##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarter ended December 28, 2002

Commission File Number: 0-16002

ADVANCED MARKETING SERVICES, INC.

(Exact name of registrant as specified in its charter)


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

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

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

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

YES X    NO


The number of shares of the Registrants Common Stock outstanding as of January
31, 2003 was approximately 19,055,000 net of treasury shares of approximately
4,097,000.





---

TABLE OF CONTENTS



|                              |                                                                                               |                                                      |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                          
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS               
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME         
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                              | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II - OTHER INFORMATION  
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                      
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS                                
|                              | ITEM 5. OTHER INFORMATION                                                                    
|                              | ITEM 6. EXHIBITS AND REPORTS                                                                 
|SIGNATURES                   
|EXHIBIT 10.1                 
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



---



##### Table of Contents



ADVANCED MARKETING SERVICES, INC.

Index to Form 10-Q
December 28, 2002

|                                                                                              |                                                                  |  |    |   |      |  | 
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- |  | -- | - | ---- |  | 
|                                                                                              |                                                                  |  |    |   | Page
|                                                                                              |                                                                  |  |    |   |     
|PART I. FINANCIAL INFORMATION                                                                
|ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                           |                                                                  |  |    |  
|                                                                                              | Condensed Consolidated Balance Sheets (Unaudited)                |  |    | 3 |     
|                                                                                              | Condensed Consolidated Statements of Income (Unaudited)          |  |    | 4 |     
|                                                                                              | Condensed Consolidated Statements of Cash Flows (Unaudited)      |  |    | 5 |     
|                                                                                              | Notes to Condensed Consolidated Financial Statements (Unaudited) |  |    | 6 |     
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS |                                                                  |  | 16 |  
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK                            |                                                                  |  | 25 |  
|ITEM 4. CONTROLS AND PROCEDURES                                                               |                                                                  |  | 25 |  
|PART II. OTHER INFORMATION                                                                   
|ITEM 1. LEGAL PROCEEDINGS                                                                     |                                                                  |  | 26 |  
|ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                             |                                                                  |  | 26 |  
|ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                                       |                                                                  |  | 26 |  
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |                                                                  |  | 26 |  
|ITEM 5. OTHER INFORMATION                                                                     |                                                                  |  | 26 |  
|ITEM 6. EXHIBITS AND REPORTS                                                                  |                                                                  |  | 27 |  
|SIGNATURES                                                                                    |                                                                  |  | 27 |  

2



---



##### 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)

|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ------- | --------- |  | -------- | ------- | - |  | - | ------- | -
|                                                                                                                                                                                             |  | Dec. 28, |         | March 31, |  | Dec. 29,
|                                                                                                                                                                                             |  | 2002     |         | 2002      |  | 2001    
|                                                                                                                                                                                             |  |          |         |           |  |         
|                                                                                                                                                                                             |  | (Note)  
|ASSETS                                                                                                                                                                                       |  |          |         |           |  |          |         |   |  |   |         |  
|Current Assets:                                                                                                                                                                              |  |          |         |           |  |          |         |   |  |   |         |  
|Cash and Cash Equivalents                                                                                                                                                                    |  | $        | 13,139  |           |  | $        | 21,115  |   |  | $ | 28,256  |  
|Investments, Available-for-Sale (Note 3)                                                                                                                                                     |  |          | 302     |           |  |          | 2,010   |   |  |   | 2,116   |  
|Accounts Receivable, Net of Allowances for
Uncollectible Accounts and
Sales Returns of $10,621 at December 28,
2002, $9,239 at March 31,
2002 and $7,061 at December 29, 2001                |  |          | 181,884 |           |  |          | 156,193 |   |  |   | 157,314 |  
|Vendor and Other Receivables                                                                                                                                                                 |  |          | 5,574   |           |  |          | 6,485   |   |  |   | 2,835   |  
|Inventories                                                                                                                                                                                  |  |          | 192,255 |           |  |          | 123,904 |   |  |   | 136,636 |  
|Deferred Income Taxes                                                                                                                                                                        |  |          | 5,161   |           |  |          | 7,242   |   |  |   | 6,486   |  
|Prepaid Expenses                                                                                                                                                                             |  |          | 3,978   |           |  |          | 3,439   |   |  |   | 2,552   |  
|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  
|Total Current Assets                                                                                                                                                                         |  |          | 402,293 |           |  |          | 320,388 |   |  |   | 336,195 |  
|Goodwill (Note 3)                                                                                                                                                                            |  |          | 38,539  |           |  |          | 37,444  |   |  |   | 8,633   |  
|Property and Equipment, Net (Note 3)                                                                                                                                                         |  |          | 33,049  |           |  |          | 30,983  |   |  |   | 26,350  |  
|Investments, Available-for-Sale (Note 3)                                                                                                                                                     |  |          | 867     |           |  |          | 3,631   |   |  |   | 3,145   |  
|Other Assets (Note 3)                                                                                                                                                                        |  |          | 10,641  |           |  |          | 10,406  |   |  |   | 6,882   |  
|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  
|TOTAL ASSETS                                                                                                                                                                                 |  | $        | 485,389 |           |  | $        | 402,852 |   |  | $ | 381,205 |  
|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                         |  |          |         |           |  |          |         |   |  |   |         |  
|Current Liabilities:                                                                                                                                                                         |  |          |         |           |  |          |         |   |  |   |         |  
|Lines of Credit (Note 3)                                                                                                                                                                     |  | $        | 12,000  |           |  | $        | 25,000  |   |  | $ |        |  
|Accounts Payable                                                                                                                                                                             |  |          | 301,718 |           |  |          | 223,960 |   |  |   | 229,327 |  
|Accrued Liabilities                                                                                                                                                                          |  |          | 22,054  |           |  |          | 20,046  |   |  |   | 18,418  |  
|Income Taxes Payable                                                                                                                                                                         |  |          | 4,464   |           |  |          | 1,522   |   |  |   | 5,417   |  
|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  
|Total Current Liabilities                                                                                                                                                                    |  |          | 340,236 |           |  |          | 270,528 |   |  |   | 253,162 |  
|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  
|Commitments and Contingencies (Note 7)                                                                                                                                                       |  |          |         |           |  |          |         |   |  |   |         |  
|Stockholders Equity:                                                                                                                                                                        |  |          |         |           |  |          |         |   |  |   |         |  
|Common Stock, $0.001 Par Value, Authorized
100,000,000 Shares,
Issued 23,150,000 Shares at December 28,
2002, 23,009,000 Shares at
March 31, 2002 and 22,907,000 Shares at
December 29, 2001 |  |          | 23      |           |  |          | 23      |   |  |   | 23      |  
|Additional Paid-In Capital                                                                                                                                                                   |  |          | 38,190  |           |  |          | 37,551  |   |  |   | 35,392  |  
|Deferred Compensation (Note 3)                                                                                                                                                               |  |          | (443    | )         |  |          | (609    | ) |  |   | (664    | )
|Retained Earnings, net of common stock dividends                                                                                                                                             |  |          | 129,096 |           |  |          | 113,503 |   |  |   | 111,247 |  
|Cumulative Other Comprehensive Loss (Note 2)                                                                                                                                                 |  |          | (250    | )         |  |          | (1,953  | ) |  |   | (1,764  | )
|Less: Treasury Stock, 4,097,000 Shares at
December 28, 2002,
3,734,000 Shares at March 31, 2002 and
December 29, 2001, at Cost                                                               |  |          | (21,463 | )         |  |          | (16,191 | ) |  |   | (16,191 | )
|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  
|Total Stockholders Equity                                                                                                                                                                   |  |          | 145,153 |           |  |          | 132,324 |   |  |   | 128,043 |  
|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                   |  | $        | 485,389 |           |  | $        | 402,852 |   |  | $ | 381,205 |  
|                                                                                                                                                                                             |  |          |         |           |  |          |         |   |  |   |         |  

Note: The balance sheet at March 31, 2002 has
been derived from the audited financial
statements at that date but does not include all of the information and
footnotes required by accounting principles
generally accepted in the United States for complete financial statements.

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

3



---



##### Table of Contents






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

|                                             |                                          |   |        |         |                    |   |                   |         |              |   |              |         |   |   |        |         |   |  | 
|-------------------------------------------- | ---------------------------------------- | - | ------ | ------- | ------------------ | - | ----------------- | ------- | ------------ | - | ------------ | ------- | - | - | ------ | ------- | - |  | 
|                                             |                                          |   |        |         | Three Months Ended |   | Nine Months Ended
|                                             |                                          |   |        |         |                    |   |                  
|                                             |                                          |   |        |         | Dec. 28,2002       |   | Dec. 29,2001      |         | Dec. 28,2002 |   | Dec. 29,2001
|                                             |                                          |   |        |         |                    |   |                   |         |              |   |             
|                                             | Net Sales                                |   | $      | 294,833 |                    |   | $                 | 267,105 |              |   | $            | 705,893 |   |   | $      | 578,286 |  
|                                             | Cost of Goods Sold                       |   |        | 243,431 |                    |   |                   | 223,384 |              |   |              | 588,679 |   |   |        | 487,951 |  
|                                             |                                          |   |        |         |                    |   |                   |         |              |   |              |         |   |   |        |         |  
|Gross Profit                                 |                                          |   | 51,402 |         |                    |   | 43,721            |         |              |   | 117,214      |         |   |   | 90,335 |        
|                                             | Distribution and Administrative Expenses |   |        | 37,222  |                    |   |                   | 22,361  |              |   |              | 92,414  |   |   |        | 58,426  |  
|                                             |                                          |   |        |         |                    |   |                   |         |              |   |              |         |   |   |        |         |  
|Income From Operations                       |                                          |   | 14,180 |         |                    |   | 21,360            |         |              |   | 24,800       |         |   |   | 31,909 |        
|                                             | Interest Income                          |   |        | 159     |                    |   |                   | 332     |              |   |              | 574     |   |   |        | 1,074   |  
|                                             | Equity in Net Income of Affiliates       |   |        | 358     |                    |   |                   | 319     |              |   |              | 350     |   |   |        | 274     |  
|                                             | Interest Expense and Other, Net          |   |        | (286    | )                  |   |                   | (168    | )            |   |              | (56     | ) |   |        | (221    | )
|                                             |                                          |   |        |         |                    |   |                   |         |              |   |              |         |   |   |        |         |  
|Income Before Provision for Income Taxes     |                                          |   | 14,411 |         |                    |   | 21,843            |         |              |   | 25,668       |         |   |   | 33,036 |        
|                                             | Provision for Income Taxes               |   |        | 5,656   |                    |   |                   | 8,573   |              |   |              | 10,075  |   |   |        | 12,966  |  
|                                             |                                          |   |        |         |                    |   |                   |         |              |   |              |         |   |   |        |         |  
|Net Income                                   |                                          | $ | 8,755  |         |                    | $ | 13,270            |         |              | $ | 15,593       |         |   | $ | 20,070 |        
|                                             |                                          |   |        |         |                    |   |                   |         |              |   |              |         |   |   |        |         |  
|Net Income Per Share:                        |                                          |   |        |         |                    |   |                   |         |              |   |              |         |   |   |        |        
|                                             | Basic                                    |   | $      | 0.46    |                    |   | $                 | 0.69    |              |   | $            | 0.81    |   |   | $      | 1.05    |  
|                                             | Diluted                                  |   | $      | 0.45    |                    |   | $                 | 0.67    |              |   | $            | 0.79    |   |   | $      | 1.01    |  
|Weighted Average Shares Used in Calculation: |                                          |   |        |         |                    |   |                   |         |              |   |              |         |   |   |        |        
|                                             | Basic                                    |   |        | 19,004  |                    |   |                   | 19,130  |              |   |              | 19,133  |   |   |        | 19,098  |  
|                                             | Diluted                                  |   |        | 19,624  |                    |   |                   | 19,887  |              |   |              | 19,835  |   |   |        | 19,851  |  

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

4



---



##### Table of Contents






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

|                                                                                  |                                                        |                      |                |              |         |                   |         |          |         |   |       | 
|--------------------------------------------------------------------------------- | ------------------------------------------------------ | -------------------- | -------------- | ------------ | ------- | ----------------- | ------- | -------- | ------- | - | ----- | 
|                                                                                  |                                                        |                      |                |              |         | Nine Months Ended
|                                                                                  |                                                        |                      |                |              |         |                  
|                                                                                  |                                                        |                      |                |              |         | Dec. 28,          |         | Dec. 29,
|                                                                                  |                                                        |                      |                |              |         | 2002              |         | 2001    
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|Net Income                                                                        |                                                        | $                    | 15,593         |              |         | $                 | 20,070  |         
|Adjustments to reconcile net income
to net cash provided by operating activities: |                                                        |                      |                |              |         |                   |         |         
|                                                                                  | Equity in net income of affiliates                     |                      |                | (350         | )       |                   |         | (274     | )      
|                                                                                  | Depreciation and amortization                          |                      |                | 4,996        |         |                   |         | 3,241    |        
|                                                                                  | Loss on disposal of equipment                          |                      |                | 103          |         |                   |         |         |        
|                                                                                  | Provision for uncollectible accounts and sales returns |                      |                | 1,382        |         |                   |         | 1,439    |        
|                                                                                  | Markdown of inventories                                |                      |                | 2,072        |         |                   |         | 751      |        
|                                                                                  | Deferred income taxes                                  |                      |                | 2,081        |         |                   |         | 711      |        
|                                                                                  | Amortization of deferred compensation                  |                      |                | 166          |         |                   |         | 166      |        
|Changes in working capital components:                                            |                                                        |                      |                |              |         |                   |         |         
|                                                                                  | (Increase) in:                                         |                      |                |              |         |                   |         |          |        
|                                                                                  |                                                        | Accounts receivable  |                |              | (25,702 | )                 |         |          | (52,877 | )
|                                                                                  |                                                        | Inventories          |                |              | (69,407 | )                 |         |          | (16,009 | )
|                                                                                  |                                                        | Other assets         |                |              | (406    | )                 |         |          | (1,356  | )
|                                                                                  | Increase in:                                           |                      |                |              |         |                   |         |          |        
|                                                                                  |                                                        | Accounts payable     |                |              | 76,587  |                   |         |          | 50,976  |  
|                                                                                  |                                                        | Accrued liabilities  |                |              | 1,576   |                   |         |          | 3,667   |  
|                                                                                  |                                                        | Income taxes payable |                |              | 2,945   |                   |         |          | 2,256   |  
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|Net cash provided by operating activities                                         |                                                        |                      | 11,636         |              |         |                   | 12,761  |         
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|                                                                                  | Purchases of property and equipment                    |                      |                | (6,806       | )       |                   |         | (11,523  | )      
|                                                                                  | Investment in equity of affiliate                      |                      |                |             |         |                   |         | (1,383   | )      
|                                                                                  | Purchase of investments, available-for-sale            |                      |                | (1,457       | )       |                   |         | (5,483   | )      
|                                                                                  | Sale and redemption of investments, available-for-sale |                      |                | 5,958        |         |                   |         | 4,621    |        
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|Net cash used in investing activities                                             |                                                        |                      | (2,305         | )            |         |                   | (13,768 | )       
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|                                                                                  | Payments on lines of credit                            |                      |                | (13,000      | )       |                   |         |         |        
|                                                                                  | Proceeds
from exercise of stock options                |                      |                | 639          |         |                   |         | 1,399    |        
|                                                                                  | Purchase of treasury stock                             |                      |                | (5,272       | )       |                   |         | (988     | )      
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|Net cash (used in) provided by financing activities                               |                                                        |                      | (17,633        | )            |         |                   | 411     |         
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|Effect of exchange rate changes on Cash and Cash Equivalents                      |                                                        |                      | 326            |              |         |                   | (922    | )       
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|Net Decrease in Cash and Cash Equivalents                                         |                                                        |                      | (7,976         | )            |         |                   | (1,518  | )       
|CASH AND CASH EQUIVALENTS, Beginning of period                                    |                                                        |                      | 21,115         |              |         |                   | 29,774  |         
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|CASH AND CASH EQUIVALENTS, End of period                                          |                                                        | $                    | 13,139         |              |         | $                 | 28,256  |         
|                                                                                  |                                                        |                      |                |              |         |                   |         |         
|Supplemental Disclosures of Cash Flow Information:                                |                                                        |                      |                |              |         |                   |         |         
|                                                                                  |                                                        |                      | Cash Paid For: |              |         |                   |         |          |         |   |      
|                                                                                  |                                                        |                      |                | Income Taxes |         | $                 | 5,463   |          |         | $ | 9,125 | 
|                                                                                  |                                                        |                      |                | Interest     |         | $                 | 695     |          |         | $ |      | 

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

5



---



##### Table of Contents






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

1. BASIS OF PRESENTATION

The accompanying interim Condensed Consolidated Financial Statements as of and
for the three and nine month periods ended December 28, 2002 and December 29,
2001 have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial statements and
with the instructions to Form 10-Q, without an audit by our independent public
accountants, and, therefore, do not include all the information and footnotes
necessary for a fair presentation of consolidated financial position, results
of operations and cash flows in accordance with accounting principles generally
accepted in the United States of America. Reference should be made to the
annual financial statements, including footnotes thereto, included in the
Advanced Marketing Services, Inc. (AMS, we, us and our) Annual Report on Form
10-K, for the fiscal year ended March 31, 2002. The accompanying unaudited
Condensed Consolidated Financial Statements include all adjustments, consisting
of normal recurring adjustments, which, in our managements opinion, are
necessary for a fair presentation. Our management believes that the
disclosures included in the accompanying Condensed Consolidated Financial
Statements and footnotes thereto 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 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 may affect amounts reported as assets and
liabilities, and the disclosure of contingent assets and liabilities at the
date of the financial statements and amounts reported as revenues and expenses
during the reporting periods. 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.

6



---



##### Table of Contents



2. COMPREHENSIVE INCOME

Comprehensive income is summarized as follows (in thousands):

|                     |                                          |   |                    |     |                   |   |          |     |          |   |        |       |  |   |        |      |  
|-------------------- | ---------------------------------------- | - | ------------------ | --- | ----------------- | - | -------- | --- | -------- | - | ------ | ----- |  | - | ------ | ---- | -
|                     |                                          |   | Three Months Ended |     | Nine Months Ended
|                     |                                          |   |                    |     |                  
|                     |                                          |   | Dec. 28,           |     | Dec. 29,          |   | Dec. 28, |     | Dec. 29,
|                     |                                          |   | 2002               |     | 2001              |   | 2002     |     | 2001    
|                     |                                          |   |                    |     |                   |   |          |     |         
|Net Income           |                                          | $ | 8,755              |     |                   | $ | 13,270   |     |          | $ | 15,593 |       |  | $ | 20,070 |     
|                     | Foreign Currency Translation Adjustment  |   |                    | 691 |                   |   |          | (81 | )        |   |        | 1,674 |  |   |        | (917 | )
|                     | Unrealized Gains/(Losses) on Investments |   |                    | (15 | )                 |   |          | 22  |          |   |        | 29    |  |   |        | (5   | )
|                     |                                          |   |                    |     |                   |   |          |     |          |   |        |       |  |   |        |     
|Comprehensive Income |                                          | $ | 9,431              |     |                   | $ | 13,211   |     |          | $ | 17,296 |       |  | $ | 19,148 |     
|                     |                                          |   |                    |     |                   |   |          |     |          |   |        |       |  |   |        |     

We do not provide for U.S. 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 consists principally of debt securities issued
by the U.S. federal government 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):

|                  |  |           |       |                  |  |                   |    |            |  |   |     |   |  |   |       | 
|----------------- |  | --------- | ----- | ---------------- |  | ----------------- | -- | ---------- |  | - | --- | - |  | - | ----- | 
|                  |  | Amortized |       | Gross            |  | Gross             |    | Estimated 
|                  |  | Cost      |       | Unrealized Gains |  | Unrealized Losses |    | Fair Value
|                  |  |           |       |                  |  |                   |    |           
|December 28, 2002 |  | $         | 1,147 |                  |  | $                 | 22 |            |  | $ |    |   |  | $ | 1,169 | 
|                  |  |           |       |                  |  |                   |    |            |  |   |     |   |  |   |       | 
|March 31, 2002    |  | $         | 5,648 |                  |  | $                 |   |            |  | $ | (7  | ) |  | $ | 5,641 | 
|                  |  |           |       |                  |  |                   |    |            |  |   |     |   |  |   |       | 
|December 29, 2001 |  | $         | 5,249 |                  |  | $                 | 33 |            |  | $ | (21 | ) |  | $ | 5,261 | 
|                  |  |           |       |                  |  |                   |    |            |  |   |     |   |  |   |       | 

As of December 28, 2002, we had investments in debt securities amounting to
approximately $0.3 million that were scheduled to mature within one year and
approximately $0.9 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.

7



---



##### Table of Contents



3. COMPONENTS OF CERTAIN BALANCE
SHEET CAPTIONS (continued)

Goodwill

|                        |  |               |        |                |  |               |        |  |  |   |       | 
|----------------------- |  | ------------- | ------ | -------------- |  | ------------- | ------ |  |  | - | ----- | 
|                        |  | As of        
|                        |  |              
|                        |  | Dec. 28, 2002 |        | March 31, 2002 |  | Dec. 29, 2001
|                        |  |               |        |                |  |              
|Goodwill United States  |  | $             | 31,532 |                |  | $             | 31,041 |  |  | $ | 2,120 | 
|Goodwill United
Kingdom |  |               | 5,537  |                |  |               | 5,052  |  |  |   | 5,136 | 
|Goodwill Australia      |  |               | 1,470  |                |  |               | 1,351  |  |  |   | 1,377 | 
|                        |  |               |        |                |  |               |        |  |  |   |       | 
|Total Goodwill          |  | $             | 38,539 |                |  | $             | 37,444 |  |  | $ | 8,633 | 
|                        |  |               |        |                |  |               |        |  |  |   |       | 

Goodwill increased by a net of approximately $1.1 million for the nine months
ended December 28, 2002 as a result of the purchase price adjustment relating
to the acquisition of Publishers Group West, Incorporated (PGW), which we
acquired in January 2002, and foreign exchange rate fluctuations. Goodwill
increased by a net of approximately $28.8 million from December 29, 2001 to
March 31, 2002 as a result of the acquisition of PGW, amortization expense and
foreign exchange rate fluctuations.

Property and Equipment, Net

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

|                                 |                                                |   |               |         |                |   |               |         |   |   |        |         |  
|-------------------------------- | ---------------------------------------------- | - | ------------- | ------- | -------------- | - | ------------- | ------- | - | - | ------ | ------- | -
|                                 |                                                |   | As of        
|                                 |                                                |   |              
|                                 |                                                |   | Dec. 28, 2002 |         | March 31, 2002 |   | Dec. 29, 2001
|                                 |                                                |   |               |         |                |   |              
|Computer equipment and software  |                                                | $ | 27,698        |         |                | $ | 9,523         |         |   | $ | 9,291  |        
|Warehouse equipment              |                                                |   | 11,805        |         |                |   | 11,625        |         |   |   | 10,550 |        
|Office furniture                 |                                                |   | 6,751         |         |                |   | 4,936         |         |   |   | 4,110  |        
|Leasehold improvements           |                                                |   | 4,569         |         |                |   | 5,869         |         |   |   | 4,795  |        
|                                 |                                                |   |               |         |                |   |               |         |   |   |        |        
|                                 |                                                |   | 50,823        |         |                |   | 31,953        |         |   |   | 28,746 |        
|                                 | Less accumulated depreciation and amortization |   |               | (19,657 | )              |   |               | (16,001 | ) |   |        | (14,953 | )
|                                 |                                                |   |               |         |                |   |               |         |   |   |        |        
|                                 |                                                |   | 31,166        |         |                |   | 15,952        |         |   |   | 13,793 |        
|Assets not yet placed in service |                                                |   | 1,883         |         |                |   | 15,031        |         |   |   | 12,557 |        
|                                 |                                                |   |               |         |                |   |               |         |   |   |        |        
|Property and equipment, net      |                                                | $ | 33,049        |         |                | $ | 30,983        |         |   | $ | 26,350 |        
|                                 |                                                |   |               |         |                |   |               |         |   |   |        |        

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

Assets not yet placed in service consist primarily of computer hardware and
software related to the ongoing enhancement of our management information
systems. The cumulative balance in assets not yet placed in service relating to
the ongoing enhancement of our management information systems amounted to
approximately $1.8 million, $14.4 million and $12.6 million at December 28,
2002, March 31, 2002 and December 29, 2001, respectively. Significant
components of these systems were placed in service during the second quarter of
Fiscal 2003 and the related costs that have accumulated are being depreciated
on a straight-line basis over a seven-year period, the expected life of the
assets.

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

8



---



##### Table of Contents



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 selling books.
We use the equity method to account for investments in entities in which we
hold a voting interest of 20% to 50% or in which we otherwise have the ability
to exercise significant influence. We regularly monitor and evaluate the
realizable value of our investments. If events or circumstances indicate that
a decline in the value of these assets has occurred and is other than
temporary, we will record a charge to Equity in Net Income of Affiliates. Our
investments in affiliates are included as part of Other Assets in the
accompanying Condensed Consolidated Balance Sheets. Consistent with our policy
regarding international subsidiaries, we include our portion of the
investments operating results in our Condensed Consolidated Statements of
Income one month in arrears.

In June 2001, we acquired a 25% equity interest in The Templar Company, PLC
(Templar) for approximately $1.4 million. Located in the United Kingdom,
Templar is a designer of childrens books that incorporate sophisticated pop-up
pictures using high quality art, including the award-winning Maurice Pledger
wildlife series. Templar markets its products on a worldwide basis.

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

During the three and nine months ended December 28, 2002, we recognized
approximately $34,000 of expense and $0.5 million of income, respectively,
related to the change in fair value on stock appreciation rights issued in
connection with certain acquisitions. This amount was included with Interest
Expense and Other in the Condensed Consolidated Statements of Income. The
liability for stock appreciation rights is included with Accrued Liabilities in
our accompanying Condensed Consolidated Balance Sheets.

Lines of Credit

On December 17, 2002, our existing unsecured $12.0 million line of credit and
secured $33.0 million line of credit were retired in full and replaced by a
$45.0 million secured revolving line of credit that matures on December 31, 2005.
Borrowings under this revolving line of credit bear interest at the
banks prime rate or LIBOR plus 1.5% to 2.0%, determined by our ratio of senior
debt to EBITDA. The interest rate on borrowings under our lines of credit at December 28, 2002
and March 31, 2002 was 3.3% and 3.4%, respectively. We are required to pay an
unused loan fee of 0.25% on any unused portions of the revolving line of credit.

The revolving line of credit agreement contains certain covenants that 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. Borrowings under this revolving line of credit agreement are
collateralized by our accounts receivable balances and may not exceed 80% of
the eligible accounts receivable. We had outstanding borrowings of $12.0
million at December 28, 2002 under the revolving line of credit. As of February 7, 2003,
our borrowings total approximately $35.0 million under the
revolving line of credit.

9



---



##### Table of Contents



3. COMPONENTS OF CERTAIN BALANCE SHEET CAPTIONS(continued)

Equity Transactions

On July 22, 1999, we adopted a stock repurchase program pursuant to which we
may repurchase in the open market or private transactions, from time to time,
based upon existing market conditions, shares of our Common Stock not to exceed
450,000 shares. On March 16, 2000, we announced that our Board of Directors had
approved an increase in the repurchase program of 525,000 shares. On July 27,
2000, our Board of Directors approved an additional 525,000-share increase in
the repurchase program and on May 25, 2001, our Board of Directors approved an
additional 350,000-share increase in our stock repurchase program. The total
shares authorized for buyback under the plan amount to 1,850,000. In the
second quarter of Fiscal 2003, we repurchased a total of 363,100 shares with an
average market price of approximately $14.52, bringing our total repurchased
shares under the plan to approximately 1,675,000 with an average market price
of approximately $11.54. No shares were repurchased during the third quarter
of Fiscal 2003. In February 2003, our Board of Directors authorized the
repurchase of up to an additional 325,000 shares of our common stock in open
market transactions or otherwise from time to time, based on then-existing
conditions. This brings the total amount of authorized shares of common stock
available for repurchase to approximately 500,000 shares. The repurchase
program has no expiration date.

We recognize deferred compensation for certain stock options granted under our
Stock Option Plan. The compensation is being amortized over the vesting period
of the options. In each of the three and nine months ended December 28, 2002
and December 29, 2001, we expensed approximately $55,000 and $166,000,
respectively. The net balance of the remaining deferred compensation amounted
to approximately $0.4 million, $0.6 million and $0.7 million at December 28,
2002, March 31, 2002 and December 29, 2001, respectively, and has been recorded
as a separate component of Stockholders Equity in the accompanying Condensed
Consolidated Balance Sheets.

4. ACQUISITIONS

H.I. MARKETING LIMITED and CUTSOUND LIMITED

On December 6, 2002, our subsidiary, Advanced Marketing (Europe), Limited, acquired all of the outstanding capital stock of two British book
distributors, H.I. Marketing Limited (H.I. Marketing) and Cutsound Limited
(Cutsound), for cash consideration of $1.9 million and $1.5 million,
respectively, subject to customary post-closing adjustments. H.I. Marketing
sells books in the United Kingdom on behalf of approximately 20 U.S. and U.K.
publishers and is currently the U.K. marketing representative for PGW.
Cutsound sells books in the U.K. to traditional and non-traditional book
markets for more than 100 small to medium-sized publishers of primarily
alternative books in the Health and Lifestyle category. As our international
subsidiaries activities are recorded one month in arrears and the effects of
these acquisitions are immaterial, these acquisitions are not reflected in our
financial statements as of December 28, 2002.

10



---



##### Table of Contents



4. ACQUISITIONS(continued)

PUBLISHERS GROUP WEST

On January 31, 2002, we acquired all of the outstanding capital stock of PGW,
located in Berkeley, California, for cash consideration of approximately $38.7
million. The acquisition of PGW was designed 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 lines of
credit.

PGI is a holding company which, through its wholly owned subsidiary PGW, is
engaged in the business of marketing and distributing books primarily for
independent publishers. Immediately prior to its acquisition by AMS, PGI
divested itself of its Avalon Publishing Group Incorporated subsidiary
(Avalon), a book publisher, and PGW entered into a five-year distribution
agreement with Avalon. Concurrent with the Avalon divestiture, PGW sold its
Canadian distribution business to a subsidiary of Raincoast Books, our
affiliate in which we own a 25% equity interest. The assets of PGW are being
used in a manner generally consistent with the use of such assets by PGW prior
to the consummation of the acquisition.

The total amount of goodwill capitalized in connection with this acquisition
amounted to approximately $29.4 million. In accordance with Statement of
Financial Accounting Standards (SFAS) No. 142, goodwill has an indefinite
life and is not amortized. Goodwill related to this acquisition will also not
be amortized for income tax purposes. Additionally, in connection with the
acquisition, we acquired $3.4 million in other intangible assets, consisting of
a publishers list and a trade name, which will be amortized over their
estimated useful lives, determined to be 20 years. Intangible assets amounted
to approximately $3.2 million and $3.3 million, net of accumulated amortization
of approximately $154,000 and $28,000, at December 28, 2002 and March 31, 2002,
respectively. At December 29, 2001, we did not have any intangible assets.

VALUATION OF GOODWILL

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

5. RELATED PARTY TRANSACTIONS

Our affiliate, Raincoast, purchased the Canadian distribution business of PGW
for $0.7 million in a transaction that occurred simultaneously with our
purchase of PGW in January 2002 (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.

11



---



##### Table of Contents



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 |        | Nine Months Ended
|                                                         |  |                    |        |                  
|                                                         |  | Dec. 28,           |        | Dec. 29,          |  | Dec. 28, |        | Dec. 29,
|                                                         |  | 2002               |        | 2001              |  | 2002     |        | 2001    
|                                                         |  |                    |        |                   |  |          |        |         
|Net Income                                               |  | $                  | 8,755  |                   |  | $        | 13,270 |          |  | $ | 15,593 |  |  | $ | 20,070 | 
|                                                         |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 
|Weighted Average Common Shares Outstanding               |  |                    | 19,004 |                   |  |          | 19,130 |          |  |   | 19,133 |  |  |   | 19,098 | 
|Basic Earnings Per Share                                 |  | $                  | 0.46   |                   |  | $        | 0.69   |          |  | $ | 0.81   |  |  | $ | 1.05   | 
|                                                         |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 
|Weighted Average Common Shares Outstanding               |  |                    | 19,004 |                   |  |          | 19,130 |          |  |   | 19,133 |  |  |   | 19,098 | 
|Dilutive Common Stock Options                            |  |                    | 620    |                   |  |          | 757    |          |  |   | 702    |  |  |   | 753    | 
|                                                         |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 
|Total Diluted Weighted Average Common Shares Outstanding |  |                    | 19,624 |                   |  |          | 19,887 |          |  |   | 19,835 |  |  |   | 19,851 | 
|                                                         |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 
|Diluted Earnings Per Share                               |  | $                  | 0.45   |                   |  | $        | 0.67   |          |  | $ | 0.79   |  |  | $ | 1.01   | 
|                                                         |  |                    |        |                   |  |          |        |          |  |   |        |  |  |   |        | 

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

7. COMMITMENTS AND CONTINGENCIES

Operating leases

We lease facilities and certain equipment under non-cancelable operating
leases. Rent expense for the three months ended December 28, 2002 and December
29, 2001 amounted to approximately $2.2 million and $2.0 million, respectively. For the nine
months ended December 28, 2002 and December 29, 2001, rent expense amounted to
approximately $6.7 million and $5.6 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.

12



---



##### Table of Contents



8. SEGMENT AND GEOGRAPHICAL INFORMATION

Management has determined that our business, consisting of wholesale,
distribution and publishing activities, operates in a single industry segment.

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

|               |  |                    |         |                   |  |          |         |          |  |   |         |  |  |   |         | 
|-------------- |  | ------------------ | ------- | ----------------- |  | -------- | ------- | -------- |  | - | ------- |  |  | - | ------- | 
|               |  | Three Months Ended |         | Nine Months Ended
|               |  |                    |         |                  
|               |  | Dec. 28,           |         | Dec. 29,          |  | Dec. 28, |         | Dec. 29,
|               |  | 2002               |         | 2001              |  | 2002     |         | 2001    
|               |  |                    |         |                   |  |          |         |         
|United States  |  | $                  | 267,853 |                   |  | $        | 245,195 |          |  | $ | 645,852 |  |  | $ | 528,860 | 
|United Kingdom |  |                    | 22,249  |                   |  |          | 18,849  |          |  |   | 48,666  |  |  |   | 40,889  | 
|Mexico         |  |                    | 1,928   |                   |  |          | 1,780   |          |  |   | 5,484   |  |  |   | 5,321   | 
|Australia      |  |                    | 2,683   |                   |  |          | 1,228   |          |  |   | 5,575   |  |  |   | 3,163   | 
|Singapore      |  |                    | 120     |                   |  |          | 53      |          |  |   | 316     |  |  |   | 53      | 
|               |  |                    |         |                   |  |          |         |          |  |   |         |  |  |   |         | 
|               |  | $                  | 294,833 |                   |  | $        | 267,105 |          |  | $ | 705,893 |  |  | $ | 578,286 | 
|               |  |                    |         |                   |  |          |         |          |  |   |         |  |  |   |         | 

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

|               |  |          |         |           |  |          |         |  |  |   |         | 
|-------------- |  | -------- | ------- | --------- |  | -------- | ------- |  |  | - | ------- | 
|               |  | As of   
|               |  |         
|               |  | Dec. 28, |         | March 31, |  | Dec. 29,
|               |  | 2002     |         | 2002      |  | 2001    
|               |  |          |         |           |  |         
|United States  |  | $        | 432,016 |           |  | $        | 367,187 |  |  | $ | 339,281 | 
|United Kingdom |  |          | 40,217  |           |  |          | 25,437  |  |  |   | 31,708  | 
|Mexico         |  |          | 5,440   |           |  |          | 4,760   |  |  |   | 4,542   | 
|Australia      |  |          | 7,019   |           |  |          | 5,165   |  |  |   | 5,513   | 
|Singapore      |  |          | 697     |           |  |          | 303     |  |  |   | 161     | 
|               |  |          |         |           |  |          |         |  |  |   |         | 
|               |  | $        | 485,389 |           |  | $        | 402,852 |  |  | $ | 381,205 | 
|               |  |          |         |           |  |          |         |  |  |   |         | 

13



---



##### Table of Contents



9. RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 142 addresses financial
accounting and reporting for acquired goodwill and other intangible assets and
supersedes APB Opinion No. 17, Intangible Assets. SFAS No. 142 addresses how
intangible assets that are acquired individually or with a group of other
assets (but not those acquired in a business combination) should be accounted
for in financial statements upon their acquisition. SFAS No. 142 also
addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. Upon
adoption of SFAS No. 142, goodwill is no longer subject to amortization over
its estimated useful life. Rather, goodwill is subject to at least an annual
assessment for impairment by applying a fair value test. We adopted this
statement effective April 1, 2002 and ceased amortization of goodwill at that
date. We completed our initial impairment test for goodwill during the quarter
ended September 28, 2002. This test confirmed that the fair value of the net
assets of each of our reporting units was equal to or greater than the carrying
value and, accordingly, no goodwill impairment loss existed at the date of
adoption of SFAS No. 142, which was April 1, 2002. Under SFAS No. 142, we will
test goodwill annually and whenever events or circumstances occur indicating
that goodwill might be impaired. Goodwill amortization expense for the three
and nine months ended December 29, 2001 amounted to approximately $109,000 and
$315,000, respectively. The effect of excluding such goodwill amortization
from the three and nine months ended December 29, 2001 would have increased our
basic and diluted earnings per share by $0.01 and $0.02, respectively.

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.

14



---



##### Table of Contents



9. RECENT ACCOUNTING PRONOUNCEMENTS(continued)

In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also states that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. FIN 45 is an interpretation of FASB Statements Nos. 5,
57, and 107 and a rescission of FASB Interpretation No. 34. The disclosure
requirements in FIN 45 are effective for financial statements of interim or
annual periods ending after December 15, 2002. The adoption of FIN 45 did not
have a significant impact on our consolidated financial position or results of
operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure. SFAS No. 148 amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December
15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning after
December 15, 2002. We plan to adopt the additional disclosure provisions of
SFAS No. 148 in the fourth quarter of Fiscal 2003.

15



---



##### Table of Contents






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

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

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

This information should be read in conjunction with the financial statements
and notes thereto included in Item 1 of this report on Form 10-Q for the
periods ended December 28, 2002 and December 29, 2001, as well as the financial
statements and notes thereto and Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report
on Form 10-K for the fiscal year ended March 31, 2002.

OVERVIEW

We provide global customized services to book retailers and publishers. We are
a leading wholesaler of general interest books to the membership warehouse
clubs and certain specialty retailers, certain e-commerce companies and
traditional bookstores. General interest books include: bestsellers; basic
reference books, including computer and medical books; books regarding business
and management; cookbooks; gift books, including art and coffee table books;
calendars; travel books; regional books; mass market paperbacks; childrens
books; and Spanish-language books. In addition, to a lesser extent, we sell
pre-recorded audiocassettes (books on tape). In conjunction with our product
sales, we provide product selection advice, vendor managed inventory (VMI)
services, specialized merchandising and product development services, and
logistical and handling services to membership warehouse clubs and other
retailers operating in the United States of America, Canada, Mexico, the United
Kingdom, Australia, Singapore and certain other Pacific Rim countries. With
our Fiscal 2002 acquisition of PGW, we are the largest independent contract
distributor for small-to-medium size publishers in North America. We also
engage in proprietary publishing, domestically and internationally, over a wide
spectrum of book categories. These titles are sold both to our wholesale
customers and to retail accounts with whom we may have no wholesale
relationship. While these books carry the potential for increased margin, they
also carry the risk of increased markdown expense, as they are owned by us,
and, unlike most wholesale purchases, they cannot be returned for credit.

16



---



##### Table of Contents



A. CRITICAL ACCOUNTING POLICIES

Our significant accounting policies are disclosed in Note 1 of the Notes to our
Consolidated Financial Statements in our Annual Report on Form 10-K for the
fiscal year ended March 31, 2002. Certain of our policies require the
application of management judgment 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 judgment
in determining such estimates and assumptions is by nature subject to a degree
of uncertainty. Accordingly, actual results could differ from estimates made.

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 $8.1 million as of
December 28, 2002, $6.5 million as of March 31, 2002, and $4.3 million as of
December 29, 2001 for the gross profit effect of estimated future sales returns
after considering historical results and evaluating current conditions.

We record allowances for doubtful accounts for estimated losses resulting from
our customers inability to pay amounts owed. If the financial condition of
one or more of our customers were to deteriorate, we could be required to
record additional allowances or write-off all or a portion of the amounts due
us. We have provided allowances for uncollectible trade accounts receivable of
$2.5 million as of December 28, 2002, $2.7 million as of March 31, 2002, and
$2.8 million December 29, 2001.

Inventories

Inventories consist primarily of books and, to a lesser extent, music CDs,
CD-ROMs and prerecorded audiocassettes purchased for resale. Inventories are
stated at the lower of cost (first-in, first-out) or market value. A majority
of our inventories carry the right of return to publishers. For the portion of
our inventories that do not have the right of return, we provide, based upon
historical results and our evaluation of current conditions, an allowance for
the estimated markdown of inventories. Our allowance for the markdown of
inventories amounted to approximately $7.7 million as of December 28, 2002,
$6.7 million as of March 31, 2002, and $6.9 million as of December 29, 2001.
Most of our contract distribution activities involve 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.

17



---



##### Table of Contents



A. CRITICAL ACCOUNTING POLICIES(continued)

Revenue Recognition

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

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

18



---



##### Table of Contents



B. RESULTS
OF OPERATIONS
Three months ended December 28, 2002 and December 29, 2001:

Net income decreased $4.5 million to $8.8 million, or $0.45 per diluted share,
for the three months ended December 28, 2002 from $13.3 million, or $0.67 per
diluted share, for the same period of Fiscal 2002. The decrease in net income
was attributable to weak domestic wholesale sales and increased costs, which
include temporary elevated labor and freight costs associated with the ongoing
implementation of two new computing systems necessary for the growth of our
business and to maintain service levels to customers affected by those systems
implementations.

Net sales increased $27.7 million to $294.8 million for the three months ended
December 28, 2002, from $267.1 million for the same period of Fiscal 2002. Net
sales reflect the invoiced amounts of products shipped and related fulfillment
services provided, less allowance for estimated returns, actual returns and
discounts. The 10.4% increase in net sales was attributable to the following
factors: $31.4 million from the inclusion of the operations of PGW, which was
not part of the same quarter of the prior fiscal year; $5.9 million of
advertising revenue as part of our co-operative advertising programs; $5.1
million related to an increase in net sales at our international subsidiaries,
primarily in the U.K.; offset by $14.7 million of decreased shipments to our
domestic wholesale customers as a result of a particularly weak holiday selling
season.

Our return rate from customers increased 8.0 percentage points to 24.0% for the
three months ended December 28, 2002 from 16.0% for the same period of Fiscal
2002. The increase was primarily due to the softer sales environment during the
period. 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 noted return rates.

Gross profit increased $7.7 million to $51.4 million for the three months ended
December 28, 2002 from $43.7 million for the same period of Fiscal 2002. Gross
profit as a percentage of net sales increased to 17.4% during the third quarter
of Fiscal 2003 from 16.4% during the same period in the prior fiscal year.
Gross profit as a percent of sales increased primarily due to the inclusion of
PGW and the international subsidiaries that have historically carried higher
margins.

Distribution and administrative expenses increased $14.8 million to $37.2
million for the three months ended December 28, 2002 from $22.4 million for the
same period of Fiscal 2002. As a percentage of net sales, these expenses
increased to 12.6% from 8.4% in the same period of the prior fiscal year, a 4.2
percentage point increase. This increase was primarily a result of the
inclusion of PGWs distribution and administrative expenses, that are higher as
a percentage of sales than historical AMS levels, and temporary elevated labor
and freight costs associated with our systems implementations, temporary
elevated systems support costs, and depreciation expense related to our new
systems and an increase in volume of small order processing.

Interest income decreased $0.1 million to $0.2 million for the three months
ended December 28, 2002 from $0.3 million for the same period of Fiscal 2002
due to lower cash and investment balances as a result of the purchase of PGW
and capital investments in our infrastructure.

Interest expense and other increased $0.1 million to $0.3 million for the three
months ended December 28, 2002 from $0.2 million for the same period of Fiscal
2002, primarily due to interest expense related to borrowings under our lines
of credit.

The provision for income taxes decreased $2.9 million to $5.7 million for the
three months ended December 28, 2002 from $8.6 million for the same period of
Fiscal 2002. The decrease is primarily due to the decrease in our pre-tax
income as compared to the same period or the prior fiscal year, with a constant
effective tax rate of 39.3% for both periods.

19



---



##### Table of Contents



B. RESULTS OF OPERATIONS(continued)Nine months ended December 28, 2002 and December 29, 2001:

Net income decreased $4.5 million to $15.6 million, or $0.79 per diluted share,
for the nine months ended December 28, 2002, from $20.1 million, or $1.01 per
diluted share, for the same period of Fiscal 2002. The decrease in net income
was attributable to weak domestic wholesale sales and increased costs, which
include temporary elevated labor and freight costs associated with the ongoing
implementation of two new computing systems necessary for the growth of our
business and to maintain service levels to customers affected by those systems
implementations.

Net sales increased $127.6 million to $705.9 million for the nine months ended
December 28, 2002 from $578.3 million for the same period of Fiscal 2002. Net
sales reflect the invoiced amounts of products shipped and related fulfillment
services provided, less allowance for estimated returns, actual returns and
discounts. The 22.1% increase in net sales can be attributed to the following
factors: $92.7 million as a result of net sales contributed by PGW, which was
not part of the same period of the prior fiscal year; $15.8 million related to
advertising revenue as part of our co-operative advertising programs; $10.3
million related to an increase in net sales at our international subsidiaries,
primarily in the U.K.; and $8.8 million related to increased shipments to our
domestic wholesale customers.

Our return rate from customers increased 3.0 percentage points to 23.0% for the
nine months ended December 28, 2002 from 20.0% for the same period of Fiscal
2002. The increase was primarily due to the softer sales environment during the
third quarter of Fiscal 2003 and the impact of PGWs high return rate, which
has historically been higher than the return rate of our wholesale activities.
Consistent with historical practice, returns reserves have been established
based on managements best estimate of expected future product returns. These
return reserves are included in the noted return rates.

Gross profit increased $26.9 million to $117.2 million for the nine months
ended December 28, 2002, from $90.3 million for the same period of Fiscal 2002.
Gross profit as a percentage of net sales increased to 16.6% in the first nine
months of Fiscal 2003 from 15.6% during the same period in Fiscal 2002. Gross
profit as a percent of sales increased primarily due to the inclusion of PGW,
increases from international subsidiaries that have historically carried higher
margins and a stronger overall margin mix for domestic AMS sales.

Distribution and administrative expenses increased $34.0 million to $92.4
million for the nine months ended December 28, 2002 from $58.4 million for the
same period of Fiscal 2002. As a percentage of net sales, these expenses
increased to 13.1% from 10.1% in the same period of the prior fiscal year, a
3.0 percentage point increase. This increase was primarily a result of the
inclusion of PGWs distribution and administrative expenses, that are higher as
a percentage of sales than historical AMS levels, temporary elevated labor and
freight costs associated with our systems implementation, temporary elevated
systems support costs, and depreciation expense related to our new systems and
an increase in volume of small order processing.

Interest income decreased $0.5 million to $0.6 million for the nine months
ended December 28, 2002 from $1.1 million for the same period of Fiscal 2002
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 decreased to approximately $56,000 for the nine
months ended December 28, 2002 from $0.2 million for the same period of Fiscal
2002. This decrease was primarily a result of a favorable change in the fair
value of stock appreciation rights issued in connection with certain
acquisitions of approximately $0.4 million offset by approximately $0.5 million
of interest expense related to borrowings under our lines of credit.

The provision for income taxes decreased $2.9 million to $10.1 million for the
nine months ended December 28, 2002 from $13.0 million for the same period in
Fiscal 2002. The decrease is primarily due to the decrease in our pre-tax
income as compared to the same period of the prior fiscal year, with a constant
effective tax rate of 39.3% for both periods.

20



---



##### Table of Contents



B. RESULTS OF OPERATIONS(continued)

Seasonality

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

C. LIQUIDITY AND SOURCES OF CAPITAL

As of December 28, 2002, we had $13.1 million in cash and cash equivalents,
compared to $28.3 million at December 29, 2001. The decrease in cash and cash
equivalents is primarily due to the funding of our PGW acquisition and
investments in our corporate infrastructure.

Cash provided by our operating activities amounted to $11.6 million for the
nine months ended December 28, 2002, compared to $12.8 million for the same
period in Fiscal 2002. The decrease in cash provided by operating activities
primarily relates to the decrease in net income for the nine months ended
December 28, 2002 as compared to the same period of Fiscal 2002, offset by the
net changes in our working capital components, whose primary changes include
accounts payable, accounts receivable and inventories.

Our accounts receivable balance increased $25.7 million during the nine months
ended December 28, 2002, as compared to an increase of $52.9 million for the
same period in Fiscal 2002. The $25.7 million increase was driven by the
overall growth and seasonality in sales of our wholesale and international
activities. The decrease in the change in accounts receivable for the nine
months ended December 28, 2002 as compared to the same period in Fiscal 2002
was primarily due to a very weak holiday sales season. The primary reason for
the $52.9 million increase in accounts receivable for the nine months ended
December 29, 2001 was strong December 2001 sales.

Inventory levels at December 28, 2002 were $192.3 million, an increase of $69.4
million from inventory levels at March 31, 2002. The $69.4 million increase
was primarily due to increases in inventory levels to meet anticipated seasonal
customer demand, which was not realized; backlog at our distribution centers as
a result of higher customer returns, increased small order processing volume,
and inefficiencies connected with our systems implementations; offset by an
increase in markdown reserve on goods purchased on a non-returnable basis.
Inventory turns decreased to 4.4 times during the third quarter of Fiscal 2003
as compared to 5.7 times in the same quarter of Fiscal 2002. For the quarter
ended December 28, 2002, the inventory turn was calculated using cost of goods
sold from operations excluding cost of goods sold relating to PGW for
comparability. PGW holds inventory on consignment, resulting in improved
inventory turnover for the Company. The increase in inventories was primarily
funded by a corresponding increase in accounts payable of
$76.6 million. Inventory levels at February 10, 2003 amounted to approximately
$166.6 million.

21



---



##### Table of Contents



C. LIQUIDITY AND SOURCES OF CAPITAL(continued)

Inventory levels at December 29, 2001 were $136.6 million, an increase of $16.0
million from March 31, 2001. This increase was primarily due to increases in
inventory levels in the nine month period to meet anticipated seasonal customer
demand, offset by a small decrease in inventory reserves over the same period a
year ago, which was the result of our continuing improvement in selling through
slow-moving books and improved buying decisions on non-returnable inventory
purchases.

Net cash used in investing activities during the nine months ended December 28,
2002 amounted to $2.3 million, of which $6.8 million was used to fund capital
investments related to our efforts to upgrade our management information
systems and other investments in capital and $1.5 million of purchases of
investments which was offset by $6.0 million related to the sale of
investments. For the nine months ended December 29, 2001, investing activities
used $13.8 million, of which $11.5 million was used to upgrade our management
information systems, $5.5 million in purchases of investments offset by $4.6
million related to the sale of investments and $1.4 million that was used to
acquire an equity interest in Templar as part of our strategic plan to grow in
diversified higher margin global businesses.

Financing activities used net cash of $17.6 million for the nine months ended
December 28, 2002, primarily from the repayment of $13.0 million on our lines
of credit and $5.3 million in purchases of treasury stock offset by $0.6
million in proceeds from the exercise of stock options. For the nine months
ended December 29, 2001, financing activities provided net cash of $0.4
million, primarily from the $1.4 million in proceeds from the exercise of stock
options offset by $1.0 million in purchases of treasury stock.

We have initiated a strategic growth plan designed to capitalize upon our core
competency of book wholesaling that is intended to allow us to grow our
business into activities that have historically had higher margins and
diversify our customer base. 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 December 17, 2002, our existing unsecured $12.0 million line of credit and
secured $33.0 million line of credit were retired in full and replaced by a
$45.0 million secured revolving line of credit that matures on December 31, 2005.
Borrowings under this revolving line of credit bear interest at the
banks prime rate or LIBOR plus 1.5% to 2.0%, determined by our ratio of senior
debt to EBITDA. The interest rate on borrowings under our lines of credit at December 28, 2002
and March 31, 2002 was 3.3% and 3.4%, respectively. We are required to pay an
unused loan fee of 0.25% on any unused portions of the revolving line of credit.

The revolving line of credit agreement contains certain covenants that 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. Borrowings under this revolving line of credit agreement are
collateralized by our accounts receivable balances and may not exceed 80% of
the eligible accounts receivable. We had outstanding borrowings of $12.0
million at December 28, 2002 under the revolving line of credit. As of February 7, 2003,
our borrowings total approximately $35.0 million under the
revolving line of credit.

We believe that our existing working capital, cash flows from operations, trade
credit traditionally available from our vendors, future availability under
existing credit facilities or other sources of credit will provide sufficient
liquidity to cover debt service costs and any reasonably foreseeable future
working capital and capital expenditure requirements associated with our
existing operations. We continue to consider additional strategic acquisitions
where deemed appropriate. Such acquisitions, if any, could materially affect
our future liquidity and capital resources.

22



---



##### Table of Contents



C. LIQUIDITY AND SOURCES OF CAPITAL(continued)

Certain Risk Factors

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

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

23



---



##### Table of Contents



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, systems implementations, 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.

24



---



##### Table of Contents






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 in recent years. The
primary currencies to which we have foreign currency exposure are the British
pound, Mexican peso, and the Australian, Canadian and Singapore dollar. Our
primary foreign currency exposure arises from foreign denominated revenues and
expenses translated into U.S. 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
U.S. 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.




ITEM 4. CONTROLS AND PROCEDURES

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

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

25



---



##### Table of Contents





















PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

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

None

ITEM 5. OTHER INFORMATION

None

26



---



##### Table of Contents









ITEM 6. EXHIBITS AND REPORTS

(a)     Exhibits

| |  |             |  |                                                                                                                                                                                       
| |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | EXHIBIT NO. |  |                                                                                                                                                                                       
| |  |             |  |                                                                                                                                                                                       
| |  | 10.1        |  | Revolving Credit
Agreement, dated as of December 17, 2002,
between Advanced Marketing Services, Inc. and California
Bank & Trust, Bank of the West, and Union Bank of
California, N.A.
| |  |             |  |                                                                                                                                                                                       
| |  | 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  Form 8-K filed September 10, 2002  Item 9.

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                                                                                                        
|                 
|February 11, 2003 | By:                                                                                                                                                 | /s/ Michael M. Nicita
|Date              | Michael M. Nicita
      Chief Executive Officer and Director
      (principal executive officer)                                                   
|                 
|February 11, 2003 | By:                                                                                                                                                 | /s/ Edward J.
Leonard
|Date              | Edward J. Leonard
      Executive Vice President and
      Chief Financial Officer and Secretary
      (principal financial and accounting officer)

27



---



##### Table of Contents



CERTIFICATIONS

I, Michael M. Nicita, certify that:

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

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

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

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

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

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

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

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

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

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

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

|      |  |                   |  |                                                                                          
|----- |  | ----------------- |  | -----------------------------------------------------------------------------------------
|Date: |  | February 11, 2003 |  | /s/ Michael M.
NicitaName: Michael M.
Nicita
Title: President and Chief Executive Officer

28



---



##### Table of Contents



CERTIFICATIONS

I, Edward J. Leonard, certify that:

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

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

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

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

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

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

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

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

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

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

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

|                         |  |                                                                                                                                  
|------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------
|Date:  February 11, 2003 |  | /s/ Edward J. Leonard
Name: Edward J. Leonard
Title:   Executive Vice President,
           Chief Financial Officer and Secretary

29