGW, stronger overall margin mix for domestic AMS sales and
increases from international subsidiaries which have historically carried
higher margins.

Distribution and administrative expenses increased to $55.2 million for the
six-month period ended September 28, 2002 from $36.1 million during the same
period of Fiscal 2002. As a percentage of net sales, these expenses rose to
13.4% from 11.6% in the same period of the prior fiscal year, a 1.8 percentage
point increase. This increase was primarily a result of the inclusion of PGWs
distribution and administrative expenses that are higher as a percentage of
sales than historical AMS levels and temporary elevated labor and freight
costs, temporary elevated systems support costs and depreciation expense
associated with our systems implementation.

Interest income decreased to $0.4 million during the first six months of Fiscal
2003 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 purchase of PGW and
capital investments in our infrastructure, as well as lower investment yields.

Interest expense and other resulted in income of $0.2 million for the six-month
period ended September 28, 2002 as compared to approximately $52,000 in expense
for the same period of the prior fiscal year. The $0.2 million of income was
primarily a result of a favorable change in the fair value of stock
appreciation rights issued in connection with certain acquisitions of
approximately $0.5 million offset by approximately $0.3 million of interest
expense related to our lines of credit.

The provision for income taxes for each of the six months ended September 28,
2002 and September 29, 2001 amounted to $4.4 million. Our effective tax rate
has remained constant between the periods at approximately 39.3%.

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|B. |  | RESULTS OF OPERATIONS(continued)
|-- |  | --------------------------------

Six months ended September 28, 2002 and September 29, 2001:

Seasonality

As is the case for most of our retail customers, our business is seasonal, with
the highest net sales and earnings occurring in our third fiscal quarter.
Income from operations during the third fiscal quarter, as a percentage of net
sales, is typically higher than in any other quarter because of product sales
mix and other economies of scale caused by the higher sales volume. This
seasonal pattern reflects the increased demand for books and related media
experienced during the holiday selling season. Working capital requirements
are generally highest during the second and early part of the third fiscal
quarters due to the seasonality of our business. We experience significant
seasonal short-term swings in our cash position due to sales seasonality and to
differences in timing of payments to our vendors and the receipt of payments
from our customers. Cash flow has been historically greatest during the third
fiscal quarter due to higher seasonal sales. Our results of operations depend
significantly upon net sales generated during the third fiscal quarter, and any
significant adverse trend in the net sales of such period would have a material
adverse effect on our results of operations for the full fiscal year. We
expect seasonality in operations to continue.

C. 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 the
second fiscal quarter.

At September 28, 2002, our cash and cash equivalents had decreased by $18.9
million as compared to September 29, 2001, primarily due to funding of the PGW
acquisition and investments in our corporate infrastructure.

For the six months ended September 28, 2002, operating activities used $28.5
million in cash. This was elevated by approximately $24.0 million in
slower-than-anticipated customer and publisher returns processing as a result
of higher than expected shipping volumes and the new systems implementation.
For the six months ended September 29, 2001, operating activities provided $5.8
million of cash.

Trade accounts receivable increased $20.5 million for the six months ended
September 28, 2002, as compared to a $18.2 million increase in trade accounts
receivable for the six months ended September 29, 2001. The $2.3 million
change in the increases between the first six months of Fiscal 2003 and Fiscal
2002 was a result of volume as well as inclusion of PGW in the first six months
of Fiscal 2003. Overall, the accounts receivable balance had increased by
$58.3 million at September 28, 2002 as compared to September 29, 2001. This
increase was driven by the addition of PGW and the overall growth in sales of
our wholesale and international businesses quarter-over-quarter.

Inventory levels at September 28, 2002 were $199.4 million, an increase of
$75.6 million from inventory levels at March 31, 2002. The $75.6 million
increase was primarily due to increases in inventory levels to meet anticipated
seasonal customer demand, increased sales volume, and backlog at our
distribution centers as a result of unprocessed returns, offset by our
continuing improvement in selling through slow-moving books and improved buying
decisions on non-returnable inventory purchases. Inventory turns increased to
3.5 times during the second quarter of Fiscal 2003 as compared to 3.4 times in
the same quarter of Fiscal 2002. For the quarter ended September 28, 2002, the
inventory turn was calculated using cost of goods sold from operations
excluding cost of goods sold relating to PGW for comparability. PGW holds
inventory on consignment, resulting in improved inventory turnover for the
Company. The increase in inventories was primarily funded by a corresponding
increase in accounts payable of $56.1 million. The increase in the overall
inventory balance quarter-over-quarter amounted to $23.1 million.

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|C. |  | LIQUIDITY AND SOURCES OF CAPITAL(continued)
|-- |  | -------------------------------------------

Net cash used in investing activities during the six months ended September 28,
2002 amounted to $5.0 million, most of which was used to fund capital
investments related to our efforts to upgrade our management information
systems. For the six months ended September 29, 2001, investing activities
used $10.8 million, of which $8.9 million was used to purchase capital assets,
primarily adding to our investment in our management information systems, and
$1.4 million which was used to acquire an equity interest in Templar as part of
our strategic plan to grow in diversified higher margin businesses.

Financing activities provided net cash of $14.9 million for the six months
ended September 28, 2002 that resulted primarily from an additional $20.0
million in borrowings against our lines of credit, offset by purchases of
treasury stock which amounted to approximately $5.3 million. The $20.0 million
was needed as a result of a temporary backlog in processing customer and
publisher returns. For the six months ended September 29, 2001, financing
activities used net cash of $0.8 million, which was primarily the result of the
purchase of treasury stock.

We have initiated a strategic growth plan designed to capitalize upon our core
competency of book wholesaling that is intended to allow us to grow our
business into market segments that have historically had higher margins and
reduce our reliance on our two largest customers. This strategic plan requires
us to upgrade and realign our existing facility capacity and management
information systems, which we intend to fund through current cash reserves,
borrowings against our existing lines of credit, and anticipated cash flows
from future operations.

We lease facilities and some equipment under non-cancelable operating leases.
The leases have initial expiration dates ranging from 2003 to 2012. Some of
the leases contain renewal options, termination options and periodic
adjustments of the minimum monthly rental payments.

On July 10, 2002, our existing unsecured $12.0 million line of credit was
amended, principally to revise certain financial covenants and extend the
maturity date to March 31, 2003. On September 26, 2002, our secured line of
credit agreement was amended to provide for a temporary increase in the secured
line from $23.0 million to $33.0 million. Effective December 1, 2002, the
amount that we may borrow under the secured line will revert back to $23.0
million, with a maturity date of March 31, 2003. Borrowings under both
revolving credit agreements bear interest at the banks prime rate or LIBOR
+1.5% (3.3% at September 28, 2002 and 3.4% at March 31, 2002). We are required
to pay an unused loan fee of 1/4 of 1% on any portion of the secured credit
facility that is available but not drawn.

The credit 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. Accounts receivable balances must be in excess of
the outstanding balance on the secured line of credit. Borrowings under the
secured line of credit are collateralized by all of our accounts receivable.
We had outstanding borrowings of $45.0 million at September 28, 2002 under both
facilities. As of November 12, 2002, our borrowings total approximately $22.0
million under both facilities.

We believe that our existing working capital, cash flows from operations, trade
credit traditionally available from our vendors, future 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. 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. |  | LIQUIDITY AND SOURCES OF CAPITAL(continued)
|-- |  | -------------------------------------------

Certain Risk Factors

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

For a more detailed list of some of the risks and uncertainties related to our
business and industry, please see our Annual Report on Form 10-K for the fiscal
year ended March 31, 2002.

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|D. |  | 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, 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.

We wish to caution readers that, with the exception of historical matters, the
matters discussed in this Quarterly Report on Form 10-Q are forward-looking
statements that involve risks and uncertainties, including but 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 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, the results of financing efforts, and other factors discussed in our
other filings with the Securities and Exchange Commission. Such factors could
affect our actual results during Fiscal 2003 and beyond and cause such results
to differ materially from those expressed in any forward-looking statement.
Accordingly, any forward-looking statements included herein do not purport to
be predictions of future events or circumstances and may not be realized.
Given these uncertainties, stockholders and prospective investors are cautioned
not to place undue reliance on such forward-looking statements. We disclaim
any obligations to update any such factors or to publicly announce the results
of any revisions to any of the forward-looking statements contained herein to
reflect future events or developments.

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to the quantitative and qualitative
information disclosed in our Annual Report on Form 10-K for the fiscal year
ended March 31, 2002.

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
typically consist 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. 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 have been subject to relatively low prevailing inflation rates in all
countries in which we operate, which generally enter into transactions
denominated in their respective functional currencies, with the exception of
Mexico, in recent years. The primary currencies to which we have foreign
currency exposure are the British pound, Mexican peso, and the Australian,
Canadian and Singapore dollar. Our primary foreign currency exposure arises
from foreign denominated revenues and expenses translated into US dollars. We
have generally been able to adjust our selling prices in all countries in which
we operate to offset increased costs of merchandise, and we expect to be able
to continue to do so in the foreseeable future. We generally view as long term
our investments in our wholly owned foreign subsidiaries with a functional
currency other than the US dollar. As a result, we do not utilize any hedging
transactions against these net investments. We believe that the risk
associated with our foreign currency exposure is not material on a consolidated
basis. While our Mexico operations are not a significant part of our overall
activities, the continued high rates of inflation in Mexico may result in
future foreign currency exchange losses.




ITEM 4.  CONTROLS AND PROCEDURES

Based on their evaluation of our internal controls, disclosure controls and
procedures, as of a date within 90 days of the filing date of this report, the
Chief Executive Officer and the Chief Financial Officer have concluded that the
effectiveness of such controls and procedures was adequate as of the
evaluation date in timely alerting them to material information required to be
included in our periodic SEC reports. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions,
regardless of how remote.

Further, we have reviewed our internal controls, and there were not any
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of their last
evaluation.

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PART II.  OTHER INFORMATION

ITEMS 1-4. 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. The
total shares authorized for buyback under the plan amount to 1,850,000. In the
second quarter of Fiscal 2003, we repurchased a total of 363,100 shares with an
average market price of approximately $14.52, bringing our total repurchased
shares under the plan to 1,675,375 shares with an average market price of
approximately $11.54. The repurchase program has no expiration date.

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ITEM 6.  EXHIBITS AND REPORTS



|(a) |  | Exhibits
|--- |  | --------

|            |      |  |  |                                                                                                                                                                                     
|----------- | ---- |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO.
|           
|            | 10.1 |  |  | Loan Modification Agreement, dated as of September 26, 2002, between Advanced Marketing Services, Inc. and
California Bank & Trust re modification of $23.0 million
Revolving Credit
|           
|            | 99.1 |  |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002                                                              
|           
|            | 99.2 |  |  | Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002                                                              



|(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
|                       
|November 12, 2002

Date |  | By:                                         |  | /s/   Michael M. Nicita

Michael M. Nicita
Chief Executive Officer and Director
(principal executive officer)                                             
|                       
|November 12, 2002

Date |  | By:                                         |  | /s/   Edward J. Leonard

Edward J. Leonard
Executive Vice President and
Chief Financial Officer and Secretary
(principal financial and accounting officer)

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CERTIFICATIONS

I, Michael M. Nicita, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advanced
Marketing Services, Inc. (the Registrant).

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in the Report.

4. The Registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the Registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The Registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrants auditors and the audit
committee of Registrants board of directors (or persons performing the
equivalent function):

(a)  all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrants ability to record,
process, summarize and report financial data and have identified for the
Registrants auditors any material weaknesses in internal controls; and

(b)  any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrants internal controls;
and

6. The Registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |                   |  |                         |  |                                                        
|----- |  | ----------------- |  | ----------------------- |  | -------------------------------------------------------
|Date: |  | November 12, 2002 |  | /s/   Michael M. Nicita
|      |  |                   |  | Name:
Title:            |  | Michael M. Nicita
President and Chief Executive Officer

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CERTIFICATIONS

I, Edward J. Leonard, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advanced
Marketing Services, Inc. (the Registrant).

2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report.

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in the Report.

4. The Registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

(a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the Registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and

(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;

5. The Registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the Registrants auditors and the audit
committee of Registrants board of directors (or persons performing the
equivalent function):

(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrants ability to record,
process, summarize and report financial data and have identified for the
Registrants auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrants internal controls;
and

6. The Registrants other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|      |  |                   |  |                         |  |                                                                                  
|----- |  | ----------------- |  | ----------------------- |  | ---------------------------------------------------------------------------------
|Date: |  | November 12, 2002 |  | /s/   Edward J. Leonard
|      |  |                   |  | Name:
Title:            |  | Edward J. Leonard
Executive Vice President,
Chief Financial Officer and Secretary

27