Advanced Marketing Services, Inc.

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%:


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- --------------------------------------------------------------------------------
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.


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(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,


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(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


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(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 ...