##### Table of Contents



SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



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FORM 10-Q

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

For the quarter ended June 29, 2002

Commission File Number: 0-16002

ADVANCED MARKETING SERVICES, INC.(Exact name of registrant as specified in its charter)

|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 95-3768341                          
|(State or other jurisdiction of
incorporation or organization) |  | (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 July
29, 2002 was 19,298,888, net of treasury shares of 3,734,000.

1



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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                           
|PART II. OTHER INFORMATION   
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.                                                    
|SIGNATURES                   
|EXHIBIT 10.1                 
|EXHIBIT 10.2                 
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



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##### Table of Contents



ADVANCED MARKETING SERVICES, INC.

Index to Form 10-Q
June 29, 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 - 20
|                             
|ITEM 3.                       |  | QUANTITATIVE AND QUALITATIVE
        DISCLOSURES ABOUT MARKET
        RISK                    |  | 21     
|                             
|PART II. OTHER INFORMATION   
|                             
|ITEM 1.                       |  | LEGAL PROCEEDINGS                                                                             |  | 22     
|                             
|ITEM 2.                       |  | CHANGES IN SECURITIES AND
        USE OF PROCEEDS                                             |  | 22     
|                             
|ITEM 3.                       |  | DEFAULTS UPON SENIOR SECURITIES                                                               |  | 22     
|                             
|ITEM 4.                       |  | SUBMISSION OF MATTERS TO
        A VOTE OF SECURITY HOLDERS                                   |  | 22     
|                             
|ITEM 5.                       |  | OTHER INFORMATION                                                                             |  | 22     
|                             
|ITEM 6.                       |  | EXHIBITS AND REPORTS ON
        FORM 8-K                                                      |  | 23     
|                             
|SIGNATURES                    |  | 23                                                                                           

2



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##### Table of Contents






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)


|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------- | ------- | --------- |  | -------- | ------- | - |  | - | ------- | -
|                                                                                                                                                                                     |  | June 29, |         | March 31, |  | June 30,
|                                                                                                                                                                                     |  | 2002     |         | 2002      |  | 2001    
|                                                                                                                                                                                     |  |          |         |           |  |         
|ASSETS                                                                                                                                                                               |  |          |         |           |  |          |         |   |  |   |         |  
|Current Assets:                                                                                                                                                                      |  |          |         |           |  |          |         |   |  |   |         |  
|Cash and Cash Equivalents                                                                                                                                                            |  | $        | 12,103  |           |  | $        | 21,115  |   |  | $ | 26,849  |  
|Investments, Available-for-Sale (Note 3)                                                                                                                                             |  |          | 1,441   |           |  |          | 2,010   |   |  |   | 4,379   |  
|Accounts Receivable, Net of Allowances for
Uncollectible Accounts and Sales Returns of
$8,934 at June 29, 2002, $9,239 at March 31,
2002 and $6,039 at June 30, 2001                 |  |          | 151,371 |           |  |          | 156,193 |   |  |   | 98,896  |  
|Vendor and Other Receivables                                                                                                                                                         |  |          | 4,478   |           |  |          | 6,485   |   |  |   | 3,807   |  
|Inventories                                                                                                                                                                          |  |          | 143,292 |           |  |          | 123,904 |   |  |   | 144,870 |  
|Deferred Income Taxes                                                                                                                                                                |  |          | 7,074   |           |  |          | 7,242   |   |  |   | 7,874   |  
|Prepaid Expenses                                                                                                                                                                     |  |          | 3,689   |           |  |          | 3,439   |   |  |   | 2,232   |  
|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  
|Total Current Assets                                                                                                                                                                 |  |          | 323,448 |           |  |          | 320,388 |   |  |   | 288,907 |  
|Goodwill                                                                                                                                                                             |  |          | 37,738  |           |  |          | 37,444  |   |  |   | 9,785   |  
|Property and Equipment, Net (Note 3)                                                                                                                                                 |  |          | 33,788  |           |  |          | 30,983  |   |  |   | 21,054  |  
|Investments, Available-for-Sale (Note 3)                                                                                                                                             |  |          | 4,294   |           |  |          | 3,631   |   |  |   | 1,213   |  
|Other Assets                                                                                                                                                                         |  |          | 10,252  |           |  |          | 10,406  |   |  |   | 5,060   |  
|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  
|TOTAL ASSETS                                                                                                                                                                         |  | $        | 409,520 |           |  | $        | 402,852 |   |  | $ | 326,019 |  
|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                 |  |          |         |           |  |          |         |   |  |   |         |  
|Current Liabilities:                                                                                                                                                                 |  |          |         |           |  |          |         |   |  |   |         |  
|Lines of Credit                                                                                                                                                                      |  | $        | 23,000  |           |  | $        | 25,000  |   |  | $ |        |  
|Accounts Payable                                                                                                                                                                     |  |          | 230,799 |           |  |          | 223,960 |   |  |   | 197,884 |  
|Accrued Liabilities                                                                                                                                                                  |  |          | 20,075  |           |  |          | 20,046  |   |  |   | 13,122  |  
|Income Taxes Payable                                                                                                                                                                 |  |          | 1,170   |           |  |          | 1,522   |   |  |   | 2,904   |  
|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  
|Total Current Liabilities                                                                                                                                                            |  |          | 275,044 |           |  |          | 270,528 |   |  |   | 213,910 |  
|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  
|Commitments
and Contingencies (Note 7)                                                                                                                                               |  |          |         |           |  |          |         |   |  |   |         |  
|Stockholders Equity:                                                                                                                                                                |  |          |         |           |  |          |         |   |  |   |         |  
|Common Stock, $0.001 Par Value, Authorized
100,000,000 Shares, Issued 23,031,000
Shares at June 29, 2002, 23,009,000 Shares
at March 31, 2002 and 22,797,000 Shares at June 30, 2001 |  |          | 23      |           |  |          | 23      |   |  |   | 23      |  
|Additional Paid-In Capital                                                                                                                                                           |  |          | 37,668  |           |  |          | 37,551  |   |  |   | 34,798  |  
|Deferred Compensation                                                                                                                                                                |  |          | (553    | )         |  |          | (609    | ) |  |   | (782    | )
|Retained Earnings                                                                                                                                                                    |  |          | 115,892 |           |  |          | 113,503 |   |  |   | 94,263  |  
|Cumulative Other Comprehensive Loss                                                                                                                                                  |  |          | (2,363  | )         |  |          | (1,953  | ) |  |   | (990    | )
|Less: Treasury Stock, 3,734,000 Shares at
June 29, 2002 and March 31, 2002 and
3,669,000 Shares at June 30, 2001, at Cost                                                            |  |          | (16,191 | )         |  |          | (16,191 | ) |  |   | (15,203 | )
|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  
|Total Stockholders Equity                                                                                                                                                           |  |          | 134,476 |           |  |          | 132,324 |   |  |   | 112,109 |  
|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                           |  | $        | 409,520 |           |  | $        | 402,852 |   |  | $ | 326,019 |  
|                                                                                                                                                                                     |  |          |         |           |  |          |         |   |  |   |         |  

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
|                                             |                                          |   |                   
|                                             |                                          |   | June 29,           |         | June 30,
|                                             |                                          |   | 2002               |         | 2001    
|                                             |                                          |   |                    |         |         
|                                             | Net Sales                                |   | $                  | 191,855 |          |   | $      | 146,978 |  
|                                             | Cost of Goods Sold                       |   |                    | 162,463 |          |   |        | 125,681 |  
|                                             |                                          |   |                    |         |          |   |        |        
|Gross Profit                                 |                                          |   | 29,392             |         |          |   | 21,297 |        
|                                             | Distribution and Administrative Expenses |   |                    | 25,806  |          |   |        | 16,399  |  
|                                             |                                          |   |                    |         |          |   |        |        
|Income From Operations                       |                                          |   | 3,586              |         |          |   | 4,898  |        
|                                             | Interest Income                          |   |                    | 222     |          |   |        | 462     |  
|                                             | Equity in Net Loss of Affiliates         |   |                    | (135    | )        |   |        | (240    | )
|                                             | Interest Expense and Other               |   |                    | 259     |          |   |        | (40     | )
|                                             |                                          |   |                    |         |          |   |        |        
|Income Before Provision For Income Taxes     |                                          |   | 3,932              |         |          |   | 5,080  |        
|                                             | Provision for Income Taxes               |   |                    | 1,543   |          |   |        | 1,994   |  
|                                             |                                          |   |                    |         |          |   |        |        
|Net Income                                   |                                          | $ | 2,389              |         |          | $ | 3,086  |        
|                                             |                                          |   |                    |         |          |   |        |        
|Net Income Per Share:                        |                                          |   |                    |         |          |   |        |        
|                                             | Basic                                    |   | $                  | 0.12    |          |   | $      | 0.16    |  
|                                             |                                          |   |                    |         |          |   |        |        
|                                             | Diluted                                  |   | $                  | 0.12    |          |   | $      | 0.16    |  
|                                             |                                          |   |                    |         |          |   |        |        
|Weighted Average Shares Used in Calculation: |                                          |   |                    |         |          |   |        |        
|                                             | Basic                                    |   |                    | 19,284  |          |   |        | 19,052  |  
|                                             |                                          |   |                    |         |          |   |        |        
|                                             | Diluted                                  |   |                    | 20,182  |          |   |        | 19,823  |  
|                                             |                                          |   |                    |         |          |   |        |        

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)


|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |          |       |   |         |  
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------- | ------------------------------------------------------ | -------------- | -------------------- | ----- | ------------------ | ------- | -------- | ----- | - | ------- | -
|                                                             |                                                                                             |                                                        |                |                      |       | Three Months Ended
|                                                             |                                                                                             |                                                        |                |                      |       |                   
|                                                             |                                                                                             |                                                        |                |                      |       | June 29,           |         | June 30,
|                                                             |                                                                                             |                                                        |                |                      |       | 2002               |         | 2001    
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|                                                             | Net income                                                                                  |                                                        | $              | 2,389                |       |                    | $       | 3,086    |      
|                                                             | Adjustments to reconcile net income to net cash (used in)
provided by operating activities: |                                                        |                |                      |       |                    |         |          |      
|                                                             |                                                                                             | Equity in net loss of affiliates                       |                |                      | 135   |                    |         |          | 240   |  
|                                                             |                                                                                             | Depreciation and amortization                          |                |                      | 1,329 |                    |         |          | 1,022 |  
|                                                             |                                                                                             | Provision for uncollectible accounts and sales returns |                |                      | (305  | )                  |         |          | 510   |  
|                                                             |                                                                                             | Markdown of inventories                                |                |                      | 577   |                    |         |          | 465   |  
|                                                             |                                                                                             | Deferred income taxes                                  |                |                      | 168   |                    |         |          | (677  | )
|                                                             |                                                                                             | Amortization of deferred compensation                  |                |                      | 56    |                    |         |          | 55    |  
|                                                             | Changes in working capital components:                                                      |                                                        |                |                      |       |                    |         |          |      
|                                                             |                                                                                             | (Increase) decrease in:                                |                |                      |       |                    |         |          |       |  
|                                                             |                                                                                             |                                                        |                | Accounts receivable  |       |                    | 6,387   |          |       |   | 2,449   |  
|                                                             |                                                                                             |                                                        |                | Inventories          |       |                    | (21,130 | )        |       |   | (25,580 | )
|                                                             |                                                                                             |                                                        |                | Other assets         |       |                    | (848    | )        |       |   | 293     |  
|                                                             |                                                                                             | Increase (decrease) in:                                |                |                      |       |                    |         |          |       |  
|                                                             |                                                                                             |                                                        |                | Accounts payable     |       |                    | 6,872   |          |       |   | 22,472  |  
|                                                             |                                                                                             |                                                        |                | Accrued liabilities  |       |                    | 1,294   |          |       |   | (1,077  | )
|                                                             |                                                                                             |                                                        |                | Income taxes payable |       |                    | (381    | )        |       |   | (213    | )
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|Net cash (used in) provided by operating activities          |                                                                                             |                                                        | (3,457         | )                    |       |                    | 3,045   |         
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|                                                             | Purchase of property and equipment                                                          |                                                        |                | (4,287               | )     |                    |         | (4,088   | )    
|                                                             | Investment in equity of affiliate                                                           |                                                        |                |                     |       |                    |         | (1,323   | )    
|                                                             | Purchase of investments, available-for-sale                                                 |                                                        |                | (622                 | )     |                    |         | (2,862   | )    
|                                                             | Sale and redemption of investments, available-for-sale                                      |                                                        |                | 587                  |       |                    |         | 1,639    |      
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|Net cash used in investing activities                        |                                                                                             |                                                        | (4,322         | )                    |       |                    | (6,634  | )       
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|                                                             | Repayments on lines of credit                                                               |                                                        |                | (2,000               | )     |                    |         |         |      
|                                                             | Proceeds from exercise of options                                                           |                                                        |                | 117                  |       |                    |         | 805      |      
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|Net cash (used in) provided by financing activities          |                                                                                             |                                                        | (1,883         | )                    |       |                    | 805     |         
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|Effect of exchange rate changes on Cash and Cash Equivalents |                                                                                             |                                                        | 650            |                      |       |                    | (141    | )       
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|Net Decrease in Cash and Cash Equivalents                    |                                                                                             |                                                        | (9,012         | )                    |       |                    | (2,925  | )       
|CASH AND CASH EQUIVALENTS,Beginning of period                |                                                                                             |                                                        | 21,115         |                      |       |                    | 29,774  |         
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|CASH AND CASH EQUIVALENTS,End of period                      |                                                                                             | $                                                      | 12,103         |                      |       | $                  | 26,849  |         
|                                                             |                                                                                             |                                                        |                |                      |       |                    |         |         
|Supplemental Disclosures of Cash Flow Information:           |                                                                                             |                                                        |                |                      |       |                    |         |         
|                                                             |                                                                                             |                                                        | Cash Paid For: |                      |       |                    |         |          |       |   |        
|                                                             |                                                                                             |                                                        |                | Income Taxes         |       | $                  | 2,275   |          |       | $ | 2,717   |  
|                                                             |                                                                                             |                                                        |                | Interest             |       | $                  | 183     |          |       | $ |        |  

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 month periods ended June 29, 2002 and June 30, 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 necessarily include all the information and footnotes
necessary for a fair presentation of consolidated financial position,
results of operations and cash flows in accordance with accounting principles
generally accepted in the United States 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
|                     |                                          |   |                   
|                     |                                          |   | June 29,           |      | June 30,
|                     |                                          |   | 2002               |      | 2001    
|                     |                                          |   |                    |      |         
|Net Income           |                                          | $ | 2,389              |      |          | $ | 3,086 |     
|                     | Foreign Currency Translation Adjustment  |   |                    | (469 | )        |   |       | (118 | )
|                     | Unrealized Gains/(Losses) on Investments |   |                    | 59   |          |   |       | (30  | )
|                     |                                          |   |                    |      |          |   |       |     
|Comprehensive Income |                                          | $ | 1,979              |      |          | $ | 2,938 |     
|                     |                                          |   |                    |      |          |   |       |     

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
|               |  |           |       |            |  |            |    |           
|June 29, 2002  |  | $         | 5,684 |            |  | $          | 51 |            |  | $ |    |   |  | $ | 5,735 | 
|               |  |           |       |            |  |            |    |            |  |   |     |   |  |   |       | 
|March 31, 2002 |  | $         | 5,648 |            |  | $          |   |            |  | $ | (7  | ) |  | $ | 5,641 | 
|               |  |           |       |            |  |            |    |            |  |   |     |   |  |   |       | 
|June 30, 2001  |  | $         | 5,636 |            |  | $          |   |            |  | $ | (44 | ) |  | $ | 5,592 | 
|               |  |           |       |            |  |            |    |            |  |   |     |   |  |   |       | 

As of June 29, 2002, we had investments in debt securities amounting to
approximately $1.4 million that were scheduled to mature within one year and
approximately $4.3 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        
|                                         |                                                |   |              
|                                         |                                                |   | June 29, 2002 |         | March 31, 2002 |   | June 30, 2001
|                                         |                                                |   |               |         |                |   |              
|Leasehold improvements                   |                                                | $ | 5,151         |         |                | $ | 5,869         |         |   | $ | 1,897  |        
|Office furniture, equipment and software |                                                |   | 15,937        |         |                |   | 14,459        |         |   |   | 12,340 |        
|Warehouse equipment                      |                                                |   | 11,736        |         |                |   | 11,625        |         |   |   | 10,036 |        
|                                         |                                                |   |               |         |                |   |               |         |   |   |        |        
|                                         |                                                |   | 32,824        |         |                |   | 31,953        |         |   |   | 24,273 |        
|                                         | Less accumulated depreciation and
amortization |   |               | (17,347 | )              |   |               | (16,001 | ) |   |        | (13,087 | )
|                                         |                                                |   |               |         |                |   |               |         |   |   |        |        
|                                         |                                                |   | 15,477        |         |                |   | 15,952        |         |   |   | 11,186 |        
|Assets not yet placed in service         |                                                |   | 18,311        |         |                |   | 15,031        |         |   |   | 9,868  |        
|                                         |                                                |   |               |         |                |   |               |         |   |   |        |        
|Property and equipment, net              |                                                | $ | 33,788        |         |                | $ | 30,983        |         |   | $ | 21,054 |        
|                                         |                                                |   |               |         |                |   |               |         |   |   |        |        

We account for our internal-use software in accordance with Statement of
Position (SOP) 98-1, Accounting for Costs of Computer Software Developed or
Obtained for Internal Use. SOP 98-1 requires capitalization of certain costs
incurred in the development of internal-use software, including external direct
material and service costs, employee payroll and payroll-related costs.

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
$18.1 million, $14.4 million and $9.2 million at June 29, 2002, March 31, 2002
and June 30, 2001, respectively. Once these systems are placed in service, the
related costs that have accumulated will be depreciated on a straight-line
basis over a seven-year period, the expected life of the assets. A significant
portion of these upgraded systems have been placed in service in the second
quarter of Fiscal 2003.

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

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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 $1.3 million. During Fiscal 2002, we capitalized
an additional $0.1 million in costs related to the acquisition, bringing our
total investment to 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 first quarter of Fiscal 2003, we recognized $0.3 million 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.

Equity Transactions

On July 22, 1999, we adopted a stock repurchase program pursuant to which we
may repurchase in the open market or private transactions, from time to time,
based upon existing market conditions, shares of our Common Stock not to exceed
450,000 shares. On March 16, 2000, we announced that our Board of Directors had
approved an increase in the repurchase program of 525,000 shares. On July 27,
2000, our Board of Directors approved an additional 525,000-share increase in
the repurchase program and on May 25, 2001, our Board of Directors approved an
additional 350,000-share increase in our stock repurchase program. Under the
plan, we have repurchased a total of approximately 1,312,275 shares through
June 29, 2002 at an average market price of approximately $10.71. The
repurchase program has no expiration date and will be financed through internal
cash flows.

We recognize deferred compensation for certain stock options granted under our
Stock Option Plan. The compensation is being amortized over the vesting period
of the options, and we have expensed approximately $56,000 and $55,000 for the
three months ended June 29, 2002 and June 30, 2001, respectively. The net
balance of the remaining deferred compensation amounted to approximately
$553,000, $609,000 and $782,000 at June 29, 2002, March 31, 2002 and June 30,
2001, respectively, and has been recorded as a separate component of
Stockholders Equity in the accompanying Condensed Consolidated Balance Sheets.

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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.

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 $29.0
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 intangible assets, consisting of a
publishers list and a trade name, which will be amortized over their estimated
useful lives, determined to be 20 years. Intangible assets amounted to
approximately $3.3 million and $3.3 million, net of accumulated amortization of
approximately $70,000 and $28,000, at June 29, 2002 and March 31, 2002,
respectively. At June 29, 2001, we did not have any intangible assets.

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 unless, at businesses one level below that operating segment (the
component level), discrete financial information is prepared and regularly
reviewed by management, in which case such component is the reporting unit. We
plan to complete our initial impairment test by September 30, 2002.

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.

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4. ACQUISITIONS (continued)

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.

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
|                                                         |  |                   
|                                                         |  | June 29,           |        | June 30,
|                                                         |  | 2002               |        | 2001    
|                                                         |  |                    |        |         
|Net Income                                               |  | $                  | 2,389  |          |  | $ | 3,086  | 
|                                                         |  |                    |        |          |  |   |        | 
|Weighted Average Common Shares Outstanding               |  |                    | 19,284 |          |  |   | 19,052 | 
|Basic Earnings Per Share                                 |  | $                  | 0.12   |          |  | $ | 0.16   | 
|                                                         |  |                    |        |          |  |   |        | 
|Weighted Average Common Shares Outstanding               |  |                    | 19,284 |          |  |   | 19,052 | 
|Dilutive Common Stock Options                            |  |                    | 898    |          |  |   | 771    | 
|                                                         |  |                    |        |          |  |   |        | 
|Total Diluted Weighted Average Common Shares Outstanding |  |                    | 20,182 |          |  |   | 19,823 | 
|                                                         |  |                    |        |          |  |   |        | 
|Diluted Earnings Per Share                               |  | $                  | 0.12   |          |  | $ | 0.16   | 
|                                                         |  |                    |        |          |  |   |        | 

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.

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7. COMMITMENTS AND CONTINGENCIES

Operating leases

We lease facilities and certain equipment under non-cancelable operating
leases. Rent expense for the three months ended June 29, 2002 and June 30, 2001
amounted to approximately $2.2 million and $1.5 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.

8. SEGMENT AND GEOGRAPHICAL INFORMATION

Our business, consisting of wholesale, distribution and publishing activities,
exhibits similar economic characteristics across these activities and, as
such, management has determined that we operate in a single 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
|               |  |                   
|               |  | June 29, 2002      |         | June 30, 2001
|               |  |                    |         |              
|United States  |  | $                  | 174,697 |               |  | $ | 133,555 | 
|United Kingdom |  |                    | 13,888  |               |  |   | 11,077  | 
|Mexico         |  |                    | 1,839   |               |  |   | 1,584   | 
|Australia      |  |                    | 1,319   |               |  |   | 762     | 
|Singapore      |  |                    | 112     |               |  |   |        | 
|               |  |                    |         |               |  |   |         | 
|               |  | $                  | 191,855 |               |  | $ | 146,978 | 
|               |  |                    |         |               |  |   |         | 

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

|               |  |               |         |                |  |               |         |  |  |   |         | 
|-------------- |  | ------------- | ------- | -------------- |  | ------------- | ------- |  |  | - | ------- | 
|               |  | As of        
|               |  |              
|               |  | June 29, 2002 |         | March 31, 2002 |  | June 30, 2001
|               |  |               |         |                |  |              
|United States  |  | $             | 369,080 |                |  | $             | 367,187 |  |  | $ | 291,921 | 
|United Kingdom |  |               | 29,505  |                |  |               | 25,437  |  |  |   | 25,684  | 
|Mexico         |  |               | 4,680   |                |  |               | 4,760   |  |  |   | 4,112   | 
|Australia      |  |               | 5,843   |                |  |               | 5,165   |  |  |   | 4,302   | 
|Singapore      |  |               | 412     |                |  |               | 303     |  |  |   |        | 
|               |  |               |         |                |  |               |         |  |  |   |         | 
|               |  | $             | 409,520 |                |  | $             | 402,852 |  |  | $ | 326,019 | 
|               |  |               |         |                |  |               |         |  |  |   |         | 

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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 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. Goodwill amortization
expense for the three months ended June 30, 2001 was approximately $120,000.
The effect of excluding such goodwill
amortization from the first quarter of Fiscal 2002 would have
increased our basic earnings per share by $0.01 and would have had
no effect on our dilutive earnings per share. We plan to complete our initial impairment test by September 30, 2002.

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 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 for the quarters ended June
29, 2002 and June 30, 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 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 also the largest independent
contract distributor for small-to-medium size publishers in North America.

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
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 $6.2 million as of
June 29, 2002, $6.5 million as of March 31, 2002, and $3.5 million as of June
30, 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 may be required to record
additional allowances or write-off all or a portion of the amount due
us. We have also
provided allowances for uncollectible trade accounts receivable of $2.7 million
as of June 29, 2002 and March 31, 2002 and $2.5 million as of June 30, 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 or
distribution fee 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 direct 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 direct 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 June 29, 2002 and June 30, 2001:

Net income for the quarter ended June 29, 2002 amounted to $2.4 million, or
$0.12 per diluted share, down from $3.1 million, or $0.16 per diluted share,
for the same quarter of the prior fiscal year. The decrease in net income was
attributable primarily to the timing of some shipments to wholesale customers
during the last weeks of the quarter, less than anticipated gross margin for
the quarter related to lower shipments in high margin categories, and expected
increases in infrastructure costs.

For the first quarter of Fiscal 2003, our net sales increased 31% to $191.9
million, from $147.0 million for the same quarter of the prior fiscal year.
Net sales reflects the invoiced amounts of products shipped and related
fulfillment services provided, less reserves for estimated returns, actual
returns and discounts. The 31.0% or $44.9 million increase in net sales
generally can be attributed to the following factors: $27.8 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 quarter of the prior fiscal
year; $9.1 million related to increased shipments to our domestic wholesale
customers; $4.3 million related to advertising revenue as part of our
co-operative advertising programs; and $3.7 million related to an increase in
net sales at our international subsidiaries, primarily in the UK and Mexico.
The increases in our UK and Mexico divisions are due to continued growth in our
wholesale activities.

We experienced a worldwide return rate of 24.0% from customers during the first
quarter of Fiscal 2003, compared to a return rate of 23.0% during the same
period of the prior fiscal year. The 1.0 percentage point increase was
primarily a result of the inclusion of PGW, which historically has
experienced higher
return rates than our wholesale activities. A partial offset to the increase
was a 0.5 percentage point reduction in our US wholesale return rate.
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 aforementioned return figures.

Gross profit for the three-month period ended June 29, 2002 was $29.4 million,
an increase of $8.1 million, or 38.0%, over the first quarter of Fiscal 2002.
Gross profit as a percentage of net sales increased to 15.3% in the first
quarter of Fiscal 2003 from 14.5% during the same period in the prior fiscal
year. Gross profit as a percent of sales increased, primarily due to an
increase in higher margin activities, including contributions from PGW and
increases in margin at certain international subsidiaries, offset by decreases
in margin for certain categories in our domestic wholesale operation.

Distribution and administrative expenses increased to $25.8 million for the
three-month period ended June 29, 2002 from $16.4 million during the same
period of Fiscal 2002. As a percentage of net sales, these expenses rose to
13.5% from 11.2% in the same period of the prior fiscal year, a 2.3 percentage
point increase. This increase was primarily as a result of the inclusion of
PGWs distribution and administrative expenses that are higher as a percentage
of sales than historical AMS levels.

Interest income decreased to $0.2 million in the first quarter of Fiscal 2003
from $0.5 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 $0.3 million for the period
ended June 29, 2002, primarily from a favorable change in the fair value of
stock appreciation rights issued in connection with certain acquisitions of
approximately $282,000 and approximately $22,000 of interest expense related to
our lines of credit. The interest expense is net of approximately $140,000
capitalized in connection with our ongoing systems development projects.

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B. RESULTS OF OPERATIONS(continued)Three Months Ended June 29, 2002 and June 30, 2001:

Provision for income taxes decreased to $1.5 million in the current quarter
from $2.0 million in the same quarter of the previous fiscal year. The
decrease reflects the decline 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 39.25%.

Seasonality

As is the case for many retailers, 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

At June 29, 2002, our cash and cash equivalents had decreased by $14.7 million
as compared to the quarter ended June 30, 2001, primarily due to funding of the
PGW acquisition and investments in our corporate infrastructure.

For the three months ended June 29, 2002, operating activities used $3.5
million in cash. For the quarter ended June 30, 2001, operating activities
provided $3.0 million of cash. Trade accounts receivable decreased $6.4
million for the quarter ended June 29, 2002, as compared to the $2.4 million
decrease in trade accounts receivable for the quarter ended June 30, 2001. We
typically experience a decrease in accounts receivable levels between March 31
and the end of the first quarter as a result of timing and seasonality. The
$4.0 million change in the decreases between the first quarters of Fiscal 2003
and Fiscal 2002 was a result of timing as well. Overall, the accounts
receivable balance had increased by $53.1 million at June 29, 2002 as compared
to June 30, 2001. This increase was driven by the addition of PGW, overall
growth in sales of our wholesale business quarter-over-quarter, and increases
in sales volume at our international subsidiaries. Inventory levels at June
29, 2002 were $143.3 million, an increase of $21.1 million from inventory
levels at March 31, 2002, which was a decrease of $4.9 million from the $26.0
increase in inventories for the three months ended June 30, 2001. The $21.1
million increase was primarily due to increases in inventory levels to meet
anticipated seasonal customer demand, offset by our continuing improvement in
selling through slow-moving books and improved buying decisions on
non-returnable inventory purchases. Inventory turns increased to 4.9 times
during the first quarter of Fiscal 2003, or 4.2 times excluding PGWs cost of
goods sold, as compared to 3.8 times in the same quarter of Fiscal 2002. PGW
holds inventory on consignment, resulting in improved inventory turnover for
the Company. In addition, the improvement in inventory turns was a result of
purchasing efficiencies gained from a better understanding of our customers
needs through the use of our proprietary VMI software program and improved
inventory management.

Net cash used in investing activities during the quarter ended June 29, 2002
amounted to $4.3 million, most of which was used to fund capital investments
related to our efforts to upgrade our management information systems and expand
our distribution capacity. For the three months ended June 30, 2001, investing
activities used $6.6 million, of which $4.1 million was used to purchase
capital assets and $1.3 million was used to acquire an equity interest in
Templar as part of our strategic plan to grow in diversified higher margin
business.

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C. LIQUIDITY AND SOURCES OF CAPITAL(continued)

Financing activities used net cash of $1.9 million for the three months ended
June 29, 2002 that resulted primarily from $2.0 million repaid on our lines of
credit, offset by proceeds of $0.1 million from the exercise of options. For
the three months ended June 30, 2001, financing activities provided net cash of
$0.8 million, which was primarily the result of the proceeds from the exercise
of options.

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 historically have 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. A second secured revolving credit agreement,
also amended on July 10, 2002, provides for up to $23.0 million through the
March 31, 2003 maturity date, secured by eligible accounts receivable.
Borrowings under both revolving credit agreements bear interest at the banks
prime rate or LIBOR +1.5% (3.4% at June 29, 2002). We are required to pay an
unused loan fee of 1/4 of 1% on any portion of the loan 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 revolving credit agreement are collateralized by all of our accounts
receivable. We had outstanding borrowings of $23.0 million with an additional
$12.0 million available, but not drawn, at June 29, 2002 under our bank lines
of credit.

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

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 profits 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.

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PART II. OTHER INFORMATION

ITEMS 1-3. NOT APPLICABLE




ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held on July 25, 2002. Robert F.
Bartlett (17,272,488 votes for; 935,189 against), Lynn S. Dawson (17,272,488
votes for; 935,189 against) and Trygve E. Myhren (17,272,488 votes for; 935,189
against) were elected as Class C directors, each to serve a three-year term,
and will serve until their respective successors are elected and qualified.

The directors whose terms of office continued after the meeting are Charles C.
Tillinghast, III, Michael M. Nicita, Loren C. Paulsen, Bruce E. Grout, James A.
Leidich and E. William Swanson Jr.

In addition, the stockholders approved the following proposals:



|1. |  | A proposal to amend our 1995 Stock Option Plan to increase by 400,000 the
number of shares of common stock reserved for issuance. There were
15,887,957 votes in favor of and 2,288,413 against the adoption of this
proposal, with 31,307 abstentions and broker non-votes.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Ratification of the selection of Deloitte & Touche LLP as our independent
auditors for the fiscal year ending March 31, 2003. There were 18,091,742
votes for and 114,671 votes against ratification, with 1,264 abstentions
and broker non-votes.                          




ITEM 5. OTHER INFORMATION

On July 22, 1999, we adopted a stock repurchase program pursuant to which we
may repurchase in open market or private transactions, from time to time, based
upon existing market conditions, shares of our Common Stock having an aggregate
cost not to exceed $5.0 million or 450,000 shares. On March 16, 2000, we
announced that our Board of Directors had approved a 525,000 share increase in
the repurchase program. 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 number of shares of Common Stock currently
remaining authorized for repurchase under the plan is approximately 538,000
shares. Under the plan, we have repurchased approximately 1,312,000 shares at
an average market price of approximately $10.71. The repurchase program has no
expiration date and will be financed through internal funds.

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



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

|            |  |                                                                                                                                                                                          
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  |                                                                                                                                                                                          
|            |  |                                                                                                                                                                                          
|10.1        |  | Loan Modification Agreement, dated as of July 10,
2002, between Advanced Marketing Services, Inc. and
California Bank & Trust re modification of $12.0 million
Loan Agreement            
|           
|10.2        |  | Loan Modification Agreement, dated as of July 10,
2002, between Advanced Marketing Services, Inc. and
California Bank & Trust re modification of $23.0 million
Revolving Credit Agreement
|           
|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
| | -------------------------------------------



|August 12, 2002 | By: | /s/ Michael M. Nicita                                                               
|--------------- | --- | ------------------------------------------------------------------------------------
|Date            |     | Michael M. Nicita
Chief Executive Officer and Director
(principal executive officer)



|August 12, 2002 | By: | /s/ Edward J. Leonard                                                                                                            
|--------------- | --- | ---------------------------------------------------------------------------------------------------------------------------------
|Date            |     | Edward J. Leonard
Executive Vice President and
Chief Financial Officer and Secretary
(principal financial and accounting officer)

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