Item 1 - BUSINESS
General
	Advanced Marketing Services, Inc. (the "Company" or "AMS") is a leading distributor of general interest books to the membership warehouse clubs and certain specialty retailers. 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, the Company sells pre-recorded audio cassettes (books on tape) video cassettes. The Company provides product selection advice, specialized merchandising and product development services, and distribution and handling services to warehouse clubs operating in the United States, Canada, Mexico and the United Kingdom.
	Due to the continuous introduction of new titles by the book publishing industry, the Company provides weekly recommendations, tailored to each customer's marketing priorities, with respect to the new titles to be sold in its customers' book departments. These recommendations are selected by the Company's buyers from among the over 1,000,000 titles in print and over 50,000 new books published each year. AMS also creates unique products and develops specially packaged book and book-related products for customers. The Company supports its customers' inventories by maintaining back-up inventory in its distribution centers for prompt delivery as needed to customer locations. The Company maintains four domestic regional distribution centers to assure timely delivery to its customers, to enhance its customers' inventory turnover rates and to reduce its customers' handling and holding costs. See "Properties."
	The Company provides distribution service to a major warehouse club customer in the United Kingdom and is expanding its distribution to other retailers. In Mexico, the Company distributes products to a variety of retailers, including warehouse clubs, hypermarkets, discount department stores and other specialty retailers. The Company utilizes the services of third party warehousing and distribution companies in its United Kingdom and Mexican subsidiaries.
	The Company was incorporated in 1982 in California and was reincorporated in Delaware in June 1987. The Company's executive offices are located at 5880 Oberlin Drive, Suite 400, San Diego, California 92121; telephone (619) 457-2500.
Membership Warehouse Club Industry
	The Company's customers include for-profit membership warehouse clubs which sell a broad range of primarily brand-name merchandise at or near wholesale prices. Membership warehouse clubs are able to provide their individual and business members, who commonly pay annual membership fees, substantial cost savings on high-quality merchandise through the efficiencies of warehouse-type facilities and a no-frills, self-service operation policy. Membership warehouse club locations typically have approximately 100,000 square feet (2 1/2 acres) of floor space and offer a limited selection of brand-name products in a wide range of merchandise categories. This merchandising approach was introduced in Southern California in 1976. Since then, the membership warehouse club industry has experienced significant growth, with sales estimated to be approximately $43 billion in 1996.
	The following table summarizes the Company's penetration of the warehouse club industry in U.S. and Canada:
The Company also serves 22 warehouse club locations in Mexico, five in the U.K. and ships a limited amount of product to six warehouse clubs in various Pacific Rim countries. See "International Business." The number of locations served is not necessarily indicative of the Company's total sales volumes to the warehouse club industry as the volume of the Company's shipments to a location can vary from year to year based on competitive and other factors.
	Books are well-suited to the membership warehouse club merchandising strategy of offering recognizable, quality merchandise at substantial savings. Books appeal to a wide range of consumers and are popular gift items. Additionally, due to their relatively high selling price in relation to their size, books generally provide membership warehouse clubs with above-average sales per square foot of selling space. By offering a continually changing selection of books at a substantial discount from suggested retail prices, warehouse clubs encourage retail customers to purchase books for their enjoyment and for business needs or interests.
	Notwithstanding the appeal of books as a product line, most membership warehouse clubs are not able to apply their standard product purchasing and handling procedures to their book departments. Typically, a membership warehouse club purchases a limited selection of each product category directly from manufacturers who ship to their retail locations. In contrast, in order to be able to offer even a limited selection of books, typically 100 to 250 stock keeping units (skus) at any one time, a membership warehouse club would be required to devote considerable time and resources to selecting from among the over 1,000,000 titles in print and the over 50,000 new books published each year by more than 4,200 primary publishing houses. The membership warehouse club also would incur high freight and handling costs to receive deliveries from, and make returns to, the numerous vendors of such books. Thus, the unique nature of books has led many membership warehouse clubs to rely on distributors for a portion of their book purchases. See "Risks and Competition."
Other Customers	
	The Company supplies an assortment of primarily business and computer titles to certain companies in the office product superstore industry. The Company serves several companies in the rapidly growing computer and electronics superstore marketplace. As a result of new business development efforts, the Company is now supplying product to the pet supply industry and the discount drugstore market. The Company serves a variety of other specialty retailers in the sporting goods, children's education and book businesses.
	For many of these customers, the Company designs and recommends media programs to satisfy the unique marketing priorities of each retailer. By constantly updating titles offered, the Company makes it possible for its customers to offer a targeted selection of books and media products without having to develop media merchandising expertise with their own organizations.
Retailing Operations
	As of March 31, 1997, the Company owned and operated 11 small retail outlet stores in eight states. The stores are located generally in factory outlet malls in Gilroy and Lake Elsinore, California; Gurnee, Illinois; Hillsboro and Conroe, Texas; Burlington and Centralia, Washington; Algodones, New Mexico; Silverthorne, Colorado; Birch Run, Michigan; and Phoenix, Arizona. These retail outlets sell both titles that were purchased on a non-returnable basis and remain unsold after being offered for sale in the Company's customers' locations as well as titles purchased specifically for these retail stores. During fiscal 1997, the Company introduced in five of its retail stores a new retail format that includes multimedia products such as computer sofware, CD-ROM and music CDs, in addition to books. To merchandise these stores, the Company is purchasing products specifically for resale as well as selling its non- returnable book inventory. The Company plans to operate approximately 13 retail stores by the end of fiscal 1998.
Business Strategy
	The Company's primary business strategy is to provide effective book purchasing, handling and distribution services to its customers. The Company believes that it has achieved its position as a leading book supplier to membership warehouse clubs as well as other specialty retailers because of its ability to offer sound product selection advice, specialized product development and marketing services and rapid product delivery, all at competitive prices.
Product Selection Services and Purchasing Practices
	The Company's warehouse club customers generally compete in the retail trade book market by offering a limited selection of books (typically 100 to 250 skus compared to 10,000 to 100,000 titles at national bookstore chains and book superstores) at prices which are generally 30% to 45% lower than cover price. The Company provides its specialty retail customers with book programs that range from as few as 50 titles to programs of several thousand titles. The Company believes that one of its principal strengths is its ability to select books that will be successful in each customer's selling environment, which is a function of various factors such as customer base, regional characteristics and marketing priorities. This service is important because many of the books offered by the Company have relatively limited sales lives (typically a few weeks to a few months) due to the relatively rapid introduction of new books to replace titles for which demand has decreased. Therefore, customers rely on the Company's expertise and experience to recommend new titles to be added to their book departments.
	The Company's book selection process depends on a close working relationship between the Company's general merchandise managers and its major vendors. The process of selecting books generally begins when a publisher's representative submits pre-publication book summaries to the Company's general merchandise managers. A general merchandise manager evaluates each book on the basis of such factors as subject matter and author; suitability for the customers' selling environments; visual appeal; the extent of the publisher's promotion and advertising support; and the estimated number of copies to be printed. Because the Company is a major customer of many of its vendors, such vendors often consult with the Company during pre-publication planning, allowing the Company to influence the design and packaging of many of the books it purchases. After choosing titles, the general merchandise managers, in conjunction with the general marketing managers, determine which specific titles will be recommended to each customer on the basis of thier knowledge of the customer base, regional characteristics and marketing priorities.
	Product selection is the responsibility of the Company's Merchandising Department, under the direction of the Vice President of Merchandising to whom five general merchandise managers and a staff of 20 associates report. Each general merchandise manager is responsible for several categories of products which include hardcover bestsellers, mass market paperbacks, cooking, travel, regional, computer, gift books (including art and coffee table books), children's books, calendars, CD-ROM products, pre-recorded audio and video cassettes, computer and Spanish-language books.
	The Company usually purchases newly published or well established back-list (previously published) titles directly from publishing houses at standard book industry wholesaler discounts, which generally exceed retailer discounts. The Company does not generally purchase remainder titles, but will occasionally purchase close-out lots of certain titles at higher than normal discounts. Virtually all books sold are returnable to AMS by its customers for full credit so long as the books are in saleable condition. Approximately 91% of the books purchased by the Company in both fiscal 1997 and 1996 were returnable to the publisher; the balance were purchased on a non-returnable or partially returnable basis, often at higher purchase discounts.
The Company has published a limited number of titles through its in-house publishing arm, Thunder Bay Press. The titles are typically sold to both the Company's customers and to independent and chain book stores. In fiscal 1998, AMS intends to increase its activities in this area to target distinct segments of the book market, including juvenile. The Company has created a new division, Advantage Publishers Group, to manage Thunder Bay as well as its new Laurel Glen and Silver Dolphin imprints.
	In the years ended March 31, 1997, 1996 and 1995, customer returns represented approximately 28%, 24% and 22%, respectively, of the Company's gross sales. Customer return rates are impacted by the sales success of individual titles relative to quantities ordered by customers as well as customer ordering practices for different volume locations. Returns to publishers by AMS represented approximately 31%, 28% and 34%, respectively, of the Company's total purchases during the same period. The publisher returns rate exceeds the customer returns rate due to the Company's policy of maintaining back-up inventory so that it can respond promptly to customer orders.
	The Company's reserves for markdowns on inventory decreased by approximately $204,000 in fiscal 1997. The Company added $2,983,000 to its reserves for markdowns as a result of slower than expected sales of certain books which are not returnable to the publisher and deducted $3,187,000 for actual losses incurred on books for which reserves had previously been made. To the extent that the Company is unable to sell non-returnable books to its traditional customers, it sells such books to customers where, in certain cases, it is necessary to sell at below the Company's cost. The Company believes its reserves for markdowns are adequate based on its past experience and present market conditions, although no assurances can be given that actual losses will not exceed present reserves when these non-returnable books are actually sold.
	The Company purchases from publishers on varying payment terms. The Company generally takes advantage of discounts for prompt payments, when economically attractive. During the year ended March 31, 1997, the Company made purchases from 356 publishers. Three publishers accounted for 10% or more of the Company's total purchases in fiscal 1997. These included Penguin Putnam, Inc., Random House and Bantam Doubleday Dell which accounted for 20%, 14% and 12%, respectively, of purchases. The Company continues to open accounts with new publishers and believes that adequate sources of supply exist to meet anticipated growth. As is customary in the industry, the Company does not maintain long-term or exclusive purchase commitments or arrangements with any publisher.
Product Development and Marketing Services
	In addition to selecting from among regularly published books, AMS provides specially packaged book and book-related products which are generally not available in retail bookstores. For example, the Company works with various publishers to create specially packaged items such as combination of books, shrink-wrapped or slipcased to sell as a single item, or packages that contain a book and a non-book item, such as a stuffed animal with a book. The Company also works directly with publishers to have books specially reprinted or created for its customers.
	The Company assists in the promotion of the books it sells by creating seasonal merchandising plans and recommending titles based on themes such as Christmas, Back to School, Father's Day and Easter. The Company also conducts theme- oriented promotions, frequently tied to specially designed products, such as gardening, taxes, health and fitness, and travel. Special in-store promotions are coordinated by the Company for certain of its customers. Customers may also take advantage of the Company's cooperative advertising coordination service whereby the Company obtains publisher-sponsored advertising for use by its customers.
	Marketing the Company's products is under the direction of the Vice President of Marketing to whom six general managers and a staff of 26 marketing personnel report. Members of the staff are assigned to each of the Company's customers and present new titles, recommend promotions, coordinate orders and shipments, and handle other customer requests.
Product Distribution and Handling Services
	Because an important financial and operating goal of many of the Company's customers is a high inventory turnover rate, a critical element of the Company's service is its ability to respond quickly to its customers' orders. The Company has established a national network of four regional distribution centers to assure rapid deliveries to its customers. These distribution centers are located in general purpose warehouse facilities in the metropolitan areas of Sacramento, California; Indianapolis, Indiana; Baltimore, Maryland; and Dallas, Texas. At its distribution centers, the Company receives books from multiple vendors and dispatches, using common and contract carriers, consolidated shipments on a weekly basis to most customer locations. Weekly deliveries eliminate the need for customers to stock large inventories on-site and enables customers to utilize valuable marketing space for other products. Consolidated shipments reduce customer handling and freight costs by eliminating the costs associated with deliveries by multiple vendors. All of the Company's distribution centers are linked with its computerized order processing center at its San Diego headquarters and as a result, customer orders are generally shipped within 24 hours of receipt. Because customer orders are generally shipped within 24 hours of receipt, the Company's backlog at any date is usually insignificant and not a meaningful indicator of future sales. The Company's computer system also enables AMS to provide information and special reports to assist customers with operations and marketing. For an additional fee, upon request, the Company will ticket books with the customer inventory item number and retail sales price. The Company believes that all of these services enhance its customers' inventory turnover rate and reduce their handling and holding costs.
In fiscal 1997, the Company introduced a Vendor Managed Inventory ("VMI") replenishment system designed to reduce the customers' need to write individual location orders and further improve their inventory turnover. AMS has developed software designed to forecast future book sales based on the expected life cycle of a particular title. This forecast, coupled with customer point of sale information, enables AMS to effectively manage customer laydown and replenishment orders for each customer location. Since late in the fourth quarter of fiscal 1997, VMI has been used to prepare store level orders for the Company's two largest customers.
To further enhance the Company's service capabilities, AMS installed new software and material handling equipment ("Acupak") in its newest distribution facility in Indianapolis. The system is designed to improve the Company's efficiency in handling customer orders requiring less than a full carton of a particular title. A similar Acupak system is presently being installed in the Company's Northern California distribution center.
The Company provides in-store management of certain customers' book departments through its network of independent service representatives.
International Business
	The Company operates two wholly owned foreign subsidiaries. Advanced Marketing (UK) Limited was incorporated in September 1993 in the United Kingdom. From its headquarters near London, it provides a full range of general interest books, audio and music products primarily to the five Costco membership warehouse club locations in the United Kingdom. Two additional Costco locations are scheduled to open during fiscal 1998. The Company also services forty-six other specialty retail locations and continues its efforts to expand its distribution of media products to other U.K. retailers.
	Advanced Marketing S. de R.L. de C.V. was incorporated in January 1994 in Mexico. From its headquarters in Mexico City, the Company distributes books to 22 membership warehouse club locations, as well a variety of general and mass merchandisers, office supply superstores and other specialty retailers. The Company continues to move forward with the introduction of the concept of a one- stop customized, book program to the retailers in the Mexican marketplace.
	During fiscal 1997, the Company's Mexican subsidiary operated at a loss and there can be no assurance of success in developing sufficient sales volumes and gross margin contributions to generate profits, particularly given the low level of economic activity in the Mexican consumer markets since the December 1994 Mexican peso devaluation. The Company accrued a provision for currency exchange loss on its investment in its Mexican subsidiary in fiscal years 1995, 1996 and 1997.
	To address the operating challenges in its Mexican subsidiary, the Company has augmented its management, marketing and product capabilities in the U.S. and Mexico with personnel with Spanish language and Mexican product expertise. The Company has also expended significant effort in developing relationships with Mexican publishers. The Company believes that this strategy will assist its expansion efforts in Mexico and also create product sourcing opportunities for the Spanish language market in the United States.
	The Company utilizes third party warehousing and distribution companies in both the United Kingdom and Mexico. No assurances can be given that the expansion in international markets will be profitable; the Company expects no significant profit contribution from these international operations in fiscal 1998.
Risks and Competition
	In fiscal 1997, approximately 93% of the Company's sales were to membership warehouse clubs with the remainder to office product superstores, computer superstores, mass merchandisers or other specialty retailers. In the year ended March 31, 1997, two warehouse club customers accounted for approximately 80% of the Company's net sales. Although the Company believes it provides services and efficiencies that membership warehouse clubs and other retailers would have difficulty duplicating, the Company believes that its customers may, from time to time, increase the percentage of books they purchase directly from publishers or from other wholesale distributors. Further, the Company could lose customers if they discontinue books as a product line, suffer a business failure or merge or consolidate with another entity not currently serviced by AMS. The Company has no long-term or exclusive purchase commitments with any of its customers. Any loss of a major customer would have a material adverse effect on the Company. Given the relatively small number of membership warehouse club chains, the Company's reliance on a few customers is likely to continue. See "Customers."
	The Company is a leading supplier of books to the membership warehouse club market, which is highly competitive. The Company competes in such markets with national book distributors, some of which are larger and have greater financial resources than the Company, and with regional book wholesalers and local book jobbers who compete with the Company on the basis of price and service. Certain publishers sell directly to membership warehouse clubs, and one or more of the Company's customers could choose in the future to purchase more of its books directly from publishers. As a result, the Company could face additional competition from publishers in the future. Membership warehouse clubs face competition from discount and retail bookstore chains which indirectly affects AMS. Due to their high sales volume, membership warehouse clubs may represent an attractive market that other book distributors may seek to enter and compete directly with the Company. The Company believes that its principal competitive advantages are its ability to select, package, and assort products so that they sell in high volumes; to distribute such products rapidly; to electronically interface with customers; to maintain sufficient back-up inventories; and to price products competitively. 	 	The Company purchases certain titles on a non-returnable basis which it in turn sells on a returnable basis. To the extent that actual sales of such titles do not equal purchased quantities, the Company risks having inventory remaining which it may be unable to sell at or above its cost. The Company has developed a retail outlet chain to assist in the sale of such inventory. In addition, the Company has implemented policies to evaluate more completely the non-returnable inventory risk it assumes. However, the Company has incurred substantial expense in the past to sell such excess inventory and may incur such expense in the future. The Company may experience an increase in non-returnable inventory and associated markdown costs as a result of its increased publishing activities.
Customers
	The Company is currently servicing four membership warehouse clubs. The Company's customers account for over 95% of the sales in the warehouse club industry and operate approximately 800 locations throughout the United States, Canada, Mexico, the United Kingdom and certain Pacific Rim countries. The following table sets forth those customers who accounted for 10% or more of the Company's total net sales in fiscal 1997, 1996 and 1995. 						
Employees
	At March 31, 1997, the Company had 428 employees who were engaged in administrative, merchandising, marketing, warehousing and retail operations. The Company also hires temporary workers, primarily during the peak holiday season. None of the Company's employees is represented by a labor union. The Company considers its employee relations to be good.
ITEM 2
ITEM 2 - PROPERTIES
	The Company is headquartered in approximately 38,000 square feet of commercial space in San Diego, California. The space is leased for a six-year term expiring in 1998 with an annual base rent of $456,000.
	The Company maintains the following distribution centers from which it ships to its customers:
	Each of these distribution centers is leased, with the leases expiring between 1997 and 2006. Annual base rental payments range from $262,000 to $617,000. In September 1997, the Company intends to relocate its Dallas distribution center to a larger facility. The Company intends to relocate its Baltimore distribution center in April 1998. See Note 5 of Notes to Consolidated Financial Statements in Item 8 of this Form 10-K. The Company believes that its four domestic distribution centers are adequate for the conduct of its business through at least fiscal 1998.
	The Company utilizes third party warehousing and distribution companies in both the United Kingdom and Mexico. It also leases office space in both countries on short-term leases, the commitments under which are not material.
ITEM 3
ITEM 3 - LEGAL PROCEDURES
	The Company is not a party to any material pending legal proceedings.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	No matters were submitted to a vote of the Company's stockholders during the last quarter of the year ended March 31, 1997.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
	The Company's Common Stock is traded in the over-the-counter market under the NASDAQ symbol "ADMS." The following table sets forth the high and low closing prices of the Common Stock, as reported on the NASDAQ National Market. On June 10, 1997, the Company had approximately 1,800 beneficial stockholders and 100 stockholders of record.
	The present policy of the Company is to retain earnings to provide funds for the operation and expansion of its business. The Company has not paid cash dividends on its Common Stock and has no plans to do so in the foreseeable future. There are no direct limitations or restrictions on the payment of cash dividends under the Company's line of credit arrangement or any other agreement. The declaration of dividends in the future will, however, remain within the discretion of the Company's Board of Directors, which will review its dividend policy from time to time. 	 	On May 30, 1994, the Company announced a stock repurchase program pursuant to which the Company may repurchase in open market transactions, from time to time, based upon existing market conditions, up to 500,000 shares of its Common Stock. The Company purchased 211,000 shares of Common Stock during fiscal 1995 and 10,000 shares of Common Stock in April of 1997 pursuant to such repurchase program.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
	The selected financial data below should be read in conjunction with Item 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Net income for the fiscal year ended March 31, 1997 was $6,456,000, or $1.13 per share, on net sales of $385,651,000. This compares to net income of $6,101,000, or $1.07 per share, on net sales of $365,499,000 for the previous fiscal year.
	The 5.5 percent increase in net sales was spread among the Company's warehouse club and specialty retailer customers. Net sales increases in the warehouse clubs were negatively impacted by higher returns, particularly from one of the Company's major customers. Net sales increases to specialty retailers were the result of the Company's continuing efforts to expand its customer base. Net sales growth was concentrated in the bestseller and mass paperback categories of books.
The Company experienced a 28 percent rate of returns from customers in fiscal 1997 compared with 24 percent in fiscal 1996. To partially address this unfavorable trend in customer returns, the Company implemented its Vendor Managed Inventory replenishment system with its two largest customers late in fiscal 1997. In addition, the Company, in conjunction with certain of its customers, is reviewing initial laydown quantities and other factors that affect return rates. Reserves have been established based on management's best estimate of expected future product returns.
Gross profit for fiscal 1997 reached $38,374,000, an increase of $1,236,000 from the fiscal 1996 level. As a percentage of sales, gross profit was 10.0 percent in fiscal 1997 compared with 10.2 percent in the previous fiscal year. The decline in the gross profit margin resulted primarily from a greater mix of best-selling novels and mass paperback titles, which generally carry lower margins.
Distribution and administrative expenses increased to $28,903,000 for fiscal 1997 from $28,243,000 for fiscal 1996. As a percentage of sales, however, these expenses declined to 7.5 percent from 7.7 percent for the prior fiscal year. Modestly higher distribution expenses and increases in payroll and other staff related costs were partially offset by higher contributions to income from the Company's promotional activities and cash discount income. As previously reported, the Company anticipates a substantial reduction in cash discount income in fiscal 1998.
Interest and dividend income decreased to $916,000 in fiscal 1997 from $1,209,000 in fiscal 1996 as a result of a reduction in the Company's investment balances, as well as lower yields due to a greater proportion of tax-exempt investment in the current fiscal year.
The Company's combined federal and state statutory tax rate is approximately 39 percent. Various adjustments, primarily due to the tax benefit of loss carryforward on one of the Company's foreign operations as well as tax-exempt interest income offset, in part, by foreign currency exchange losses caused the fiscal 1997 provision for income taxes to be $3,911,000, or 38 percent of pre- tax income. The fiscal 1996 provision for income taxes was $4,003,000, or 40 percent of pre-tax income, primarily due to the Company's loss on foreign operations.
FISCAL 1996 COMPARED TO FISCAL 1995
Net income for the fiscal year ended March 31, 1996 was $6,101,000, or $1.07 per share, on net sales of $365,499,000. This compares to net income of $3,362,000, or $0.60 per share, on net sales of $303,708,000 for the previous fiscal year.
The 20.3 percent increase in net sales was due primarily to (1) the Company being designated, effective June 1995, as primary book supplier to 65 additional SAM's Club locations and (2) an increase in the extent of the Company's participation in the book programs of SAM's Club and certain other customers beginning in August 1995, in part as a result of a competitor filing for bankruptcy protection. The sales growth was spread across most categories of books that the Company offers, with particularly strong increases in the computer and mass paperback categories.
The Company experienced a 24 percent rate of returns from customers in fiscal 1996 compared with 22 percent in fiscal 1995. To date, initiatives designed to reduce customer returns have fallen short of plan, but the Company continues to work with its customers and vendors to reduce the rate of returns. Reserves have been established based on management's best estimate of expected product returns.
Gross profit for fiscal 1996 reached $37,138,000, an increase of $8,206,000 from the fiscal 1995 level. As a percentage of sales, gross profit was 10.2 percent in fiscal 1996 compared with 9.5 percent in the previous fiscal year. The increase in the gross profit percent resulted primarily from an improved mix of higher margin titles and higher income from publisher incentive programs. These increases were offset, in part, by larger provisions for markdown expense than during the prior year on the Company's non-returnable inventory.
Distribution and administrative expenses increased to $28,243,000 for fiscal 1996 from $24,083,000 for fiscal 1995. As a percentage of sales, however, these expenses declined to 7.7 percent from 7.9 percent for the prior fiscal year. This improvement was the result of freight, facilities and labor efficiencies, stemming in part from the Company's move over the last several years to fewer, but larger warehouses as well as from reductions in certain negotiated freight rates. General and administrative expenses increased modestly as a percentage of sales, primarily as a result of higher corporate office staffing costs to handle increased sales volume from existing customers and costs associated with serving and obtaining new customers. The Company increased its accounts receivable reserve for adjustments and potential write- offs due, in part, to increased incidence of disputed items with customers. The Company's foreign exchange losses on the investment in its Mexican subsidiary increased from the prior year due to additional devaluation of the Mexican peso.
Interest and dividend income increased to $1,209,000 in fiscal 1996 from $894,000 in fiscal 1995 as a result of an increase in the Company's investment balances, as well as higher yields due to a greater proportion of taxable investment in the current fiscal year. Interest income was reduced in the previous year due to a provision for anticipated losses on preferred stock investments.
The Company's combined federal and state statutory tax rate is approximately 39 percent. Various adjustments, primarily due to the Company's loss on foreign operations, caused the fiscal 1996 provision for income taxes to be $4,003,000, or 40 percent of pre-tax income compared to $2,346,000, or 41 percent of pre-tax income in fiscal 1995.
SEASONALITY The Company's net sales and earnings in the third fiscal quarter have historically been, and are expected to continue to be, significantly higher than in any other quarter due to the holiday season. 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. The Company expects seasonality in its operations to continue.
The Company experiences significant seasonal short-term swings in its cash position due to sales seasonality and to differences in timing of payments to its vendors and the receipt of payments from its customers. Cash flow has been historically greatest during the third fiscal quarter due to higher seasonal sales.
LIQUIDITY AND CAPITAL RESOURCES For the year ended March 31, 1997, $5,161,000 of cash was provided by operating activities. In the same period of the prior year, $3,284,000 of cash was provided by operating activities. At March 31, 1997, the Company's cash and investments had increased by $4,886,000 compared to March 31, 1996, primarily due to net income generated in fiscal 1997 offset, in part, by increased working capital requirements. Trade accounts receivable decreased $4,136,000 compared to one year ago as a result of a decrease in net sales in the latter part of the fourth quarter as well as a decrease in customer disputed items. The inventory increase of $19,448,000 was comprised of an approximately $4,646,000 increase in non-returnable inventory related to expansion of the Company's publishing activities and to purchases exceeding net sales of certain titles purchased on a non-returnable or partially returnable basis. Returnable inventory increased approximately $14,802,000 as a result of a variety of circumstances which are believed to be short term in nature, including the timing of receipt of individual high volume titles, the impact of reducing initial customer laydown quantities and the timing of returns to publishers of certain titles. A majority of the increase in inventories was offset by an increase in accounts payable of $14,881,000 from levels at March 31, 1996.
The working capital required to finance inventories is directly related to inventory turnover rate and trade credit terms provided by publishers. Trade credit terms from the Company's vendors did not change significantly during fiscal 1997. Inventory turnover rates declined to 4.2 times in fiscal 1997 from 4.5 times in fiscal 1996.
The Company had available at March 31, 1997 an unsecured bank line of credit with a maximum borrowing limit of $10 million. The interest rate is at the prime rate (8.5 percent at March 31, 1997). The Company did not borrow on its line of credit during fiscal 1997 or fiscal 1996. The line of credit expires July 31, 1998.
The Company believes that its working capital, cash flows from operations, trade credit traditionally available from its vendors and its $10 million line of credit will be sufficient to finance its current and anticipated level of operations. Although the Company has no commitments to do so at the present time, the Company may consider strategic acquisitions where deemed appropriate. Such acquisitions, if any, could affect the Company's liquidity and capital resources.
IMPACT OF INFLATION The Company has been subject to relatively low prevailing inflation rates in all countries in which it operates, with the exception of Mexico, during fiscal 1997, 1996 and 1995. The Company has generally been able to adjust its selling prices in all countries in which it operates to offset increased costs of merchandise and expects to be able to continue to do so in the foreseeable future. While the international activities are not a significant part of the Company's overall operations, the continued high rates of inflation in Mexico may result in future foreign currency exchange losses.
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. The Company desires to take advantage of the "safe harbor" provisions of the Act.
The Company wishes to caution readers that, with the exception of historical matters, the matters discussed in this Annual Report on Form 10-K 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, the Company's concentration of sales and credit risk with two customers, the Company's ability to impact customer return rates, currency and other risks related to foreign operations, the Company's expansion plans, the results of financing efforts and other factors discussed in the Company's other filings with the Securities and Exchange Commission. Such factors could affect the Company's actual results during fiscal 1998 and beyond and cause such results to differ materially from those expressed in any forward-looking statement made by or on behalf of the Company.
ITEM 8
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Advanced Marketing Services, Inc.:
We have audited the accompanying consolidated balance sheets of ADVANCED MARKETING SERVICES, INC. (a Delaware corporation) and subsidiaries as of March 31, 1997 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Advanced Marketing Services, Inc. and subsidiaries as of March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997 in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to schedule to consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states, in all material respects, the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
								ARTHUR ANDERSEN LLP
San Diego, California May 14, 1997
The accompanying notes are an integral part of these consolidated balance sheets.
The accompanying notes are an integral part of these consolidated balance sheets.
The accompanying notes are an integral part of these consolidated statements.
	 The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
ADVANCED MARKETING SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.	ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
	Advanced Marketing Services, Inc., a Delaware corporation, (the "Company") distributes general interest books, pre-recorded audio cassettes (books on tape), CD-ROM and video cassettes primarily to membership warehouse clubs and other specialty retailers. The Company established subsidiaries in Mexico and the United Kingdom to distribute similar media products including music (U.K. only).
PRINCIPLES OF CONSOLIDATION
	The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
USE OF ESTIMATES
	The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
	The Company considers all highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. Cash equivalents consisting of money market funds totaled $7,953,000 and $5,046,000 as of March 31, 1997 and 1996, respectively.
INVESTMENTS, AVAILABLE-FOR-SALE
	Investments, available-for-sale consist principally of highly rated corporate and municipal bonds. The Company accounts for its investments in accordance with Statement of Financial Accounting Standards No. 115 which requires the use of fair value accounting for debt and equity securities, except in those cases where there is a positive intent and ability to hold debt securities to maturity. See Note 2.
CONCENTRATION OF CREDIT RISK
	The Company invests its excess cash in debt and equity instruments of financial institutions and corporations with strong credit ratings. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. These guidelines are periodically reviewed and modified to take advantage of trends in yields and interest rates.
	Approximately 80 and 84 percent of the Company's accounts receivable balances at March 31, 1997 and 1996, respectively, were concentrated with two major customers in the warehouse club industry.
ACCOUNTS RECEIVABLE ALLOWANCES
	In accordance with industry practice, a significant portion of the Company's products are sold to customers with the right of return. On approximately 91 percent of the Company's purchases, the Company has the right to return unsold product to publishers. The Company has provided allowances of $2,035,000 and $2,173,000 as of March 31, 1997 and 1996, respectively, for the gross profit effect of estimated future sales returns after considering historical results and evaluating current conditions. The Company has also provided allowances for uncollectible trade accounts receivable of $1,747,000 and $2,000,000 as of March 31, 1997 and 1996, respectively.
VENDOR AND OTHER RECEIVABLES
	Vendor and other receivables primarily consist of amounts due from vendors for purchase rebates and for merchandise returned to vendors.
INVENTORIES
	Inventories consist primarily of books and, to a lesser extent, music CDs, CD-ROM and pre-recorded audio and video cassettes purchased for resale and are stated at the lower of cost (first-in, first-out) or market. The Company's rights to return to publishers were limited or non-existent on approximately 26 and 27 percent of the Company's inventories at March 31, 1997 and 1996, respectively.
DEPRECIATION AND AMORTIZATION
	Depreciation and amortization of property and equipment are provided using the straight-line method over the estimated useful lives (ranging from three to five years) of the assets.
LONG-LIVED ASSETS
In fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed Of." The statement requires entities to review long-lived assets and certain intangible assets in certain circumstances, and if the value of the asset is impaired, an impairment loss must be recognized. This pronouncement had no material effect on the Company's financial position or results of operations.
SIGNIFICANT CUSTOMERS
	A substantial portion of the revenue earned by the Company is derived from a limited number of customers. Two customers accounted for 44 and 36 percent of net sales in fiscal 1997, 43 and 40 percent of net sales in fiscal 1996 and 46 and 39 percent of net sales in fiscal 1995. No other customers accounted for 10 percent or more of the Company's net sales during these years.
REVENUE RECOGNITION
	Sales and related cost of sales are recognized upon delivery of merchandise to customer locations. The Company provides reserves for the effect of estimated future sales returns.
INCOME TAXES
	The Company provides currently for taxes on income regardless of when such taxes are payable in accordance with SFAS No. 109 "Accounting for Income Taxes." Deferred income taxes result from temporary differences in the recognition of income and expense for tax and financial reporting purposes. See Note 4.
PER SHARE INFORMATION
Per share information is based on the weighted average number of common shares and, when applicable, dilutive common share equivalents outstanding during the periods. The effects of all anti-dilutive common share equivalents are excluded from the calculation of earnings per share. The Company's only potential dilutive common share equivalents are stock options.
Statement of Financial Accounting Standards No. 128, "Earnings Per Share," was issued in February 1997 and becomes effective for the Company's fiscal year ending March 31, 1998. SFAS No. 128 modifies the way in which earnings per per share ("EPS") is calculated and disclosed. Currently, the Company discloses primary and fully diluted EPS. Upon adoption of the standard, the Company will disclose basic and diluted EPS for fiscal 1998 and will restate all prior period EPS data presented. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS, similar to fully diluted EPS, reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings of the entity. If the Company had adopted SFAS No. 128 for fiscal 1997, basic EPS would have been $1.18 per share versus $1.13 reported for primary EPS. Diluted EPS would have been $1.13 per share, unchanged from fully diluted EPS reported in fiscal 1997.
2.	INVESTMENTS, AVAILABLE-FOR-SALE
	Investments, available-for-sale at March 31, 1997 and March 31, 1996 are as follows (in thousands):
			
	Investments in debt securities issued by states of the U.S. and political subdivisions of the States as of March 31, 1997 in the amount of approximately $9,177,000 are scheduled to mature within one year and $2,063,000 are scheduled to mature within two years. 	 	Proceeds from the sale of investments aggregated approximately $4,438,000 for year ended March 31, 1997. The realized net gain on these sales totaled approximately $3,000. Proceeds from the sale of investments during the same period of the previous year totaled approximately $15,128,000 on which a net loss of approximately $42,000 was realized. The Company uses the specific identification method in determining cost on these investments. The change in net unrealized gain on investments was an increase of approximately $1,000 and $54,000 for the years ended March 31, 1997 and 1996.
3.	LINE OF CREDIT
	The Company had available at March 31, 1997 and 1996 an unsecured bank line of credit with a maximum borrowing limit of $10 million. The interest rate is at prime (8.5 and 8.25 percent at March 31, 1997 and 1996, respectively). The line of credit expires July 31, 1998. As of and during the years ended March 31, 1997 and 1996, there were no borrowings on the Company's line of credit.
4.	INCOME TAXES
The components of the provision for income taxes are as follows (in thousands):
A reconciliation of the provision for income taxes at the statutory federal income tax rate of 34 percent to the effective tax provision as reported is as follows (in thousands):
The temporary differences which give rise to the deferred tax assets as of March 31, 1997 and 1996 are as follows (in thousands):
5.	COMMITMENTS
	The Company leases its facilities and certain equipment under non-cancelable operating leases. Rental expense for the years ended March 31, 1997, 1996 and 1995 was $2,998,000, $2,834,000 and $2,641,000 respectively. The leases have initial expiration dates ranging from 1997 to 2008. Certain of the leases contain renewal options, termination options and periodic adjustment of the minimum monthly rental payment based upon increases in the Consumer Price Index.
	At March 31, 1997, the aggregate future minimum rentals are as follows (in thousands):
6.	EMPLOYEE BENEFIT PLANS
	The Company has a qualified 401(k) profit-sharing plan covering substantially all of its employees. The Company matches, at a 25 percent rate, employee contributions up to 4 percent of compensation. In fiscal years 1997, 1996 and 1995, the Company's matching contributions equaled $71,000, $45,000 and $43,000, respectively. The plan also provides for discretionary Company contributions as approved by the Board of Directors. Company discretionary contributions of $262,000, $251,000 and $149,000 for the years ended March 31, 1997, 1996 and 1995, respectively, are included in the accompanying statements of income.
	On March 1, 1996, the Company introduced a deferred compensation plan which permits eligible employees and officers to defer a portion of their compensation and requires the Company to provide certain matching amounts and accrued interest as defined in the plan. The deferred compensation, together with company matching and accumulated interest, is accrued and amounted to approximately $274,000 at March 31, 1997. The deferred compensation plan is funded under a trust agreement whereby the Company pays to the trust amounts necessary to pay premiums on life insurance policies carried to meet the obligations under the plan. The expense associated with the plan, including life insurance costs, was $92,000 for fiscal 1997.
7.	STOCK OPTION PLANS
	The Company has two stock option plans (the "Plans") which provide for the grant of incentive stock options or nonqualified stock options to employees and directors of the Company. Nonemployee directors are only eligible to be granted nonqualified stock options. Incentive stock options may be granted at prices not less than 100% of the fair market value of such shares at the date of grant (110% with respect to optionees who are 10% or more stockholders of the Company). Nonqualified options may be granted at prices not less than 85% of the fair market value of such shares at the date of grant. Options granted under the Plans become exercisable in installments as determined by the Board of Directors. There were 676,000 shares issuable under the 1987 Plan and are 400,000 shares issuable under the 1995 Plan. The expiration date of the options is determined by the Board of Directors and does not exceed 10 years for incentive options (5 years with respect to optionees who are 10% or more stockholders of the Company) and 10 years and 1 day for nonqualified options. As of March 31, 1997, no further options may be granted under the 1987 Plan.
	The Company has adopted the disclosure only provision of SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no compensation expense has been recognized for stock options. Had compensation expense been recorded for options granted in fiscal years 1997 and 1996, the Company's net income and earnings per share would have been reduced approximately $85,000 or $.01 per share in fiscal 1997. The impact on net income for fiscal 1996 would not have been material. These amounts are for disclosure purposes only and may not be representative of future calculations since additional options may be granted in future years. The fair value for these options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for fiscal years 1997 and 1996: expected volatility of 45 percent; risk-free interest rate of 6.5 percent; expected option life of 5 years; and no dividend yield.
	The changes in the number of common shares under option for the years ended March 31, 1995, 1996, and 1997 are summarized as follows:
8.	SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	 The information called for by Part III, Items 10, 11, 12 and 13, is hereby incorporated by reference to the "Security Ownership of Certain Beneficial Owners and Management," "Management," "Executive Compensation - Summary of Cash and Other Compensation," "- Option Grants" and "- Option Exercises and Holdings," "Certain Transactions" and "Compliance with Section 16(a) of Exchange Act" sections of the Company's definitive Proxy Statement filed with the Securities and Exchange Commission and mailed to stockholders on June 20, 1997.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
	(a)	1.	See Index to Consolidated Financial Statements contained in Item 8 herein.
		2. See Index to Schedule to Consolidated Financial Statements included herein.
		3. See Item 14(c) for Index of Exhibits.
	(b)	No reports on Form 8-K filed during the fourth quarter ended March 31, 1997.
	(c)	Exhibits 		 		 3.1 Registrant's Certificate of Incorporation, as amended. (1)
		 3.2 Registrant's Bylaws, as amended. (1)
		10.1	 1987 Stock Option Plan (2)
		10.2	 Employee Profit-Sharing Plan (3)
		10.3	 1995 Stock Option Plan (4)
		10.4 Employment Agreement between the Company and Charles C. Tillinghast, III
		11.0 Statement re Computation of Per Share Earnings
		21.0 Subsidiaries of the Registrant
		23.1 Consent of Arthur Andersen LLP
		27.0 Financial Data Schedule
	(d)	The required financial statement schedules are listed on the Index to Schedule to Consolidated Financial Statements included herein.			
	(1)		Incorporated by reference to Registrant's Report on Form 8-K (File No. 0-16002) for July 25, 1991, as filed on October 18, 1991.
	(2)		Incorporated by reference to Registrant's Annual Report on Form 10-K (File No. 0-16002) for the fiscal	year ended March 31, 1992, as filed on June 26, 1992.
	(3)		Incorporated by reference to Registrant's Registration Statement on Form S-1 (File No. 33-14596) filed	on May 28, 1987.
	(4)		Incorporated by reference to Registrant's Registration Statement on Form S-8 (File No. 333-01155 filed	on February 22, 1996.)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date:	 June 23, 1997	 By:	/s/ Charles C. Tillinghast, III Charles C. Tillinghast, III 					 Chairman of the Board and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date: June 23, 1997	 By:	/s/ Charles C. Tillinghast, III 				Charles C. Tillinghast, III 				Chairman of the Board and Director
Date: June 23, 1997 By:	/s/ Michael M. Nicita		 Michael M. Nicita Chief Executive Officer and Director 				(Principal Executive, Financial and 				 Accounting Officer)
Date: June 23, 1997 By: /s/ Loren C. Paulsen	 					Loren C. Paulsen 				Director
Date: June 23, 1997 By: /s/ James A. Leidich 				James A. Leidich 				Director
Date: June 23, 1997 By: /s/ E. William Swanson, Jr. 				E. William Swanson, Jr. 				Director
Date:	 June 23, 1997	 By: /s/ Trygve E. Myhren 					Trygve E. Myhren 				Director
Date	 June 23, 1997 By: /s/ Lynn S. Dawson		 					Lynn S. Dawson 					Director
Date: June 23, 1997 By: /s/ Robert F. Bartlett		 					Robert F. Bartlett 					Director 	
ADVANCED MARKETING SERVICES, INC.
INDEX TO SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS
	All other schedules are not submitted because they are not applicable, not required or because the required information is included in the consolidated financial statements of Advanced Marketing Services, Inc. or in the notes thereto.
Exhibit 10.4 Employment Agreement
THIS EMPLOYMENT AGREEMENT is made and entered into as of July 16, 1996 by and between Advanced Marketing Services, Inc., a Delaware "Company"), and Charles C. Tillinghast, III ("Executive").
RECITALS
WHEREAS, Executive has served the Company as Chairman of the Board and Chief Executive Officer since November 1994 and, prior thereto, as Chairman of the Board, President and Chief Executive Officer since the Company's inception in 1982; WHEREAS, Executive's leadership and services have constituted a major factor in the successful growth and development of the Company; WHEREAS, in anticipation of retirement, Executive wishes to reduce gradually his active involvement in the management of the Company; WHEREAS, in order to provide for an orderly, efficient and successful transition in the management of the Company, Executive and the Company desire to specify the terms of Executive's resignation as Chief Executive Officer of the Company and continued service as Chairman of the Board of the Company;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals, the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
1.	Term. The Company hereby agrees to employ Executive, and Executive hereby grees to serve the Company, on the terms and conditions set forth in this Agreement, for a five-year period commencing on January 1, 1997 (such period, subject to termination as provided herein, being referred to as the "Period of Employment").
2.	Resignation as Chief Executive Officer. The Executive hereby tenders, and the Company hereby accepts, the Executive's resignation from his position as Chief Executive Officer of the Company, effective as of the close of business December 31, 1996.
3.	Continuing Duties and Services. During the Period of Employment, the Company shall use it's best efforts to nominate Executive for a seat on the Company's Board of Directors (the "Board of Directors"), to cause his election thereto and to designate Executive as Chairman of the Board. During the Period of Employment, Executive agrees to serve the Company as Chairman of the Board and and to perform such other reasonable and appropriate duties and responsibilities customary for the position of Chairman of the Board as may be requested of him by the Board of Directors, in accordance with the terms herein set forth. In addition, during the Period of Employment, the Company shall use its best efforts to nominate Executive and cause his election, and Executive shall continue to serve, as a member of the Stock Option Committee for the Company's 1987 Stock Option Plan, the Company's 1995 Stock Option Plan and as a member of the Committee administrating the Company's Deferred Compensation Plan. It is intended that during the first year of the Period of Employment, Executive shall serve the Company on a full-time basis. Thereafter, the number of days per year that Executive shall be required to serve shall decrease proportionately during the Period of Employment, such that during the fifth year of the Period of Employment, Executive shall only be required to serve the Company on an approximately half-time basis; provided, however, that the parties intend that in no event shall Executive's services be provided for less than 1,000 hours per calendar year. The principal place of performance by Executive of his duties hereunder shall be in San Diego, California or at such other location as may be mutually agreed upon by the Company and the Executive; provided, however, that Executive may be reasonably required to travel outside that area in connection with Company business.
4.	Compensation.
(a)	Salary and Bonuses. As compensation for his services hereunder, the Company shall pay Executive, during the Period of Employment, annual base salary in the amounts set forth on Exhibit A hereto, payable in accordance with the Company's normal payroll procedures for senior executives, or at such other times as may mutually be agreed upon by the Company and Executive. Although it is intended that Executive's base salary shall be as set forth on Exhibit A, Executive's base salary may be subject to periodic increase by the Board of Directors in its discretion. Executive shall be entitled to participate in the Company's bonus plan, deferred compensation plan and any other plan or plans which the Company may adopt during the Period of Employment, all on terms and conditions that are consistent with those established by the Compensation Committee of the Board of Directors in prior years or otherwise available to senior Company executives.
(b)	Fringe Benefits. During the Period of Employment, Executive shall be entitled to coverage under the Company's employee benefit programs (as such programs are in effect from time to time), including without limitation any pension plan, profit-sharing plan, savings plan, deferred compensation plan and medical, life and disability insurance plan or arrangement, on terms no less favorable than those generally made available to the Company's senior executive officers; provided, however, that if coverage of Executive on such terms is not permitted under the provisions of any such benefit program, the Company shall, at its own expense, provide the Executive with a comparable level of benefits during the Period of Employment; and provided further that with respect to any current or future deferred compensation plan which provides for a vesting period of five years or greater, all amounts contributed by or on behalf of Executive, plus all interest accrued thereon, shall be deemed fully vested as of the last day of the Period of Employment. Executive shall also be entitled to all other Company provided employment fringe benefits on terms not less favorable than those made available to the Company's senior executive officers.
(c)	Expenses. All travel, entertainment and other expenses incident to the rendering of services by Executive hereunder shall be paid by the Company. If any such expenses are paid in the first instance by Executive, the Company shall reimburse Executive therefor on presentation of the appropriate documentation, subject to the Company's normal rules with respect to documentation of such expenses.
(d)	Vacation. Executive shall be entitled to paid vacation, on the same basis as other senior executives of the Company based on length of service, to be taken at a time or times mutually satisfactory to Executive and the Company. In addition, Executive shall be entitled to participate in any sabbatical program which the Company has now or in the future during the Period of Employment.
5.	Early Termination.
(a)	For Cause. Executive may be discharged by the Company only for Cause (as defined in Section 5(d) hereof), in which event the Period of Employment hereunder shall cease and terminate and the Company shall have no further obligation or duties under this Agreement, except for obligations accrued under Section 4 at the date of termination. In the event that the Board of Directors shall determine that grounds exist for terminating the Period of Employment hereunder for Cause, the Company shall, within 60 days after the discovery of the Cause, send notice to the Executive that his employment is terminated effective not sooner than 30-days following the notice and specifying in reasonable detail the facts based upon which Cause exist for such actions.
(b)	Due to Death or Disability. The Period of Employment hereunder shall cease and terminate upon the earliest to occur of the following events: (i) the death of Executive, or (ii) at the election of the Board of Directors (subject to the Americans With Disabilities Act), the inability of Executive by reason of physical or mental disability to continue the substantial performance of his duties hereunder for a period of 180 consecutive days. In the event that the Board of Directors shall elect to terminate the Period of Employment pursuant this Section 5(b), it shall provide Executive with not written notice of its election to do so. Upon termination of the Period of Employment pursuant to this Section 5(b), the Company shall continue to pay to Executive or his estate, as the case may be, the entire compensation otherwise payable to him under Section 4 hereof for the lesser of one year or the remaining Period of Employment.
(c)	In the event that (i) Executive is discharged by the Company other than for Cause or other than pursuant to Section 5(b) hereof by reason of physical or mental disability, or (ii) Executive terminates employment with the Company For Good Reason (as defined in Section 5(e) hereof) (collectively an "Untimely Termination"), Executive shall have no further obligations or duties under this Agreement; provided, however, that Executive shall continue to be bound by the provisions of Section 6 hereof if the Company performs its obligations under this Section 5(c). In the event of an Untimely Termination, Executive shall nevertheless be entitled to the compensation specified in Section 4 hereof with an assumed termination date of that date on which the Period of Employment would have expired but for such Untimely Termination.
(d)	For purposes of this Agreement, Cause shall be deemed to exist only (i) willful misconduct in the substantial performance of his duties and obligations hereunder or (ii) upon the material breach by Executive of this Agreement.
(e)	For purposes of this Agreement, the term "For Good Reason" shall mean (i) the assignment to Executive of any duties or responsibilities which are inconsistent with Executive's position (including status, office, title and reporting requirements), authority, duties or responsibilities as contemplated by Section 3, or any other action by the Company which results in a substantial diminishment in such position, authority, duties or responsibilities; (ii) the Company's requiring relocation of Executive, without his prior written consent, to a place of employment other than San Diego, California, except for travel reasonably required in the performance of Executive's responsibilities; or (iii) the Company's material breach of this Agreement.
6.	Confidentiality and Non-Competition.
(a)	The Company and Executive acknowledge that the services to be performed by Executive under this Agreement are unique and extraordinary and, as a result of such employment, Executive will be in possession of confidential information, proprietary information and trade secrets (collectively, "Confidential Material") relating to the business practices of the Company. Executive agrees that he will not, directly or indirectly, (i) disclose to anyone other than the Company and its affiliates and subsidiaries or any of their respective officers, directors or agents, either during or after his employment by the Company or (ii) use, except during his employment by the Company in the business and for the benefit of the Company, any Confidential Material acquired by Executive during his employment by the Company, without the prior written consent of the Company, unless (i) Executive is required to disclose any such information by judicial or administrative process or, in the opinion of counsel, by other requirements of law, (ii) such information in the public domain through no fault of the Executive, or (iii) such information has been lawfully acquired by Executive from other sources unless Executive knows that such information was obtained in violation of an agreement of confidentiality or law. Upon termination of his employment with the Company for any reason, Executive agrees to return to the Company all tangible manifestations of Confidential Materials. All programs, ideas, strategies, approaches, practices or inventions created, developed, obtained or conceived of by Executive prior to or during the term thereof, and all business opportunities presented to Executive during the term hereof by reason of his engagement by the Company, shall be owned by and belong exclusively to the Company, provided that they are related in any manner to its business. Executive shall (i) promptly disclose all such programs, ideas, strategies, approaches, practices, inventions or business opportunities to the Company and (ii) execute and deliver to the Company, without additional compensation, such instruments as the Company may require from time to time to evidence its ownership of any such items.
(b)	Executive agrees that during the term hereof and for a period of 12 months thereafter, he will not become a stockholder, director, officer, employee or agent of or consultant to any corporation (other than the Company), or member of or consultant to any partnership or other entity, or engage in any business as a sole proprietor or act as a consultant to any such entity, or otherwise engage, directly or indirectly, in any enterprise, in each case which competes with any business or activity engaged in, or known by Executive to be contemplated to be engaged in, by the Company within 100 miles of any location in which the Company does business or in which Executive has knowledge that the Company contemplates doing business; provided, however, that competition shall not include the ownership (solely as an investor and without any other participation in or contact with the management of the business) of less than five percent of the outstanding shares of stock of any corporation engaged in any such business, which shares are regularly traded on a national securities exchange or in an over-the-counter market. Executive agrees that during the non-compete period referred to in this Section 6, neither Executive nor any person or enterprise controlled by Executive will solicit for employment any person employed by the Company at, or at any time within three months prior to, the time of the solicitation.
(c)	Executive agrees that the remedy at law for any breach by him of this Section 6 will be inadequate and that the Company shall be entitled to injunctive relief.
7.	Miscellaneous.
(a)	Notices. Any notice or other communication required or permitted to be given hereunder shall be made in writing and shall be delivered in person, by facsimile transmission or mailed by prepaid registered or certified mail, return receipt requested, addressed to the parties as follows:
If to the Company:	 Advanced Marketing Services, Inc. 5880 Oberlin Drive, Suite 400 San Diego, California 92121 Attention: Chief Financial Officer Facsimile: (619) 452-2167
If to Executive:	 Charles C. Tillinghast, III 1762 Nautilus Street La Jolla, California 92037 Facsimile: (619) 459-6407
or to such other address as the party shall have furnished in writing in accordance with this Section. Such notices or communications shall be effective upon delivery if delivered in person or by facsimile and either upon actual receipt or three (3) days after mailing, whichever is earlier, if delivered by mail.
(b)	Parties In Interest. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and to their respective successors, whether by operation of law or through the merger or consolidation of the Company or the sale of all or substantially all of the business or assets of the Company. This Agreement may otherwise not be assigned by either party without the express written consent thereto by the other party, which consent may be given or withheld in the sole and absolute discretion of such party.
(c)	Entire Agreement. This Agreement supersedes any and all other agreements, either oral or in writing, between the parties hereto with respect to such employment of Executive by the Company and contains all of the covenants and agreements between the parties with respect to such employment in any manner whatsoever. Any modification of this Agreement will be effective only if it is in writing signed by the party to be charged.
(d)	Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to the choice of law or conflicts of laws rules and laws of such jurisdiction.
(e)	Severability. In the event that any term or condition contained in this Agreement shall for any reason be held by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other term or condition of this Agreement, but this Agreement shall be construed as if such invalid or illegal or unenforceable term or condition had never been contained herein. If a court of competent jurisdiction determines by final judgment that the scope, time period or geographical limitations set forth in Section 6 are too broad to be capable of enforcement, it may modify such covenants and enforce such provisions as to scope, time and geographical area as it deems equitable.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates across from their respective signatures, effective as of the date first written above.
ADVANCED MARKETING SERVICES, INC. By:/s/ James A. Leidich JAMES A. LEIDICH, Chairman of the Compensation Committee
/s/Charles C. Tillinghast, III	 CHARLES C. TILLINGHAST, III
Exhibit 11.0 	 _____________________________ The effects of all anti-dilutive common stock equivalents are excluded from the calculation of EPS.
Exhibit 21.0
Subsidiaries of the Registrant
	Advanced Marketing (UK) Limited - England 	Advanced Marketing S. de R.L. de C.V. - Mexico 	Advanced Marketing Services Investments, Inc. - California 	Mira Mesa Marketing, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K into the Company's previously filed Registration Statements, File Nos. 33-30467, 33-43792 and 333-01155.
					
San Diego, California					 ARTHUR ANDERSEN LLP June 19, 1997