Document:

Exhibit 10.1

                        WAIVER AND AMENDMENT NUMBER THREE
                                       TO
                           LOAN AND SECURITY AGREEMENT

     This Waiver and Amendment Number Three to Loan and Security Agreement (this
"Amendment") is entered into as of May 12, 2005, by and among, on the one hand,
ADVANCED MARKETING SERVICES, INC., a Delaware corporation ("Parent"), PUBLISHERS
GROUP WEST INCORPORATED, a California corporation, and PUBLISHERS GROUP
INCORPORATED, a California corporation (collectively, "Borrowers"), and, on the
other hand, the lenders identified on the signature pages to the Agreement (as
defined below) ("Lenders"), and WELLS FARGO FOOTHILL, INC., a California
corporation ("Agent"), as the arranger and administrative agent for the Lenders,
in light of the following:

     A. Borrowers and the Lender Group have previously entered into that certain
Loan and Security Agreement, dated as of April 27, 2004 (as amended by the First
Amendment, and the Second Amendment the "Agreement"), that certain Amendment
Number One to Loan and Security Agreement, dated as of October 8, 2004 (the
"First Amendment"), and that certain Amendment Number Two to Loan and Security
Agreement, dated as of February 28, 2005 (the "Second Amendment").

     B. Borrowers and the Lender Group desire to further amend the Agreement as
provided for and on the conditions herein.

     NOW, THEREFORE, Borrowers and the Lender Group hereby amend and supplement
the Agreement as follows:

     1. DEFINITIONS. All initially capitalized terms used in this Amendment
shall have the meanings given to them in the Agreement unless specifically
defined herein.

     2. AMENDMENTS.

     (a) The "Exhibits and Schedules" page to the Agreement shall be amended and
restated in its entirety as set forth on Exhibit A attached hereto.

     (b) Schedules C-1, 5.5, 5.7(a), 5.7(b), 5.7(c), 5.8(b), 5.8(c), 5.10, 5.18
and 5.20 to the Agreement shall be amended and restated in their entirety as set
forth on Exhibit B attached hereto.

     (c) Section 1.1 of the Agreement is hereby amended as follows:

        (i) The defined term "Applicable Margin" is hereby amended and restated
in its entirety as follows:

          "Applicable Margin" means, with respect to Base Rate Loans or LIBOR
Rate Loans, as the case may be, as of any date of determination, the margin set
forth in the following table that corresponds to the most recent TTM EBITDA
calculation (determined as set forth in the following paragraph) for the most
recently completed fiscal quarter of Parent; provided, however, that for the
period from May 12, 2005 through the date Agent receives a Compliance
Certificate in respect of the covenant testing period ending June 30, 2005, the
Applicable Margin shall be the Base Rate plus 1.50%:

                                       1
<PAGE>

--------------------------------------------------------------------------------
                                              Margin above          Margin above
 Level            TTM EBITDA                    Base Rate            LIBOR Rate
--------------------------------------------------------------------------------
   I      greater than $20,000,000                0.00%                 1.75%
--------------------------------------------------------------------------------
   II     greater than $15,000,000                0.50%                 2.25%
          but less than or equal to
          $20,000,000
--------------------------------------------------------------------------------
  III     greater than $10,000,000                1.00%                 2.75%
          but less than or equal to
          $15,000,000
--------------------------------------------------------------------------------
   IV     less than or equal to                   1.50%                 2.75%
          $10,000,000
--------------------------------------------------------------------------------

     The Applicable Margin shall be based upon the most recent TTM EBITDA
calculation and shall be redetermined each fiscal quarter of Parent as of the
first day of the month following the date Agent receives the certified
calculation of TTM EBITDA in a Compliance Certificate pursuant to Section
6.3(a)(ii) hereof; provided, however, that if Borrower fails to provide the
Compliance Certificate when due, the Applicable Margin shall be the margin in
the row styled "Level IV" as of the first day of the month following the date on
which the Compliance Certificate was required to be delivered until the first
day of the month following the date on which it is delivered (on which date (but
not rectroactively), without constituting a waiver of any Default or Event of
Default caused by the failure to timely deliver the Compliance Certificate, the
Applicable Margin shall be set at a margin based upon the TTM EBITDA calculation
set forth therein.

        (ii) The defined term "Applicable Prepayment Premium" is hereby amended
and restated in its entirety as follows:

          "Applicable Prepayment Premium" means, as of any date of
determination, an amount equal to, (i) during the period from and after the date
of the execution and delivery of the Second Amendment up to and including April
30, 2006, 1.0% times the Maximum Revolver Amount, and (ii) during the period
from and after April 30, 2006 up to and including April 30, 2007, 0.50% times
the Maximum Revolver Amount; provided, however, that if this Agreement is
terminated and the Obligations prepaid as a result of refinancing by a
commercial banking unit of Wells Fargo, then the Applicable Prepayment Premium
shall be $0.

                                       2
<PAGE>

        (iii) The defined term "Borrowing Base" is hereby amended and restated
in its entirety as follows:

          "Borrowing Base" means, as of any date of determination, the result
of:

          (a) the lesser of:

            (i) 85% of the amount of Eligible Accounts, and

            (ii) an amount equal to Borrowers' Collections with respect to
Accounts for the immediately preceding 45 day period, plus

          (b) the lowest of:

            (i) $30,000,000,

            (ii) 35% of the value of Eligible Inventory,

            (iii) 80% times the then extant Net Liquidation Percentage times the
book value of Borrowers' Inventory, and

            (iv) 50% of the amount of credit availability created by clause (a)
above, minus

          (c) the sum of (i) the Inventory Availability Block, (ii) the Bank
Product Reserve, (iii) the Dilution Reserve, and (iv) reserves established by
Agent under Section 2.1(b).

            (iv) The defined term "Cash Dominion Triggering Event" is hereby
amended and restated in its entirety as follows:

              "Cash Dominion Triggering Event" means the occurrence of any of
the following (i) an Event of Default, or (ii) Availability is less than
$20,000,000.

            (v) The defined term "Collateral Reporting Triggering Event" is
deleted.

            (vi) The defined term "Eligible Accounts" is hereby amended by
deleting clause (i) therein in its entirety and replaced with the following:

              (i) Accounts with respect to an Account Debtor whose total
obligations owing to Borrower exceed 10% (or, with respect to Costco, 45%, or,
with respect to each of Sam's Club and BJ's Wholesale, 35%) of Eligible Accounts
(with all such percentages, as applied to a particular Account Debtor, being
subject to reduction by Agent in its Permitted Discretion if the
creditworthiness of such Account Debtor deteriorates), to the extent of the
obligations owing by such Account Debtor in excess of such percentage; provided,
however, that, in each case, the amount of Eligible Accounts that are excluded
because they exceed the foregoing percentage shall be determined by Agent based
on all of the otherwise Eligible Accounts prior to giving effect to any
eliminations based upon the foregoing concentration limit,

                                       3
<PAGE>

            (vii) The defined term "Eligible Inventory" is hereby added to the
Agreement in the appropriate alphabetic order and shall read as follows:

              "Eligible Inventory" means Inventory of Borrowers consisting of
first quality finished goods held for sale in the ordinary course of Borrowers'
business, that complies with each of the representations and warranties
respecting Eligible Inventory made in the Loan Documents, and that is not
excluded as ineligible by virtue of one or more of the excluding criteria set
forth below; provided, however, that such criteria may be revised from time to
time by Agent in Agent's Permitted Discretion to address the results of any
audit or appraisal performed by Agent from time to time after the Closing Date.
In determining the amount to be so included, Inventory shall be valued at the
lower of cost or market on a basis consistent with Borrowers' historical
accounting practices. An item of Inventory shall not be included in Eligible
Inventory if:

              (a) a Borrower does not have good, valid, and marketable title
thereto,

              (b) it is not located at one of the locations in the continental
United States set forth on Schedule E-1 (or in-transit from one such location to
another such location),

              (c) it is not subject to a valid and perfected first priority
Agent's Lien,

              (d) it consists of goods that are obsolete or slow moving,
restrictive or custom items (other than books that are printed and bound for
Borrower in a proprietary format), work-in-process, raw materials, or goods that
constitute spare parts, packaging and shipping materials, supplies used or
consumed in a Borrower's business, bill and hold goods, defective goods,
"seconds," or Inventory acquired on consignment,

              (e) such Inventory is subject to a license agreement or other
arrangement with a third party which restricts in any material respects the
ability of the Agent to exercise its rights under this Agreement with respect to
such Inventory, or

                                       4
<PAGE>

              (f) such Inventory is Inventory which is held by a Borrower for
return to a vendor in accordance with the terms of any agreement between such
Borrower and vendor.

provided, however, that, with respect to Inventory located at a leased facility
or a public warehouse at which the Borrowers maintain Inventory in the event the
Borrowers are not able to obtain a Collateral Access Agreement duly executed by
the landlord or warehouseman at such facility or public warehouse, as
applicable, the aggregate amount of "Eligible Inventory" shall, upon five (5)
Business Days' prior written notice to and following good faith consultation
with the Borrowers, be reduced by an inventory reserve determined from time to
time by the Agent in its commercially reasonable credit judgment on a basis
consistent with credit procedures for lending and in an amount equal to the
lesser of (A) three (3) months rent for such leased facility or public warehouse
or (B) the aggregate value of the Eligible Inventory located at such leased
facility or public warehouse.

            (viii) The defined term "Fee Letter" is hereby amended and restated
in its entirety as follows:

              "Fee Letter" means that certain amended and restated fee letter,
dated as of May 12, 2005, between Borrowers and Agent, in form and substance
satisfactory to Agent.

            (ix) The defined term "Financial Covenant Triggering Event" is
deleted.

            (x) The defined term "First Amendment" is hereby added to the
Agreement in the appropriate alphabetic order and shall read as follows:

              "First Amendment" means that certain Amendment Number One to Loan
and Security Agreement dated as of October 8, 2004 by and among the Borrowers
and Agent.

            (xi) The defined term "Inventory Availability Block" is hereby added
in the appropriate alphabetic order and shall read as follows:

              "Inventory Availability Block" means a reserve in an amount equal
to the amount of credit availability created by clause (b) of the definition of
"Borrowing Base"; provided, however, that such reserve shall be eliminated upon
Agent's receipt of an Inventory appraisal performed by Hilco Appraisal Services,
Inc.

            (xii) The defined term "Maximum Revolver Amount" is hereby amended
and restated in its entirety as follows:

              "Maximum Revolver Amount" means $90,000,000.

                                       5
<PAGE>

            (xiii) The defined term "Net Liquidation Percentage" is hereby added
to the Agreement in the appropriate alphabetic order and shall read as follows:

              "Net Liquidation Percentage" means the percentage of the book
value of Borrowers' Inventory that is estimated to be recoverable in an orderly
liquidation of such Inventory, such percentage to be as determined from time to
time by a qualified appraisal company selected by Agent.

            (xiv) The defined term "Required Lenders" is hereby amended and
restated in its entirety as follows:

              "Required Lenders" means, at any time, Lenders whose aggregate Pro
Rata Shares (calculated under clause (d) of the definition of Pro Rata Shares)
equal or exceed 66-2/3%, but in any event no fewer than two Lenders if there
exist at least two Lenders at such time.

            (xv) The defined term "Second Amendment" is hereby added to the
Agreement in the appropriate alphabetic order and shall read as follows:

              "Second Amendment" means that certain Amendment Number Two to Loan
and Security Agreement, dated as of February 28, 2005 by and among the Borrowers
and Agent.

            (xvi) The defined term "Third Amendment" is hereby added to the
Agreement in the appropriate alphabetic order and shall read as follows:

              "Third Amendment" means that certain Waiver and Amendment Number
Three to Loan and Security Agreement, dated as of May 12, 2005 by and among the
Borrowers and Agent.

          (d) The second paragraph of Section 2.6(a) of the Agreement is hereby
amended and restated in its entirety as follows:

            The foregoing notwithstanding, at no time shall any portion of the
Obligations (other than Bank Product Obligations) bear interest on the Daily
Balance thereof at a per annum rate less than 4.50%. To the extent that interest
accrued hereunder at the rate set forth herein would be less than the foregoing
minimum daily rate, the interest rate chargeable hereunder for such day
automatically shall be deemed increased to the minimum rate.

          (e) Section 2.11(c) of the Agreement is hereby amended and restated in
its entirety as follows:

            (c) Audit, Appraisal, and Valuation Charges; Annual Appraisals.
Audit, appraisal, and valuation fees and charges as follows (i) a fee of $850
per day, per auditor, plus out-of-pocket expenses for each collateral audit of a
Borrower performed by personnel employed by Agent, which collateral audits may
be performed as frequently as Agent deems necessary, provided, however,
Borrowers shall not be obligated to reimburse Agent for more than 2 collateral
audits during any calendar year (with additional collateral audits at the
Agent's expense), (ii) if implemented, a fee of $850 per day, per applicable
individual, plus out of pocket expenses for the establishment of electronic
collateral reporting systems, (iii) a fee of $1,500 per day per appraiser, plus
out-of-pocket expenses, for each appraisal of the Collateral, or any portion
thereof, performed by personnel employed by Agent, and (iv) the actual charges
paid or incurred by Agent if it elects to employ the services of one or more
third Persons to perform financial audits of Borrowers or their Subsidiaries, to
establish electronic collateral reporting systems, to appraise the Collateral,
or any portion thereof, or to assess Borrowers' and their Subsidiaries' business
valuation. Agent shall have the right to have the Inventory reappraised by a
qualified appraisal company selected by Agent: (1) except as provided in clauses
(2) and (3) below, once during any year following the Closing Date for the
purpose of redetermining the Net Liquidation Percentage of the Inventory portion
of the Collateral and, as a result, redetermining the Borrowing Base, (2) at any
time following an appraisal, the results of which are not satisfactory to Agent,
and (3) at any time following the occurrence of an Event of Default which is
continuing.

                                       6
<PAGE>

          (f) The first paragraph of Section 2.12(a) of the Agreement is hereby
amended and restated in its entirety as follows:

            (a) Subject to the terms and conditions of this Agreement, the
Issuing Lender agrees to issue letters of credit for the account of Borrowers
(each, an "L/C") or to purchase participations or execute indemnities or
reimbursement obligations (each such undertaking, an "L/C Undertaking") with
respect to letters of credit issued by an Underlying Issuer (as of the Closing
Date, the prospective Underlying Issuer is to be Wells Fargo) for the account of
Borrowers. Each request for the issuance of a Letter of Credit or the amendment,
renewal, or extension of any outstanding Letter of Credit shall be made in
writing by an Authorized Person and delivered to the Issuing Lender and Agent
via hand delivery, telefacsimile, or other electronic method of transmission
reasonably in advance of the requested date of issuance, amendment, renewal, or
extension. Each such request shall be in form and substance satisfactory to the
Issuing Lender in its Permitted Discretion and shall specify (i) the amount of
such Letter of Credit, (ii) the date of issuance, amendment, renewal, or
extension of such Letter of Credit, (iii) the expiration of such Letter of
Credit, (iv) the name and address of the beneficiary thereof (or the beneficiary
of the Underlying Letter of Credit, as applicable), and (v) such other
information (including, in the case of an amendment, renewal, or extension,
identification of the outstanding Letter of Credit to be so amended, renewed, or
extended) as shall be necessary to prepare, amend, renew, or extend such Letter
of Credit. If requested by the Issuing Lender, Borrowers also shall be an
applicant under the application with respect to any Underlying Letter of Credit
that is to be the subject of an L/C Undertaking. The Issuing Lender shall have
no obligation to issue a Letter of Credit if any of the following would result
after giving effect to the issuance of such requested Letter of Credit:

                                       7
<PAGE>

              (i) the Letter of Credit Usage would exceed the Borrowing Base
less the outstanding amount of Advances, or

              (ii) the Letter of Credit Usage would exceed $30,000,000, or

              (iii) the Letter of Credit Usage would exceed the Maximum Revolver
Amount less the outstanding amount of Advances.

          (g) Section 2.13(b)(i) of the Agreement is hereby amended and restated
in its entirety as follows:

              (i) Administrative Borrower may, at any time and from time to
time, so long as (1) no Event of Default has occurred and is continuing, and (2)
TTM EBITDA is greater than $10,000,000, elect to exercise the LIBOR Option by
notifying Agent prior to 11:00 a.m. (California time) at least 3 Business Days
prior to the commencement of the proposed Interest Period (the "LIBOR
Deadline"). Notice of Administrative Borrower's election of the LIBOR Option for
a permitted portion of the Advances and an Interest Period pursuant to this
Section shall be made by delivery to Agent of a LIBOR Notice received by Agent
before the LIBOR Deadline, or by telephonic notice received by Agent before the
LIBOR Deadline (to be confirmed by delivery to Agent of a LIBOR Notice received
by Agent prior to 5:00 p.m. (California time) on the same day). Promptly upon
its receipt of each such LIBOR Notice, Agent shall provide a copy thereof to
each of the Lenders having a Revolver Commitment.

          (h) Section 5.3 of the Agreement is hereby amended and restated in its
entirety as follows:

            5.3 Eligible Inventory. All Eligible Inventory is of good and
merchantable quality, free from known defects. As to each item of Inventory that
is identified by Administrative Borrower as Eligible Inventory in a borrowing
base report submitted to Agent, such Inventory is not excluded as ineligible by
virtue of one or more of the excluding criteria set forth in the definition of
Eligible Inventory.

          (i) The table in Section 6.2 of the Agreement is hereby amended and
restated in its entirety as follows:

                                       8
<PAGE>

================================================================================
Weekly              (a)  a sales journal, collection journal, and credit
                         register since the last such schedule, a report
                         regarding credit memoranda that have been issued since
                         the last such report, and a calculation of the
                         Borrowing Base as of such date, and

                    (b)  Inventory reports specifying the cost of Borrowers' and
                         their Subsidiaries Inventory, by category, and
--------------------------------------------------------------------------------
Monthly (not later  (c)  a detailed calculation of the Borrowing Base (including
than the 10th day        detail regarding those Accounts of Borrowers that are
of each month)           not Eligible Accounts),

                    (d)  a detailed aging, by total, of the Accounts of
                         Borrowers, together with a reconciliation to the
                         detailed calculation of the Borrowing Base previously
                         provided to Agent, and together with a reconciliation
                         to the general ledger,

                    (e)  a summary aging, by vendor, of Borrowers' and their
                         Subsidiaries' accounts payable, accrued expenses, held
                         check listing and any book overdraft, together with a
                         reconciliation to the general ledger,

                    (f)  a detailed report regarding Borrowers' and their
                         Subsidiaries' cash and Cash Equivalents including an
                         indication of which amounts constitute Qualified Cash,
                         and
--------------------------------------------------------------------------------
Quarterly           (g)  a detailed list of each Borrower's and each of its
                         Subsidiaries' customers,

                    (h)  a report regarding each Borrower's and each of its
                         Subsidiaries' accrued, but unpaid, ad valorem taxes,
                         and
--------------------------------------------------------------------------------
Upon request by     (i)  copies of invoices in connection with Borrowers' and
Agent                    their Subsidiaries' Accounts, credit memos, remittance
                         advices, deposit slips, shipping and delivery documents
                         in connection with Borrowers' and their Subsidiaries'
                         Accounts and, for Inventory and Equipment acquired by
                         Borrowers or their Subsidiaries, purchase orders and
                         invoices,

                    (j)  such other reports as to the Collateral or the
                         financial condition of Borrowers and their
                         Subsidiaries, as Agent may request, and

                    (k)  notice of all claims, offsets, or disputes asserted by
                         Account Debtors with respect to Borrowers' and their
                         Subsidiaries' Accounts.
================================================================================

     (j) Section 7.18 of the Agreement is hereby amended and restated in its
entirety as follows:

        7.18 Financial Covenants.

          (a) Fail to maintain or achieve:

                                       9
<PAGE>

            (i) Minimum EBITDA. EBITDA, measured on a quarterly basis, of at
least the required amount set forth in the following table for the applicable
period set forth opposite thereto:

--------------------------------------------------------------------------------
            Applicable Amount                           Applicable Period
--------------------------------------------------------------------------------
               ($4,600,000)                           For the 3 month period
                                                        ending June 30 2005
--------------------------------------------------------------------------------
               $(1,949,000)                          For the 6 month period
                                                    ending September 30, 2005
--------------------------------------------------------------------------------
               $10,212,000                           For the 9 month period
                                                     ending December 31, 2005
--------------------------------------------------------------------------------
                $7,265,000                           For the 12 month period
                                                      ending March 31, 2006
--------------------------------------------------------------------------------
 The "Applicable Amount(s)" for such future     For the trailing 12 month period
periods shall be determined by Agent in its     ending on the last day of each
  sole discretion based upon, among other       fiscal quarter of Administrative
 things, the Projections to be delivered to           Borrower thereafter.
  Agent (pursuant to Section 6.3(c) of the
   Agreement) prior to the commencement of
Parent's 2007 fiscal year. Within 30 days of
 Agent's receipt of such Projections, Agent
  shall advise Borrowers in writing of such
       future "Applicable Amount(s)".
--------------------------------------------------------------------------------

          (b) Make:

            (ii) Capital Expenditures. Capital Expenditures in excess of
$8,441,000 for Parent's 2006 fiscal year. For Parent's fiscal years 2007 and
beyond such amount shall be determined by Agent in its sole discretion based
upon, among other things, the Projections to be delivered to Agent (pursuant to
Section 6.3(c) of the Agreement) prior to the commencement of Parent's 2007
fiscal year. Within 30 days of Agent's receipt of such Projections, Agent shall
advise Borrowers in writing of such future amounts.

     3. WAIVER. Borrowers hereby request and Agent and the Lenders hereby agree
to waive, effective as of April 29, 2005, the Cash Dominion Triggering Event and
the Collateral Reporting Triggering Event that occurred on April 29, 2005 as a
result of Borrowing Base Availability being less than $10,000,000.

     4. EXTENSIONS. Pursuant to Section 6.3(d) of the Agreement, Borrowers are
required to deliver to Agent, with copies to each Lender, certain consolidated
financial statements of Parent and its Subsidiaries for each fiscal year,
audited by independent certified public accountants. Borrowers hereby request
and Agent and the Lenders hereby agree to extend to July 31, 2005 the date that
the Borrowers are required to deliver such financial statements for Parent's
fiscal year ending March 31, 2004. In addition, Borrower hereby request and
Agent and the Lenders hereby agree to extend to October 31, 2005 the date that
the Borrowers are required to deliver such financial statements for Parent's
fiscal year ending March 31, 2005.

                                       10
<PAGE>

     5. REPRESENTATIONS AND WARRANTIES. Borrowers hereby affirm to the Lender
Group all of Borrowers' representations and warranties set forth in the
Agreement are true, complete and accurate in all respects as of the date hereof.

     6. NO DEFAULTS. Borrowers hereby affirm to the Lender Group that no Event
of Default has occurred and is continuing as of the date hereof.

     7. CONDITIONS PRECEDENT. The effectiveness of this Amendment is expressly
conditioned upon: (i) the receipt by Agent of a fully executed copy of this
Amendment and the Fee Letter; (ii) payment to Agent of fees payable under the
Fee Letter, which fees will be charged to Borrowers' Loan Account pursuant to
Section 2.6(d) of the Agreement; (iii) the receipt by Agent of a certificate of
status with respect to each Borrower, dated within 10 days of this Amendment,
such certificate to be issued by an appropriate officer of the jurisdiction of
organization of such Borrower, which certificate shall indicate that such
Borrower is in good standing in such jurisdiction; (iv) completion of Agent's
business, legal and collateral due diligence, the results of which are
satisfactory to Agent; and (v) review of Borrowers' business plan, the results
of which are satisfactory to Agent.

     8. CONDITIONS SUBSEQUENT. The failure to satisfy any of the following
conditions subsequent shall constitute an Event of Default:

        (a) Within 15 days of the Amendment, Agent shall have received (i)
updated Schedules 5.16 and 5.18 to the Agreement, (ii) an Amendment to
Memorandum of Security Interest in Intellectual Property with schedules attached
thereto, and (iii) an opinion of Borrowers' counsel in form and substance
satisfactory to Agent; and

        (b) Within 30 days of the Amendment, Agent shall have received
certificates of status with respect to each Borrower, each dated within 30 days
of this Amendment, such certificates to be issued by the appropriate officer of
the jurisdictions (other than the jurisdiction of organization of such Borrower)
in which its failure to be duly qualified or licensed would constitute a
Material Adverse Change, which certificates shall indicate that such Borrower is
in good standing.

     9. COSTS AND EXPENSES. Borrowers shall pay to Agent all of the Lender
Group's out-of-pocket costs and expenses (including, without limitation, the
fees and expenses of its counsel, which counsel may include any local counsel
deemed necessary, search fees, filing and recording fees, documentation fees,
appraisal fees, travel expenses, and other fees) arising in connection with the
preparation, execution, and delivery of this Amendment and all related
documents.

                                       11
<PAGE>

     10. LIMITED EFFECT. In the event of a conflict between the terms and
provisions of this Amendment and the terms and provisions of the Agreement, the
terms and provisions of this Amendment shall govern. In all other respects, the
Agreement, as amended and supplemented hereby, shall remain in full force and
effect.

     11. COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which when so executed and delivered shall be deemed to be an original. All
such counterparts, taken together, shall constitute but one and the same
Amendment. This Amendment shall become effective upon the execution of a
counterpart of this Amendment by each of the parties hereto.

                         [Signature follow on next page]

                                       12
<PAGE>

     IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
the date first set forth above.

                                 WELLS FARGO FOOTHILL, INC.,
                                 a California corporation, as Agent and a Lender

                                 By:    /s/ Daniel Whitwer
                                        ----------------------------------------
                                 Title: Vice President
                                        ----------------------------------------

                                 ADVANCED MARKETING SERVICES, INC.,
                                 a Delaware corporation

                                 By:    /s/ Curtis R. Smith
                                        ----------------------------------------
                                 Title: EVP, CFO
                                        ----------------------------------------

                                 PUBLISHERS GROUP WEST
                                 INCORPORATED, a California corporation

                                 By:    /s/ Curtis R. Smith
                                        ----------------------------------------
                                 Title: EVP, CFO
                                        ----------------------------------------

                                 PUBLISHERS GROUP INCORPORATED,
                                 a California corporation

                                 By:    /s/ Curtis R. Smith
                                        ----------------------------------------
                                 Title: EVP, CFO
                                        ----------------------------------------

                                       13
<PAGE>

                                    Exhibit A

                             EXHIBITS AND SCHEDULES

Exhibit A-1     Form of Assignment and Acceptance
Exhibit C-1     Form of Collateral Access Agreement (Landlord Waiver)
Exhibit C-2     Form of Compliance Certificate
Exhibit L-1     Form of LIBOR Notice

Schedule A-1    Agent's Account
Schedule C-1    Commitments
Schedule D-1    Designated Account
Schedule E-1    Eligible Inventory Locations
Schedule P-1    Permitted Investments
Schedule P-2    Permitted Liens
Schedule R-1    Real Property Collateral
Schedule 2.7(a) Cash Management Banks
Schedule 5.5    Locations of Inventory and Equipment
Schedule 5.7(a) States of Organization
Schedule 5.7(b) Chief Executive Offices
Schedule 5.7(c) Organizational Identification Numbers
Schedule 5.7(d) Commercial Tort Claims
Schedule 5.8(b) Capitalization of Borrowers
Schedule 5.8(c) Capitalization of Borrowers' Subsidiaries
Schedule 5.10   Litigation
Schedule 5.14   Environmental Matters
Schedule 5.16   Intellectual Property
Schedule 5.18   Deposit Accounts and Securities Accounts
Schedule 5.20   Permitted Indebtedness

                                    Exhibit A
<PAGE>

                                  Schedule C-1
                                  ------------

                                   Commitments

================================================================================

          Lender                                             Revolver Commitment
================================================================================
Wells Fargo Foothill, Inc.                                       $90,000,000
================================================================================

================================================================================

================================================================================

================================================================================

================================================================================
All Lenders                                                      $90,000,000
================================================================================EXHIBIT 10.1

                    AMENDED AND RESTATED EMPLOYMENT AGREEMENT
                    -----------------------------------------

     THIS EMPLOYMENT AGREEMENT is made as of this 16th day of May, 2005, by and
between William J. Merritt, a Pennsylvania resident (the "Employee"), and
InterDigital Communications Corporation, a corporation organized and existing
under the laws of the Commonwealth of Pennsylvania (the "Company").

     WHEREAS, the Company is engaged in the business of the design and
development of advanced wireless technologies and products that drive voice and
data communications and the licensing of wireless digital technology (as more
particularly described in the Company's Form 10-K for the year ended December
31, 2004) (the "Business"). The definition of Business shall change and evolve
over time as the Company's business changes and evolves, and such definition
shall further automatically adjust each year with the filing of the Company's
then current Form 10-K to be consistent with the business of the Company
described therein.

     WHEREAS, Employee and the Company are parties to a certain Employment
Agreement dated September 3, 1998 and amended as of April 6, 2000 (the "Original
Agreement").

     WHEREAS, Employees has been promoted to the position of Chief Executive
Officer of the Company (Employee's "Position") effective May 2, 2005.

     WHEREAS, the Company has offered Employee a substantial increase in
compensation and extended severance benefits on the condition that Employee
enter into this Agreement in order to amend and restate the Original Agreement
so as to set forth certain terms and conditions relating to Employee's continued
employment and directorship with the Company.

     NOW, THEREFORE, in consideration of the mutual covenants and obligations
contained herein, and intending to be legally bound, the parties, subject to the
terms and conditions set forth herein, agree as follows:

1. Salary Increase. The Company hereby grants Employee an increase to his base
salary as set forth in Section 5 below and Employee hereby accepts such
increase.

2. Term and Duties. Until such time as Employee's employment hereunder is
terminated pursuant to the provisions of Section 10 hereto (the "Term"),
Employee shall serve the Company faithfully and to the best of his ability and
shall devote his full time, attention, skill and efforts to the performance of
the duties required by or appropriate for his Position. Employee agrees to
assume such duties and responsibilities as may be customarily incident to such
position, and as may be reasonably assigned to Employee from time to time by the
Board of Directors of the Company. Employee shall report to the Board of
Directors of the Company.

3. Director Appointment. Employee is being appointed a director of the Company
contemporaneously with Employee's assumption of the Position. Employee agrees
that, without further action or acknowledgment by Employee or the Company, his
position as a director of the Company and his position as an officer or director
of all subsidiaries or affiliates of the Company shall terminate upon Employee's
termination of employment regardless of the reason for the termination.

<PAGE>

4. Other Business Activities. During the Term, Employee will not, without the
prior written consent of the Company, directly or indirectly engage in any other
business activities or pursuits whatsoever, except activities in connection with
any charitable or civic activities, personal investments and serving as an
executor, trustee or in other similar fiduciary capacity; provided, however,
that such activities do not interfere with his performance of his
responsibilities and obligations pursuant to this Agreement.

5. Compensation.

     (a) The Company shall pay Employee, and Employee hereby agrees to accept,
as compensation for all services rendered hereunder and for Employee's covenant
not to compete as provided for in Section 9 hereof, a base salary at the annual
rate of Three Hundred and Sixty Thousand Dollars (subject to any increase from
time to time, the "Base Salary"). The Base Salary shall be inclusive of all
applicable income, social security and other taxes and charges which are
required by law to be withheld by the Company or which are requested to be
withheld by Employee, and which shall be withheld and paid in accordance with
the Company's normal payroll practice for its similarly situated employees from
time to time in effect.

     (b) Employee shall be eligible to participate in the Company's Annual
Employee Bonus Plan, as amended from time to time (the " Bonus Plan"), on terms
and conditions no less favorable than those provided to the other Company senior
and executive officers so long as the same may be in effect. For the Year 2005,
Employee shall have a target bonus level of 57% of his Base Salary under the
Bonus Plan. The goals shall be consistent with the goals set for other senior
and executive officers. The bonus shall be subject to the terms of the Bonus
Plan, as amended from time to time, and shall be referred to herein as the
"Annual Target Bonus".

     (c) Employee shall be eligible to participate in the Company's Long Term
Compensation Program as it may be amended from time to time for so long as the
same may be in effect ("Program"). Employee's existing eligibility for an LTIP
cash bonus and RSU award shall be adjusted upward on a pro rata basis for the
period remaining under the current Program cycles to reflect his salary of
$360,000 and a target of 120% of Base Salary. Additionally, Employee has been
awarded 10,000 Restricted Stock Units. Such shares shall be granted pursuant to,
and shall be governed by, the terms and conditions of the Company's 1999
Restricted Stock Plan ("1999 Plan"). Subject to such terms and conditions of the
1999 Plan, the Restricted Stock Units shall vest as follows:

                          May 5, 2006     3,333 shares
                          May 5, 2007     3,333 shares
                          May 5, 2008     3,334 shares

     (d) In the event any amount or benefit payable to the Employee under this
Agreement or under any other plan, agreement or arrangement applicable to the
Employee, is subject to an excise tax imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended (the "Code") (or imposed under any successor
provision of the Code imposing a tax liability on "excess parachute payments" as
that term is defined in Code Section 280G), Employee shall be entitled, in
addition to any other amounts payable under the terms of this Agreement or under
any other plan, agreement or arrangement applicable to the Employee, to a cash
payment in an amount sufficient to indemnify the Employee (or such other person
as may be liable for the payment of such excise tax) for the amount of any such
excise tax, and leaving Employee with an amount, net after all federal, state
and local taxes, equal to the amount Employee would have had if no portion of
his benefit under the Plan constituted an "excess parachute payment."
Notwithstanding the foregoing, the determination of the amount necessary to
indemnify the Employee shall be made taking into account all other payments made
to the Employee under any plans, agreements or arrangements aside from this
Agreement that are intended to indemnify the Employee with respect to excise
taxes on "excess parachute payments". Any disputes as to calculations to be made
under this paragraph shall be resolved by the Company's independent auditors,
whose determinations shall be final and binding. This provision shall survive
the termination of this Agreement and Employee's employment.

                                       2
<PAGE>

     (e) If any payment to Executive under the terms of this Agreement is
determined to constitute a payment of nonqualified deferred compensation for
purposes of Section 409A of the Code, such payment shall be delayed until the
date that is six months after the date of Executive's separation from service
with the Company, so as to comply with the special rule for certain "specified
employees" set forth in Code Section 409A(a)(2)(B)(i) unless it is determined
that immediate distribution is permissible (and does not trigger any additional
tax liability pursuant to Code Section 409A(a)(l)) pursuant to Code Section
409A(a)(2)(A)(v) by reason of being payable in connection with a change in the
ownership or effective control of the Company or in the ownership of a
substantial portion of the assets of the Company or is otherwise determined not
to be subject to such addition tax liability.

6. Benefits and Expenses. Employee and his dependants shall be entitled to
receive those employee benefits (including without limitation medical plan,
dental plan, optional 401K participation and expense reimbursement) as shall be
provided to similarly situated executive employees of the Company ("Benefits").

7. Confidentiality. Employee recognizes and acknowledges that the Proprietary
Information (as hereinafter defined) is a valuable, special and unique asset of
the Business of the Company. As a result, both during the Term and thereafter,
Employee shall not, without the prior written consent of the Company, for any
reason either directly or indirectly divulge to any third party or use for his
own benefit, or for any purpose other than the exclusive benefit of the Company,
any confidential, proprietary, business and technical information or trade
secrets of the Company or of any subsidiary or affiliate of the Company
("Proprietary Information") revealed, obtained or developed in the course of his
employment with the Company. Such Proprietary Information shall include, but
shall not be limited to, the intangible personal property described in Section
8(b) hereof, any information relating to methods of production and manufacture,
research, computer codes or instructions (including source and object code
listings, program logic algorithms, subroutines, modules or other subparts of
computer programs and related documentation, including program notation),
computer processing systems and techniques, concepts, layouts, flowcharts,
specifications, know how, any associated user or service manuals or other like
textual materials (including any other data and materials used in performing the
Employee's duties), all computer inputs and outputs (regardless of the media on
which stored or located), hardware and software configurations, designs,
architecture, interfaces, plans, sketches, blueprints, and any other materials
prepared by the Employee in the course of, relating to or arising out of his
employment by the Company, or prepared by any other Company employee,
representative, or contractor for the Company, or its customers (including
information and other material relating to any ASIC), costs, business studies,
business procedures, finances, marketing data, methods, plans and efforts, the
identities of licensees, strategic partners, customers, contractors and
suppliers and prospective licensees, strategic partners, customers, contractors
and suppliers, the terms of contracts and agreements with licensees, strategic
partners, customers, contractors and suppliers, the Company's relationship with
actual and prospective licensees, strategic partners, customers, contractors and
suppliers and the needs and requirements of, and the Company's course of dealing
with, any such actual or prospective licensees, strategic partners, customers,
contractors and suppliers, personnel information, customer and vendor credit
information, and any other materials that have not been made available to the
general public, provided, that nothing herein contained shall restrict
Employee's ability to make such disclosures during the course of his employment
as may be necessary or appropriate to the effective and efficient discharge of
the duties required by or appropriate for his Position or as such disclosures
may be required by law; and further provided, that nothing herein contained
shall restrict Employee from divulging or using for his own benefit or for any
other purpose any Proprietary Information that is readily available to the
general public so long as such information did not become available to the
general public as a direct or indirect result of Employee's breach of this
Section 7. Failure by the Company to mark any of the Proprietary Information as
confidential or proprietary shall not affect its status as Proprietary
Information under the terms of this Agreement.

                                       3
<PAGE>

8. Property.

     (a) All right, title and interest in and to Proprietary Information shall
be and remain the sole and exclusive property of the Company. During the Term,
Employee shall not remove from the Company's offices or premises any documents,
records, notebooks, files, correspondence, reports, memoranda or similar
materials of or containing Proprietary Information, or other materials or
property of any kind belonging to the Company unless necessary or appropriate in
accordance with the duties and responsibilities required by or appropriate for
his Position and, in the event that such materials or property are removed, all
of the foregoing shall be returned to their proper files or places of
safekeeping as promptly as possible after the removal shall serve its specific
purpose. Employee shall not make, retain, remove and/or distribute any copies of
any of the foregoing for any reason whatsoever except as may be necessary in the
discharge of his assigned duties and shall not divulge to any third person the
nature of and/or contents of any of the foregoing or of any other oral or
written information to which he may have access or with which for any reason he
may become familiar, except as disclosure shall be necessary in the performance
of his duties; and upon the termination of his employment with the Company, he
shall leave with or return to the Company all originals and copies of the
foregoing then in his possession, whether prepared by Employee or by others.

     (b)(i) Employee agrees that all right, title and interest in and to any
innovations, designs, systems, analyses, ideas for marketing programs, and all
copyrights, patents, trademarks and trade names, or similar intangible personal
property which have been or are developed or created in whole or in part by
Employee (1) at any time and at any place while the Employee is employed by
Company and which, in the case of any or all of the foregoing, are related to
and used in connection with the Business of the Company, (2) as a result of
tasks assigned to Employee by the Company, or (3) from the use of premises or
personal property (whether tangible or intangible) owned, leased or contracted
for by the Company (collectively, the "Intellectual Property"), shall be and
remain forever the sole and exclusive property of the Company. The Employee
shall promptly disclose to the Company all Intellectual Property, and the
Employee shall have no claim for additional compensation for the Intellectual
Property.

                                       4
<PAGE>

     (ii) The Employee acknowledges that all the Intellectual Property that is
copyrightable shall be considered a work made for hire under United States
Copyright Law. To the extent that any copyrightable Intellectual Property may
not be considered a work made for hire under the applicable provisions of the
United States Copyright Law, or to the extent that, notwithstanding the
foregoing provisions, the Employee may retain an interest in any Intellectual
Property that is not copyrightable, the Employee hereby irrevocably assigns and
transfers to the Company any and all right, title, or interest that the Employee
may have in the Intellectual Property under copyright, patent, trade secret and
trademark law, in perpetuity or for the longest period otherwise permitted by
law, without the necessity of further consideration. The Company shall be
entitled to obtain and hold in its own name all copyrights, patents, trade
secrets, and trademarks with respect thereto.

     (iii) Employee further agrees to reveal promptly all information relating
to the same to an appropriate officer of the Company and to cooperate with the
Company and execute such documents as may be necessary or appropriate (1) in the
event that the Company desires to seek copyright, patent or trademark
protection, or other analogous protection, thereafter relating to the
Intellectual Property, and when such protection is obtained, to renew and
restore the same, or (2) to defend any opposition proceedings in respect of
obtaining and maintaining such copyright, patent or trademark protection, or
other analogous protection.

     (iv) In the event the Company is unable after reasonable effort to secure
Employee's signature on any of the documents referenced in Section 8(b)(iii)
hereof, whether because of Employee's physical or mental incapacity or for any
other reason whatsoever, Employee hereby irrevocably designates and appoints the
Company and its duly authorized officers and agents as Employee's agent and
attorney in fact, to act for and in his behalf and stead to execute and file any
such documents and to do all other lawfully permitted acts to further the
prosecution and issuance of any such copyright, patent or trademark protection,
or other analogous protection, with the same legal force and effect as if
executed by Employee.

9. Covenant Not to Compete. The Employee shall not, during the Term and
thereafter for the Restricted Period (as defined below), do any of the
following, directly or indirectly, without the prior written consent of the
Company:

     (a) engage or participate in any product business directly competitive with
the Company's Business, or the business of any of the Company's subsidiaries or
affiliates, as same are conducted during the Term with respect to any period
during the Term, or upon the termination of Employee's employment hereunder with
respect to any period thereafter;

     (b) become interested in (as owner, stockholder, lender, partner,
co-venturer, director, officer, employee, agent, consultant or otherwise) any
person, firm, corporation, association or other entity engaged in any business
that is directly competitive with the Business of the Company or the business of
any subsidiary or affiliate of the Company, or become interested in (as owner,
stockholder, lender, partner, co-venturer, director, officer, employee, agent,
consultant or otherwise) any portion of the business of any person, firm,
corporation, association or other entity where such portion of such business is
competitive with the Business of the Company or the business of any subsidiary
or affiliate of the Company. Notwithstanding the foregoing, Employee may hold
not more than one percent (1 %) of the outstanding securities of any class of
any publicly traded securities of a company that is engaged in activities
referenced in Section 9(a) hereof;

                                       5
<PAGE>

     (c) influence or attempt to influence any licensee, strategic partner,
supplier, or customer of the Company or potential licensee, strategic partner,
supplier or customer of the Company to terminate or modify any written or oral
agreement or course of dealing with the Company; or

     (d) influence or attempt to influence any person or entity to either (i)
terminate or modify their employment, consulting, agency, distributorship or
other arrangement with the Company, or (ii) employ or retain, or arrange to have
any other person or entity employ or retain, any person or entity that has been
employed or retained by the Company as an employee, consultant, agent or
distributor of the Company at any time during the twelve (12) month period
immediately preceding the termination of Employee's employment hereunder.

     An activity shall be deemed "directly competitive" when there is a
reasonable likelihood based on Employee's actual possession (whether or not in
tangible form) of technical trade secrets or confidential information that the
activity prohibited would result in the use of technical or other trade secrets
or other confidential information of the Company's or its business associates.

     For purposes of this Section 9, the Restricted Period shall constitute a
period ending one (1) year after Employee's termination date, regardless of the
reason for termination.

10. Termination. Employee's employment hereunder may be terminated during the
Term upon the occurrence of any one of the events described in this Section 10.
Upon termination, Employee shall be entitled only to such compensation and
benefits as described in this Section 10.

10.1 Termination for Inability to Perform.

     (a) In the event of a long term disability of the Employee (as such term is
defined in the Company's Long Term Disability Plan) such that the Employee is
not otherwise qualified to perform the essential functions of the job with or
without reasonable accommodation ("Inability to Perform"), Employee's employment
hereunder may be terminated by the Company.

     (b) In the event of a termination of Employee's employment hereunder
pursuant to Section 10.1(a), Employee will be entitled to receive all accrued
and unpaid (as of the date of such termination) Base Salary and Benefits and
other forms of compensation and bonus payable or provided in accordance with the
terms of any then existing compensation, bonus or benefit plan or arrangement
("Other Compensation"), including payments prescribed under any disability or
life insurance plan or arrangement in which Employee is a participant or to
which Employee is a party as an employee of the Company. In addition, provided
Employee signs Company's standard form termination letter as provided for in
Section 11 below, Employee shall be entitled to receive continued Base Salary at
the rate in effect at the time of such termination reduced by the amount of
payments received by the Employee with respect to this period pursuant to any
Social Security disability entitlement, or any long term disability or any other
employee benefit plan, policy or program maintained by the Company to provide
benefits in the event of disability in which the Employee was entitled to
participate at the time of termination, and continued medical and dental
coverage pursuant to COBRA on terms and conditions comparable to those most
recently provided to the Employee pursuant to this Agreement (to the extent such
coverage is not provided under other Company policies, plans or programs
relating to disability) for a period of eighteen (18) months after termination
once the termination letter becomes effective. Such severance shall be inclusive
of all applicable income, social security and other taxes and charges which are
required by law to be withheld by the Company and shall be withheld and paid in
accordance with the Company's normal payroll practice for its employees from
time to time in effect. Except as specifically set forth in this Section
10.1(b), the Company shall have no liability or obligation to Employee for
compensation or benefits hereunder by reason of such termination.

                                       6
<PAGE>

     (c) For purposes of this Section 10.1, the determination as to whether
Employee has a Disability shall be made by a licensed physician selected by the
Company (and reasonably acceptable to Employee) and shall be based upon a full
physical examination and good faith opinion by such physician.

10.2 Termination by Death. In the event that Employee dies during the Term,
Employee's employment hereunder shall be terminated thereby and the Company
shall pay to Employee's executors, legal representatives or administrators an
amount equal to the accrued and unpaid portion of his Base Salary, Benefits and
Other Compensation up through the date on which he dies. Except as specifically
set forth in this Section 10.2, the Company shall have no liability or
obligation hereunder to Employee's executors, legal representatives,
administrators, heirs or assigns or any other person claiming under or through
him by reason of Employee's death, except that Employee's executors, legal
representatives or administrators will be entitled to receive the payment
prescribed under any death or disability benefits plan in which he is a
participant as an employee of the Company, and to exercise any rights afforded
under any compensation or benefit plan then in effect.

10.3 Termination for Cause.

     (a) The Company may terminate Employee's employment hereunder at any time
for "cause" upon written notice to Employee. For purposes of this Agreement,
"cause" shall mean: (i) any material breach by Employee of any of his
obligations under this Agreement, which breach is not cured within thirty (30)
days after Employee's receipt of written notification from the Company of such
breach, or (ii) other conduct of Employee involving any type of willful
misconduct with respect to the Company, including without limitation fraud,
embezzlement, theft or proven dishonesty in the course of his employment or
conviction of a felony.

     (b) In the event of a termination of Employee's employment hereunder
pursuant to Section 10.3(a), Employee shall be entitled to receive all accrued
but unpaid (as of the effective date of such termination) Base Salary, Benefits
and Other Compensation. All Base Salary, Benefits and Other Compensation shall
cease at the time of such termination, subject to the terms of any benefit or
compensation plan then in force and applicable to Employee. Except as
specifically set forth in this Section 10.3, the Company shall have no liability
or obligation hereunder, including without limitation for any severance
whatsoever, by reason of such termination.

10.4 Termination Without Cause.

     (a) The Company may terminate Employee's employment hereunder at any time,
for any reason, without cause upon notice to Employee.

     (b) In the event of a termination of Employee's employment hereunder
pursuant to Section 10.4(a), Employee shall be entitled to receive all accrued
but unpaid (as of the effective date of such termination) Base Salary, Benefits
and Other Compensation. In addition, provided Employee signs and does not revoke
Company's standard form termination letter as provided for in Section 11 below,
Employee shall be entitled to receive continued payment of Employee's Base
Salary and continued medical and dental coverage pursuant to COBRA on terms and
conditions comparable to those most recently provided to the Employee pursuant
to this Agreement for a period of eighteen (18) months after the date of such
termination, once the termination letter becomes effective. Employee shall also
be entitled to receive additional severance equal to the total amount of fifty
percent (50%) of Employee's Target Bonus for the year in which Employee was
terminated. This additional severance shall be payable in equal installments
over a period of eighteen (18) months after the date of such termination once
the termination letter becomes effective. Such severance shall be inclusive of
all applicable income, social security and other taxes and charges which are
required by law to be withheld by the Company and shall be withheld and paid in
accordance with the Company's normal payroll practice for its executives from
time to time in effect. Except as specifically set forth in this Section
10.4(b), all Base Salary, Benefits and Other Compensation shall cease at the
time of such termination, subject to the terms of any benefit or compensation
plan then in force and applicable to Employee. Except as specifically 10.4, the
Company shall have no liability or obligation hereunder by reason of such
termination.

                                       7
<PAGE>

10.5 Termination by Employee.

     (a) Employee may terminate Employee's employment hereunder at any time, for
Good Reason or without Good Reason, effective upon the date designated by
Employee in written notice of the termination of his employment hereunder
pursuant to this Section 10.5(a); provided that, such date shall be at least
thirty (30) days after the date of such notice. Company may elect to have
Employee remain absent from the workplace and cease Company business during all
or part of such thirty (30) day period. For purposes of this Agreement, Good
Reason shall mean: (i) the failure by the Company to pay in a timely manner Base
Salary or any other material form of compensation or material benefit to be paid
or provided to Employee hereunder, or (ii) any material breach, not encompassed
within clause (i) of this Section 10.5(a), of the obligations of the Company
under this Agreement which breach is not cured within thirty (30) days after the
Company's receipt of written notification from the Employee of such breach.

     (b) In the event of a termination of Employee's employment hereunder
pursuant to Section 10.5(a) hereof, Employee shall be entitled to receive all
accrued but unpaid (as of the effective date of such termination) Base Salary,
Benefits and Other Compensation. In addition, solely if such termination is for
Good Reason and provided Employee signs and does not revoke Company's standard
form termination letter as provided for in Section 11 below, Employee shall be
entitled to receive continued payment of the Employee's Base Salary, and medical
and dental coverage pursuant to COBRA on terms and conditions comparable to
those most recently provided to the Employee pursuant to this Agreement for a
period of eighteen (18) months after the date of such termination, once the
termination letter becomes effective. Employee shall also be entitled to receive
additional severance equal to the total amount fifty percent (50%) of Employee's
Target Bonus for the year in which Employee was terminated, payable in equal
installments over a period of eighteen (18) months after the date of such
termination once the termination letter becomes effective. Such severance shall
be inclusive of all applicable income, social security and other taxes and
charges which are required by law to be withheld by the Company and shall be
withheld and paid in accordance with the Company's normal payroll practice for
its executives from time to time in effect. Except as specifically set forth in
this Section 10.5(b), all Base Salary, Benefits and Other Compensation shall
cease at the time of such termination, subject to the terms of any benefit or
compensation plan then in force and applicable to Employee. Except as
specifically set forth in this Section 10.5, the Company shall have no liability
or obligation hereunder by reason of such termination.

                                       8
<PAGE>

10.6 Change of Control.

     (a) If there is a Change of Control during the Term, and Employee's
employment with the Company hereunder is terminated within one (1) year
following such Change of Control by the Company (except for cause) or by
Employee (whether or not for Good Reason), provided Employee signs Company's
standard form termination letter as provided for in Section 11 below, Employee
shall be entitled to receive all accrued but unpaid (as of the effective date of
such termination) Base Salary, Benefits and Other Compensation. In addition, (i)
Employee shall be entitled to receive, on the date of such termination, an
amount equal to two years' worth of Employee's Base Salary, and (ii) all stock
options and restricted stock granted to Employee by Company which pursuant to
the terms of the applicable plan vest upon a Change in Control shall vest.
Except as specifically set forth in this Section 10.6, all Base Salary, Benefits
and Other Compensation shall cease at the time of such termination, subject to
the terms of any benefit or compensation plans then in force and applicable to
Employee, and the Company shall have no liability or obligation hereunder by
reason of such termination.

     (b) For purposes of this Section 10.6, a "Change of Control" means the
acquisition (including by merger or consolidation, or by the issuance by the
Company of its securities) by one or more persons in one transaction or a series
of related transactions, of more than fifty percent (50%) of the voting power
represented by the outstanding stock of the Company on the date hereof or a sale
of substantially all of the assets of the Company. For these purposes, "Person"
means an individual, partnership, corporation, joint venture, association,
trust, unincorporated association, other entity or association.

10.7 Termination for Absenteeism.

     (a) Regular attendance at work or in conducting work is an essential
element of Employee's job. Without limiting the Company's right to terminate
Employee pursuant to Section 10.1 or 10.3 herein, in the event that Employee is
absent for more than one hundred and fifty (150) days within any twelve (12)
month period, Employee's employment hereunder may be terminated by Company.

     (b) In the event of a termination of Employee's employment hereunder
pursuant to Section 10.7(a), Employee will be entitled to receive all accrued
and unpaid (as of the date of such termination) Base Salary and Benefits and
Other Compensation, including payments prescribed under any disability or life
insurance plan or arrangement in which Employee is a participant or to which
Employee is a party as an employee of the Company. In addition, provided
Employee signs Company's standard form termination letter as provided for in
Section 11 below, Employee shall be entitled to receive continued payment of
Base Salary at the rate in effect at the time of such termination, such amount
being reduced by the amount of payments received by the Employee with respect to
this period pursuant to any Social Security disability entitlement, or any long
term disability or any other employee benefit plan, policy or program maintained
by the Company to provide benefits in the event of disability in which the
Employee was entitled to participate at the time of termination under Section
10.8(a), and medical and dental coverage pursuant to COBRA on terms and
conditions comparable to those most recently provided to the Employee pursuant
to this Agreement( to the extent such coverage is not provided under other
Company policies, plans or programs relating to disability) for a period of
eighteen (18) months after the date of such termination once the termination
letter becomes effective. Employee shall also be entitled to receive additional
severance amount equal to the total amount of fifty percent (50%) of Employee's
Target Bonus for the year in which Employee was terminated, payable in equal
installments over a period of eighteen (18) months after the date of such
termination, once the termination letter becomes effective. Except as
specifically set forth in, this Section 10.7(b), the Company shall have no
liability or obligation to Employee for compensation or benefits hereunder by
reason of such termination.

                                       9
<PAGE>

11. Termination Letter. As a condition precedent to the Company's payment of
severance and continuation of medical and dental insurance coverage pursuant to
Sections 10.1, 10.4, 10.5, 10.6 and 10.7 above, Employee must sign and deliver
to Company, Company's proposed termination letter, without revocation, which
shall include, without limitation, a broad based employment release (containing,
without limitation, a release of claims for age discrimination), an obligation
to return Company property, a reiteration of Employee's confidentiality
obligations, and other terms protecting the Company's reasonable business
interests, within the time frame specified in the termination letter.

12. Other Agreements. Employee represents and warrants to the Company that:

     (a) There are no restrictions, agreements or understandings whatsoever to
which Employee is a party which would prevent or make unlawful Employee's
execution of this Agreement or Employee's employment hereunder, or which are or
would be inconsistent or in conflict with this Agreement or Employee's
employment hereunder, or would prevent, limit or impair in any way the
performance by Employee of his obligations hereunder,

     (b) Employee's execution of this Agreement and Employee's employment
hereunder shall not constitute a breach of any contract, agreement or
understanding, oral or written, to which Employee is a party or by which
Employee is bound, and

     (c) Employee is free to execute this Agreement and to enter into the employ
of the Company pursuant to the provisions set forth herein.

     (d) Employee shall disclose the existence and terms of the restrictive
covenants set forth in this Agreement to any employer that the Employee may work
for during the term of this Agreement (which employment is not hereby
authorized) or after the termination of the Employee's employment at the
Company.

13. Survival of Provisions. The provisions of this Agreement set forth in
Sections 7, 8, 9, 10 (as to section 10, solely with respect to the payment
obligations of the Company to Employee, if any, set forth therein), 11 12, 13,
14, 17, 19, 23 and 24 hereof shall survive the termination of Employee's
employment hereunder. If for any reason Employee shall continue to be employed
by the Company following the termination of Employee's employment hereunder,
Employee shall have no right to receive any severance or other payments
hereunder until Employee ceases to be employed by the Company, whereupon
Employee's right to severance or other payments, if any, shall be governed by
the provisions of Section 10 hereof with respect to the particular circumstances
involved in the Employee's termination of employment.

                                       10
<PAGE>

14. Successors and Assigns. This Agreement shall inure to the benefit of and be
binding upon the Company and Employee and their respective successors,
executors, administrators, heirs and/or permitted assigns; provided, however,
that neither Employee nor the Company may make any assignments of this Agreement
or any interest herein, by operation of law or otherwise, without the prior
written consent of the other party hereto.

15. Employee Benefits. This Agreement shall not be construed to be in lieu of or
to the exclusion of any other rights, benefits and privileges to which Employee
may be entitled as an employee of the Company under any retirement, pension,
profit sharing, insurance, hospital or other plans or benefits which may now be
in effect or which may hereafter be adopted.

16. Notice. Any notice or communication required or permitted under this
Agreement shall be made in writing and sent by certified or registered mail,
return receipt delivery, or by recognized overnight courier, addressed as
follows:

     If to Employee:

                  William J. Merritt
                  c/o InterDigital Communications Corporation
                  781 Third Avenue
                  King of Prussia, Pennsylvania  19406

     If to Company:

                  InterDigital Communications Corporation
                  781 Third Avenue
                  King of Prussia, Pennsylvania  19406
                  Attention: General Counsel

or to such other address as either party may from time to time duly specify by
notice given to the other party in the manner specified above.

17. Entire Agreement: Amendments. This Agreement contain the entire agreement
and understanding of the parties hereto relating to the subject matter hereof,
and merges and supersedes all prior and contemporaneous discussions, agreements
and understandings of every nature between the parties hereto relating to the
employment of Employee with the Company excepting the Non Disclosure and
Assignment of Ideas Agreement dated February 28, 2005 and any applicable
policies relating to Employee's employment with the Company and any forms
relating to Employee's participation in employee benefit plans offered by the
Company (including, without limitation, option and restricted stock agreements),
and all agreements, acknowledgements, and obligations to be bound by Company
policies and procedures to the extent that they do not conflict with the terms
of this Agreement.

18. Waiver. The waiver of the breach of any term or provision of this Agreement
shall not operate as or be construed to be a waiver of any other or subsequent
breach of this Agreement.

19. Governing Law. This Agreement shall be construed and enforced in accordance
with the laws of the Commonwealth of Pennsylvania without reference to conflict
of laws principles.

                                       11
<PAGE>

20. Invalidity. In case any one or more of the provisions contained in this
Agreement shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
the validity of any other provision of this Agreement, and such provision(s)
shall be deemed modified to the extent necessary to make it enforceable.

21. Section Headings. The section headings in this Agreement are for convenience
only; they form no part of this Agreement and shall not affect its
interpretation.

22. Number of Days. In computing the number of days for purposes of this
Agreement, all days shall be counted, including Saturdays, Sundays and legal
holidays; provided, however, that if the final day of any time period falls on a
Saturday, Sunday or day which is a holiday in the Commonwealth of Pennsylvania,
then such final day shall be deemed to be the next day which is not a Saturday,
Sunday or legal holiday.

23. Specific Enforcement Extension of Period.

     (a) Employee acknowledges that the restrictions contained in Sections 7, 8
and 9 hereof are reasonable and necessary to protect the legitimate interests of
the Company and its subsidiaries and affiliates and that the Company would not
have entered into this Agreement in the absence of such restrictions. Employee
also acknowledges that any breach by him of Sections 7, 8 or 9 hereof will cause
continuing and irreparable injury to the Company for which monetary damages
would not be an adequate remedy. The Employee shall not, in any action or
proceeding to enforce any of the provisions of this Agreement, assert the claim
or defense that an adequate remedy at law exists. In the event of such breach by
Employee, the Company shall have the right to enforce the provisions of Sections
7, 8 and 9 of this Agreement by seeking injunctive or other relief in any court,
and this Agreement shall not in any way limit remedies of law or in equity
otherwise available to the Company. If an action at law or in equity is
necessary to enforce or interpret the terms of this Agreement, the prevailing
party shall be entitled to recover, in addition to any other relief, reasonable
attorneys' fees, costs and disbursements. In the event that the provisions of
Sections 7, 8 or 9 hereof should ever be adjudicated to exceed the time,
geographic, or other limitations permitted by applicable law in any applicable
jurisdiction, then such provisions shall be deemed reformed in such jurisdiction
to the maximum time, geographic, or other limitations permitted by applicable
law.

     (b) In the event that Employee shall be in breach of any of the
restrictions contained in Section 9 hereof, then the Restricted Period shall be
extended for a period of time equal to the period of time that Employee is in
breach of such restriction.

24. Consent to Suit. Any legal proceeding arising out of or relating to this
Agreement shall be instituted in the U.S. District Court of the Eastern District
of Pennsylvania, or if such court does not have jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in the Commonwealth of
Pennsylvania, and the Employee hereby consents to the personal and exclusive
jurisdiction of such court and hereby waives any objection that the Employee may
have to the laying of venue of any such proceeding and any claim or defense of
inconvenient forum.

                                       12
<PAGE>

25. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which together shall be
deemed to be one and the same instrument.

                                     * * * *

     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
the day and year first written above.

ATTEST:                                       INTERDIGITAL COMMUNICATIONS
                                              CORPORATION

By:    /s/ Lisa Axt Alexander                 By:    /s/ Harry G. Campagna
       ----------------------                        ---------------------
Title: Lisa Axt Alexander                     Title: Harry G. Campagna
       Corporate Secretary                           Chairman of the Board

                                                     [CORPORATE. SEAL]

                                                     /s/ William J. Merritt
                                                     ----------------------
                                                     William J. Merritt

                                       13

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