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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (the "Exchange Act")

For the fiscal year ended September 30, 2003
Commission File No. 0-19188

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APPLIED EXTRUSION TECHNOLOGIES, INC.(Exact name of registrant as specified in its charter)

|Delaware                                                       |  | 51-0295865                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer
Identification No.)

15 Read's Way
New Castle, DE 19720
(302) 326-5500

(Address, including zip code and telephone number, of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

|Title of Each Class |  | Name of Each Exchange
On Which Registered
|------------------- |  | -----------------------------------------
|None                |  | None                                     

Securities registered pursuant to Section 12(g) of the Act:

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Common Stock ($.01 Par Value)
Junior Preferred Stock Purchase Rights
(Title of Classes)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes ý No o

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the
Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K. o

Indicate
by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes ý No o

The
aggregate market value of the Registrant's voting stock held by non-affiliates was approximately $33,750,874 on December 12, 2003, based on the closing sales price
of the Registrant's common stock, $.01 par value (the "Common Stock"), as reported on the NASDAQ National Market System as of such date.

The
number of shares of the Registrant's Common Stock outstanding as of December 12, 2003 was 12,833,032 shares. The number of shares of the Registrant's Junior Preferred Stock
Purchase Rights outstanding as of December 12, 2003 was 12,833,032 shares.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents are incorporated herein by reference: Portions of the registrant's Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the 2004 Annual Meeting of Stockholders are incorporated by reference into Part III.

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FORM 10-K INDEX

|         |  |                                                                                      |  |   
|-------- |  | ------------------------------------------------------------------------------------ |  | --
|PART I  
|Item 1.  |  | Business                                                                             |  | 1 
|Item 2.  |  | Properties                                                                           |  | 8 
|Item 3.  |  | Legal Proceedings                                                                    |  | 9 
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                  |  | 9 
|Item 4a. |  | Executive Officers                                                                   |  | 9 
|PART II 
|Item 5.  |  | Market for the Registrant's Common Equity and Related Stockholder Matters            |  | 11
|Item 6.  |  | Selected Financial Data                                                              |  | 11
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operation |  | 12
|Item 7a. |  | Quantitative and Qualitative Disclosures about Market Risk                           |  | 22
|Item 8.  |  | Financial Statements and Supplementary Data                                          |  | 22
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |  | 22
|Item 9a. |  | Controls and Procedures                                                              |  | 23
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                   |  | 23
|Item 11. |  | Executive Compensation                                                               |  | 24
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                       |  | 24
|Item 13. |  | Certain Relationships and Related Transactions                                       |  | 24
|Item 14. |  | Principal Accounting Fees and Services                                               |  | 24
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and Reports on Form 8K                       |  | 25
|         |  | Signatures                                                                           |  | 29

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PART I

ITEM 1. BUSINESS

General

Applied Extrusion Technologies, Inc. ("AET" or "the Company") is the largest North American manufacturer and supplier of oriented polypropylene, or OPP,
films, which are used primarily in consumer product labeling, flexible packaging and overwrap applications. AET has a leading position in most of the major high-end OPP films
end-use product categories in North America and has a market share of approximately 25 percent.

AET
offers one of the most extensive product lines in the OPP films industry, ranging from high-margin, specialized labels and holographic films to basic heat sealable
co-extruded films. With an experienced technology group and state-of-the-art production facilities, the Company works directly with its customers to
develop innovative products to meet their specialized requirements. AET believes that its combination of leadership position, innovative capabilities, strong sales force and highly efficient
manufacturing will allow it to achieve future growth and profitability.

End
users of AET's films are consumer product companies whose labels and packages require special attributes such as vivid graphics, exceptional clarity and moisture barriers to preserve
freshness. AET's OPP films product line is classified into two categoriesthe Core Business, which is comprised primarily of labels and packaging films, and the High Value Business, which
consists of the Company's TOppCure® and Platinum films. AET's film products are utilized by end users such as Coca-Cola®,
Pepsi-Cola®, Frito-Lay®, Nabisco®, Kellogg's®, Hershey Foods®, Sony® and Lipton®.

Business Strategy

AET's objective is to generate sustainable increasing profitability in the cyclical OPP films industry. The business strategy to achieve this objective is divided
into two phases:

Phase OneThe first phase covered 1996 - 2001 and was directed at significantly enhancing the
efficiency of the asset base and creating sufficient critical mass to support future product development. The strategic elements of this first phase were as follows:



During
Phase One, AET doubled its capacity without increasing headcount, thus reducing unit costs, developed over fifty new products, and greatly expanded its presence in Latin America.

Phase TwoThe second phase covers 2002 - 2006 and is directed at driving margin expansion primarily
through the development of new high-value films, including products which substitute for other materials, expanding the overall OPP market. The strategic elements of the second phase are
as follows:



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AET
has developed four new technology platforms, providing a foundation on which to build innovative products that provide significant value to its customers and expanding margins for
the Company. These products are referred to as AET's Platinum Products. To put the concept of these new technology platforms in context, there has not been a single new technology platform introduced
into the OPP industry for over fifteen years. Examples of currently utilized technology platforms are coextrusion, voiding, out-of-line metallizing and coating, surface
treatment and the use of copolymers and terpolymers.

Innovative Products / Technology Platforms

The four new technology platforms and certain related applications recently developed by AET include:



In
addition to Platinum Products developed utilizing these proprietary technology platforms, AET has also developed other high-value products such as the HOTR
line of films. These patented films have a tightly controlled range of high oxygen transmission rates that facilitate the packaging of spring mix salads, spinach, selected fruits and vegetables, case
ready meats, as well as lidding stock.

Maintain Market Leadership in Signature Products

AET is a leading supplier to four of the top end users and five of the top six converters of OPP films, which is the result of excellent service coupled with
superior products in selected target markets. These products are referred to as AET's "Signature Products" and include the Company's roll-fed, cut-and-stack and
shrink label films, cold seal release films, non-sealable metallized films, and overwrap films.

AET
is continually improving and upgrading its Signature Products to insure it maintains its strong market position by setting the standard for these value-added products. The North
American market share AET enjoys in the segments in which these products participate ranges from 40 percent to 90 percent.

Upgrade Sales Mix

During Phase One of AET's Business Strategy, a period of rapid capacity expansion, the Company doubled its volume of products produced and sold. However, due to
the unprecedented rate of growth in manufacturing capacity, approximately half of AET's aggregate growth in volume during this period was in lower margin films. During Phase Two of AET's Business
Strategy, much of this capacity will be

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redirected
to higher value-added opportunities. While the Company has no plans to add additional capacity in the foreseeable future, an opportunity exists as AET introduces its innovative new Platinum
Products and expands its Signature Products in place of lower margin films to enhance the overall profit margins of the Company.

Industry Overview

OPP films are highly engineered products developed and manufactured through a complex process of polymer design, extrusion, controlled multi-directional
stretching, heating and cooling, and surface treatment. Depending on the application, finished products can then be further processed to be embossed or add high barrier or metallized coatings, and are
often designed to be laminated with other films to provide highly specialized attributes required by end users.

Recent
advancements in film extrusion and resin technology have produced new, sophisticated films that are thinner and stronger and have better barrier and sealant properties than other
materials or predecessor films. These technological advances have allowed many traditional forms of rigid packaging to be replaced with film-based, flexible packaging that is lighter,
lower in cost and has enhanced performance characteristics, such as oxygen and moisture barriers, printability and durability. In addition, flexible packaging is often recyclable.

The
Company estimates that the North American OPP film market grew at an average compound annual growth rate of over six percent from 1980 through 2000. However, beginning in 2001 and
continuing into 2002, demand growth in the OPP films industry slowed to near zero due primarily to both the recession and inventory de-stocking throughout the supply chain. Growth in OPP
film demand in fiscal 2003 at approximately three percent, based on Company estimates, was also lower than the historical growth rate. This relatively sluggish demand growth resulted from the
continued economic weakness coupled with lower demand for snacks and beverages due to unseasonably cool and wet weather conditions, during the spring and early summer, particularly on the east coast
of the United States. Assuming a full economic recovery in 2004, the Company anticipates growth in OPP films of approximately four percent, a decrease of two percent as compared to the historical
growth rate. Substitution accounted for over half of the historical growth rate in OPP films due to their superior performance characteristics, such as improved protection against light, oxygen and
moisture, good printability and durability, and exceptional clarity. In addition, due to its low density OPP provides greater coverage at lower cost than any other plastic film material. OPP films
have replaced many non-OPP plastic film material such as polyester, nylon, cellophane and paper. Several fundamental trends should reestablish a stronger future growth rate:



Production
capacity in the North American OPP films industry increased by more than 35 percent from 1996 to 1999. As a result, capacity utilization levels declined from
approximately 95 percent to a utilization rate approaching 80 percent. This decline in capacity utilization led to sharp declines in selling prices of OPP films and severely impacted
profitability in the OPP films industry. Historically, when capacity utilization has reached the low-90 percent levels, the OPP films industry has been able pass on increases in the
cost of raw materials to customers. When capacity utilization reaches the

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mid-90s,
the industry has been able to achieve reasonable levels of price realization. For example, in 1995, when capacity utilization was at the mid-90 percent level,
the industry was able to achieve significant pricing power and achieve one of its most profitable years.

Capacity
utilization in the North American OPP films industry has been recovering but remained depressed in 2003. The Company estimates that capacity utilization is currently
approximately 90 percent. According to Chemical Data Inc., the price of polypropylene resin has increased from an average of $0.36 per pound in fiscal 2002 to an average of $0.43 per
pound in fiscal 2003, representing a 19 percent year-over-year increase. Although capacity utilization levels remain soft, the Company led two industry price increases
in fiscal 2003 and was able to recover essentially all of the raw material cost increases. As the expected growth in demand outpaces the announced capacity additions, industry capacity utilization
levels will continue to improve and the ability of producers to pass on costs to customers will be enhanced.

The
Company estimates that annualized industry capacity increased by approximately 30 million pounds with the startup of ExxonMobil's new line in Shawnee, Oklahoma in 2003.
Because a substantial capital investment is required to build a new line and the industry has experienced low capacity utilization levels and poor profitability, industry participants will be cautious
about introducing new lines. In addition, since at least two years are required to design and construct a new OPP films line, with a third year to fully ramp up production, no additional new lines are
expected to come on stream in the United States for at least the next two to three years.

Competitive Strengths

AET is well positioned to compete successfully in the OPP films market and to increase sales and profitability due to:



Products

Core Business Products:



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Platinum
Products:

The
Company has developed, and is currently commercializing, the first four innovative new high-margin products utilizing its new technology platforms. These products,
including TOppCure®, Holographic, SynCarta, and HOTR films, provide higher margins and expand the OPP market by
delivering favorable costs and/or performance attributes versus existing materials. AET believes that these new proprietary technology platforms provide a strong foundation to develop additional
high-margin innovative products.

Marketing and Customers

AET's OPP films products are sold primarily through its direct sales organization. Its highly skilled sales force, whose principal role is to develop sales
opportunities and provide customer support, has considerable technical expertise and industry experience. Marketing activities have historically been focused primarily in North and South America,
although the Company also has a sales presence in Europe and Asia. In addition, the Company's sales force and research and development scientists work directly with its customers to create new films,
as well as new applications for existing OPP films.

The
majority of AET's OPP films sales are to converters, who print and laminate films before selling to end-users. One such converter accounted for approximately
15 percent of sales in fiscal 2003 and approximately 16 percent in fiscal 2002. The Company also sells a significant portion of OPP films directly to end-users, and considers
it an important part of its marketing effort to maintain direct relations with major end-users, who generally direct packaging design efforts and provide detailed specifications to
converters about the films used in their labeling and packaging applications. Sales and marketing efforts and customer relationships are enhanced by the numerous requirements of customer-specific
technical qualifications that have been secured. The qualification process typically involves significant customer time and effort and results in a strong competitive position for qualified products.
Once qualified, products are often referenced in end-user specifications or qualified product lists. These qualification processes also reinforce the partnership between AET and its
customers and can lead to additional sales and marketing opportunities.

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Manufacturing and Technology

OPP films are manufactured and processed through either the tenter or the tubular process. AET is the only North American OPP films producer that has both tenter
and tubular manufacturing capabilities. Additionally, OPP films can be further processed through value-adding secondary operations.

Tenter Process

In the tenter process, specifically formulated polypropylene resins are combined and melted, sometimes with additives, and extruded from a flat die into a thick
film containing from one to five distinct layers, which are then chilled, reheated and stretched lengthwise in the machine direction and widthwise in the
transverse direction while still heated. This dual stretching process is known as "biaxial orientation." The specific characteristics demanded of each film are controlled throughout this complex
process by a multitude of variables, including proprietary polymer design, application of unique skin layers, timed variations of the heating, cooling and stretching processes, alteration of molecular
surface characteristics through the application of flame or high-voltage electrical discharge and controlled winding tension. AET has eight tenter lines, ranging from 5.5 to 10 meters. The
tenter process is a more economical way than the tubular process to manufacture thicker films.

Tubular Process

In the tubular process, molten resin is extruded from a circular die to form a thick tube which is stretched lengthwise and widthwise with air pressure and
gravity at controlled temperatures. Tubular processed films offer "balanced biaxial orientation," meaning that the film is stretched equally both widthwise and lengthwise. This process results in
improved stability and a more uniform thickness for thinner films. The Company believes that its tubular manufacturing capacity enables it to manufacture thinner films, while preserving clarity,
machinability and other performance characteristics of thicker film. These thinner films use less materials, thereby improving performance relative to cost. AET currently operates nine tubular lines.

Secondary Processes

In addition to the tenter and tubular manufacturing processes, AET also performs operations to coat, metallize, and emboss its films. In the coating process,
various materials are applied in liquid form to the surface of the film, which is then dried in-line. These coatings are applied uniformly at varying thicknesses and layers to impart
desired properties. In the metallization process, the film is run through a vacuum and a thin layer of aluminum is applied to the surface of the film. The embossing process uniformly modifies the
surface of highly engineered films, through the application of heat and pressure, to produce films suitable for holographic applications.

Research and Development

AET believes that it has one of the largest and most experienced technology groups in the industry, with more than 60 chemists, engineers and technicians, and has
invested approximately $14 million in research and development over the past two years. Utilizing extensive laboratory and film testing facilities, advanced pilot film production lines, and an
array of end-use packaging and labeling equipment, the Company's technology group has introduced approximately 50 new or enhanced products in the past three fiscal years. The Company
believes that this strength in innovation will continue to drive higher growth levels for differentiated, higher margin Platinum Products, and provide an advantage to customers who work with AET in
the development of new labeling, packaging and overwrap products and applications. During fiscal 2001, 2002 and 2003, the Company spent approximately $6.4 million, $6.6 million and
$7.2 million, respectively, on research and development.

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Polypropylene and Other Raw Materials

AET manufactures its principal products primarily from polypropylene resin. The relatively low density and low cost of polypropylene resins allow OPP films to
provide very cost-efficient material for packaging applications. In addition, polypropylene possesses superior clarity and natural barrier qualities, and can be modified to add other
attributes or features such as metallization, which make it a higher performing and more cost-efficient material than other plastic resins.

Four
suppliers provide the majority of the Company's resin supply requirements. However, these materials are generally available from a large number of suppliers in sufficient quantities
to meet ongoing requirements. Historically, there have not been any significant disruptions in supply as a result of shortages in raw materials.

Historically,
the price of polypropylene has fluctuated, and in recent years the price has increased significantly due to the increased price of crude oil. As a result of low capacity
utilization levels, not all of the increases in costs of polypropylene resin over the past two years have been passed on to customers. According to Chemical Data Inc., polypropylene resin
prices have increased from an average of $0.34 per pound in fiscal 2002 to an average of $0.42 per pound in fiscal 2003. Any major disruption in the supply of oil, including continued unrest in the
Middle East, is likely to cause a significant increase in the cost of polypropylene.

Competition

AET competes with manufacturers of OPP films and other specialty films, such as cellophane and polyester, as well as with producers of traditional packaging
materials, such as paper, foil, metal, glass and other containers. The flexible packaging industry is very competitive, and some competitors are subsidiaries of larger corporations that have
significantly greater financial resources than the Company. There are approximately six primary manufacturers in North America producing OPP films for resale. Out of these six manufacturers, only AET
and ExxonMobil, the other broad-line producer of OPP films, have a greater than 20 percent market share. Competition in OPP films markets is based primarily on customer
relationships, product performance characteristics such as machinability and quality, reliability and price. Competition also depends on developing new and enhanced products for customers. The Company
also sells products in countries outside North America and, therefore, competes with local OPP manufacturers.

The
Company believes that it has various competitive advantages including:



Although
this is an asset intensive business and the cost to enter is high, it cannot be assumed that the markets into which the Company sells its products will not attract additional
competitors that could have significantly greater financial, technological, manufacturing and marketing resources than AET.

Patents and Trademarks

AET currently holds approximately 46 active domestic and international patents and applications and has approximately 15 domestic and international trademark
registrations and applications. The termination, expiration or infringement of one or more patents or trademarks would not have a material adverse effect on the business.

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Government Regulation

Due to the nature of AET's business, its operations are subject to a variety of federal, state and local laws, regulations and licensing requirements. The Company
believes that its operations are in substantial compliance with those laws, regulations and requirements. Compliance with federal, state and local requirements relating to the protection of the
environment has not had and is not expected to have, a material effect on capital expenditures, financial condition, results of operations or competitive position.

Environmental, Health and Safety Matters

AET is subject to stringent environmental, health and safety requirements, including laws and regulations relating to air emissions, wastewater management, the
handling and disposal of waste, and the cleanup of properties affected by hazardous substances. The Company believes that its operations have been and are in substantial compliance with environmental,
health and safety requirements, and that it has no liabilities arising under such requirements, except as could not reasonably be expected to have a material adverse effect on operations, liquidity or
financial condition.

In
the last five years, the Company has received no requests for information or related correspondence from the United States Environmental Protection Agency and other third parties
indicating that it might be responsible under the Comprehensive Environmental Response, Compensation and Liability Act or other environmental laws for costs associated with the investigation and
cleanup of contaminated sites. The Company believes that any future involvement in matters arising under various environmental laws will not have a material adverse effect on its operations, liquidity
or financial condition.

Employees

The Company employs approximately 940 full-time employees. Approximately 98 production and maintenance employees at the Covington, Virginia facility
are represented by the Paper Allied Industrial Chemical and Energy Workers International Union, Local 2-0884 under a collective bargaining agreement that expires in June 2005. All
employee relations are considered to be satisfactory.

ITEM 2. PROPERTIES

The following table provides information with respect to AET's facilities:Location Square Feet Owned/Leased

|                                                      |  | Location                 |  | Square Feet |  | Owned/
Leased
|----------------------------------------------------- |  | ------------------------ |  | ----------- |  | -------------
|OPP Films manufacturing and research pilot facilities |  | Terre Haute, Indiana     |  | 821,000     |  | Owned        
|                                                      |  | Covington, Virginia      |  | 517,000     |  | Owned        
|                                                      |  | Varennes, Quebec, Canada |  | 163,000     |  | Owned        
|                                                      |  | Newport, Delaware        |  | 12,825      |  | Leased       
|Corporate and Research and Development                |  | New Castle, Delaware     |  | 50,000      |  | Leased       

All
of AET's owned real property, except for the Covington, Virginia property, is collateral under the Company's term credit facility. The Company believes that its facilities are
suitable for their currently intended purposes and adequate for its level of operations.

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ITEM 3. LEGAL PROCEEDINGS

The Company is periodically subject to legal proceedings and claims which have arisen in the ordinary course of business and have not been fully adjudicated. It
is not a party to litigation or other legal proceedings which it believes, either singly or in the aggregate, could reasonably be expected to have a material adverse effect on its business, financial
condition and results of operations.

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

AET did not submit any matters to a vote of the security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year
covered by this report.

ITEM 4a. EXECUTIVE OFFICERS

The executive officers of AET are as follows:

|Name               |  | Age |  | Position                                             |  | Since         
|------------------ |  | --- |  | ---------------------------------------------------- |  | --------------
|Amin J. Khoury     |  | 64  |  | Chairman of the Board and Chief Executive Officer(1) |  | October 1986  
|David N. Terhune   |  | 57  |  | President and Chief Operating Officer(2)             |  | February 1996 
|Terry E. Smith     |  | 52  |  | Vice President Operations(3)                         |  | July 1998     
|Brian P. Crescenzo |  | 42  |  | Vice President of Finance, Secretary, and Treasurer  |  | September 1997

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AET's
executive officers are elected annually by the Board of Directors and serve at the discretion of the Board of Directors.

Business Experience of Executive Officers

Amin J. KhouryFounder and Chairman of the Board of Directors of the Company since 1986; Chief
Executive Officer of the Company since October 2002; Founder and Chairman of the Board of Directors of BE Aerospace, Inc., a manufacturer of aircraft cabin interior products; Director of
Brooks Automation, Inc., a leader in semiconductor tool and factory automation solutions for the global semiconductor industry; and Director of Synthes-Stratec, one of the world's leading
orthopedic trauma companies.

David N. TerhunePresident of the Company since October 2002, and Chief Operating Officer of the Company since 1996;
Executive Vice President from 1996 to 2002; Senior Vice President and Chief Financial Officer of the Company from 1994 to 1996; from 1972 until 1993, as Chief Operating Officer for seven years and
Chief Financial Officer for fourteen years for five primarily public companies in the technology, banking, real estate, food service and manufacturing industries.

Terry E. SmithVice President of Operations of the Company since January 2003; Vice President of Manufacturing from
July 1998 to January 2003; from 1994 until 1998 Vice President of Manufacturing Operations for Sentry Group, a leading manufacturer of fire proof safes, files and

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chests;
from 1979 until 1994 held various operational positions including Manager of Manufacturing, Senior Planning Associate and Business Manager with Mobil Chemical Company's Plastics Division.

Brian P. CrescenzoVice President of Finance of the Company since September 1997; Secretary of the Company since
September 2002; Treasurer of the Company since January 2003; from 1989 until 1997, held various controllership positions with Hercules, Inc., a specialty chemical company based in
Wilmington, Delaware, including the controllership of the OPP Films Division.

The
information presented under the heading, "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement to be filed with the Securities and Exchange
Commission in connection with the 2004 Annual Meeting of Stockholders is incorporated herein by reference.

AET
has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer, as well as to its directors, other
officers and employees. AET's Code of Conduct and Ethics is available on its website at www.aetfilms.com.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock has been quoted on the NASDAQ National Market System since June 6, 1991 under the symbol "AETC." Before June 6, 1991, no
established public trading market existed for the Company's Common Stock. Below is the range of high and low sales information for the Common Stock for the two most recently completed fiscal years, as
quoted on the NASDAQ National Market System:

|                           |  | Fiscal Year 2003 |      | Fiscal Year 2002
|-------------------------- |  | ---------------- | ---- | ----------------
|
|Quarter ended December 31  |  | $                | 3.79 |                 
|Quarter ended March 31     |  |                  | 2.10 |                 
|Quarter ended June 30      |  |                  | 2.50 |                 
|Quarter ended September 30 |  |                  | 2.80 |                 

The
Company has not paid any cash dividends on its Common Stock, and the Company's Board of Directors intends, for the foreseeable future, to retain any earnings to repay debt and
finance the future growth of the Company. In addition, the Company's credit facility and the indenture governing its senior notes restrict the payment of cash dividends. As of December 12,
2003, there were approximately 247 registered holders of record and more than 3,000 beneficial holders of the Company's Common Stock.

ITEM 6. SELECTED FINANCIAL DATA

The following selected financial data should be read in conjunction with the consolidated financial statements, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. The following information is in thousands, except per share amounts:

|                                        |                                       | 2003 |         | 2002(a) |   | 2001(b) |        | 2000 |         | 1999   |  
|--------------------------------------- | ------------------------------------- | ---- | ------- | ------- | - | ------- | ------ | ---- | ------- | ------ | -
|Statement of Operations Data:           |                                       |      |         |         |   |         |        |      |         |        |  
|Sales                                   |                                       | $    | 247,364 |         | $ | 252,092 |        | $    | 279,840 |        | $
|Cost of sales                           |                                       |      | 203,154 |         |   | 208,099 |        |      | 222,719 |        |  
|                                        |                                       |      |         |         |   |         |        |      |         |        |  
|Gross profit                            |                                       |      | 44,210  |         |   | 43,993  |        |      | 57,121  |        |  
|Operating expenses:                     |                                       |      |         |         |   |         |        |      |         |        |  
|                                        | Selling, general and administrative   |      |         | 22,989  |   |         | 32,085 |      |         | 29,500 |  
|                                        | Research and development              |      |         | 7,209   |   |         | 6,605  |      |         | 6,419  |  
|                                        | Restructuring and impairment charges  |      |         |        |   |         | 9,002  |      |         |       |  
|                                        | Loss on sale of assets                |      |         |        |   |         |       |      |         | 7,054  |  
|                                        | QPF acquisition and integration costs |      |         |        |   |         | 950    |      |         | 2,548  |  
|                                        |                                       |      |         |         |   |         |        |      |         |        |  
|Operating profit (loss)                 |                                       |      | 14,012  |         |   | (4,649  | )      |      | 11,600  |        |  
|Non-operating expenses:                 |                                       |      |         |         |   |         |        |      |         |        |  
|                                        | Interest expense, net(a)              |      |         | 29,912  |   |         | 29,147 |      |         | 27,748 |  
|                                        | Acquisition costs and other           |      |         |        |   |         |       |      |         |       |  
|                                        |                                       |      |         |         |   |         |        |      |         |        |  
|Loss before income taxes                |                                       |      | (15,900 | )       |   | (33,796 | )      |      | (16,148 | )      |  
|Income tax expense (benefit)(a)         |                                       |      | 1,053   |         |   | (2,045  | )      |      | 10,264  |        |  
|                                        |                                       |      |         |         |   |         |        |      |         |        |  
|Net loss                                |                                       | $    | (16,953 | )       | $ | (31,751 | )      | $    | (26,412 | )      | $
|                                        |                                       |      |         |         |   |         |        |      |         |        |  
|Basic and Diluted Loss per common share |                                       | $    | (1.33   | )       | $ | (2.55   | )      | $    | (2.23   | )      | $
|                                        |                                       |      |         |         |   |         |        |      |         |        |  
|                                        |                                       |      |         |         |   |         |        |      |         |        |  

11

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|Balance Sheet Data:  |  |   |         |  |   |         |  |   |         |  |   |         |  |   |         | 
|-------------------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- |  | - | ------- | 
|Working capital      |  | $ | 28,047  |  | $ | 40,987  |  | $ | 75,893  |  | $ | 48,221  |  | $ | 36,621  | 
|Total assets         |  |   | 407,695 |  |   | 405,062 |  |   | 425,858 |  |   | 390,754 |  |   | 375,537 | 
|Long-term debt       |  |   | 271,790 |  |   | 277,876 |  |   | 277,462 |  |   | 209,500 |  |   | 182,500 | 
|Stockholders' equity |  |   | 34,357  |  |   | 38,761  |  |   | 68,822  |  |   | 97,004  |  |   | 98,952  | 

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain information contained in this report should be considered "forward-looking statements" as defined by the Private Securities Litigation Reform Act of 1995.
These statements represent, among other things, the expectations, beliefs, plans and objectives of management with respect to future financial performance or operations and/or assumptions underlying
or judgments concerning matters discussed in this document. The words "believe," "estimate," "intend," "anticipate," "project," and "expect" and similar expressions are intended to identify
forward-looking statements. All forward-looking statements involve certain risks, estimates, assumptions, and uncertainties with respect to future revenues, cash flows, expenses and the cost of
capital, among other things.

Some
important risk factors that could cause the Company's actual results to differ materially from those expressed in its forward-looking statements include, but are not limited to:



In
addition to the risk factors set forth above, you should consider the risks set forth in Exhibit 99.1 to this Annual Report, the "Business" section of this Annual Report and
elsewhere in the Company's filings with the Securities and Exchange Commission. The Company undertakes no obligation to revise the forward-looking statements included in this Annual Report to reflect
any future events or circumstances.

Introduction

The Company derives its revenues, earnings and cash flows primarily from the sale of oriented polypropylene films, referred to as OPP films, used in consumer
product labeling, flexible packaging and overwrap applications. AET has a leading position in substantially all of the major high-end OPP films end-use product categories in
North America, and offers one of the most extensive product lines

12

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in
the OPP films industry, ranging from high-margin, specialized label and high barrier films to basic heat sealable lower barrier films.

Results of Operations

|                                    |  | Fiscal 2003 |   | Fiscal 2002 |  
|----------------------------------- |  | ----------- | - | ----------- | -
|
|Sales                               |  | 247,364     |   | 100.0       |  
|Cost of sales                       |  | 203,154     |   | 82.1        |  
|                                    |  |             |   |             |  
|Gross profit                        |  | 44,210      |   | 17.9        |  
|Selling, general and administrative |  | 22,989      |   | 9.3         |  
|Research and development            |  | 7,209       |   | 2.9         |  
|Restructuring charges               |  |            |   |            |  
|Other operating expenses            |  |            |   |            |  
|                                    |  |             |   |             |  
|Operating profit (loss)             |  | 14,012      |   | 5.7         |  
|Interest expense, net               |  | 29,912      |   | 12.1        |  
|Income tax expense (benefit)        |  | 1,053       |   | 0.4         |  
|                                    |  |             |   |             |  
|Net loss                            |  | (16,953     | ) | (6.8        | )
|                                    |  |             |   |             |  

Fiscal 2003 Compared with Fiscal 2002

Sales for fiscal 2003 of $247,364 were $4,728, or 1.9 percent, lower compared with fiscal 2002. A 7.4 percent decline in volume was partially offset
by a 6.0 percent increase in average selling price. The higher average selling price was due to both price increases and an improved mix of products sold.

Sales
outside of the United States were $48,717, or 19.7 percent of sales, and $41,473, or 16.5 percent of sales, for fiscal 2003 and 2002, respectively, and generated
$4,724 of operating profit in fiscal 2003 and $3,449 of operating profit in fiscal 2002. Operating profit margins on foreign sales increased in fiscal 2003 due to improved pricing and a favorable
sales mix.

Gross
profit in fiscal 2003 of $44,210 increased by $217 compared with fiscal 2002. An increase in average selling prices of $13,839 as a result of price increases, in addition to an
improved mix of products sold, offset the impact of lower sales volumes and a $14,700, or 17 percent, increase in raw material costs. Gross margin was 17.9 percent versus
17.5 percent in fiscal 2002.

Selling,
general and administrative expenses were $22,989, or 9.3 percent of sales, in fiscal 2003, compared with $32,085, or 12.7 percent of sales, in fiscal 2002. The
decrease of $9,096 reflects the successful implementation of the September 2002 restructuring and ongoing cost reduction efforts.

Research
and development expense was $7,209, or 2.9 percent of sales, in fiscal 2003 compared with $6,605, or 2.6 percent of sales in fiscal 2002, reflecting the Company's
strategy to develop a number of new, highly differentiated products. The Company expects to continue to invest in research and development in fiscal 2004 pursuant to its strategy to increase growth in
gross margins primarily through the development of new high value films.

Restructuring
charges of $9,002 in fiscal 2002 reflect the costs associated with the closure of the corporate office in Peabody, Massachusetts, a realignment of the Company's business
units, and a reorganization of key roles and responsibilities. This reorganization eliminating 50 full time positions, together with other cost reduction efforts, has successfully implemented and
provided annual cost savings in excess of $9,000.

13

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Other
expenses in fiscal 2002 of $950 reflect costs to complete the Company's transition of the assets acquired from QPF, L.L.C. ("QPF").

Interest
expense increased $765 to $29,912 in fiscal 2003 due to a higher average outstanding debt balance.

Income
tax expense of $1,053 in fiscal 2003 represents an adjustment to the valuation allowance against deferred taxes. The Company recorded an income tax benefit in fiscal 2002 of
$2,045 as the result of a
tax refund received due to the change in the tax law in fiscal 2002 increasing the loss carryback period. Aside from these items, the Company's effective tax rate in fiscal 2003 and fiscal 2002 was
zero.

Fiscal 2002 Compared with Fiscal 2001

|                                    |  | Fiscal 2002 |   | Fiscal 2001 |  
|----------------------------------- |  | ----------- | - | ----------- | -
|
|Sales                               |  | 252,092     |   | 100.0       |  
|Cost of sales                       |  | 208,099     |   | 82.5        |  
|                                    |  |             |   |             |  
|Gross profit                        |  | 43,993      |   | 17.5        |  
|Selling, general and administrative |  | 32,085      |   | 12.7        |  
|Research and development            |  | 6,605       |   | 2.6         |  
|Restructuring charges               |  | 9,002       |   | 3.6         |  
|Other operating expenses            |  | 950         |   | 0.4         |  
|                                    |  |             |   |             |  
|Operating profit (loss)             |  | (4,649      | ) | (1.8        | )
|Interest expense, net               |  | 29,147      |   | 11.6        |  
|Income tax expense (benefit)        |  | (2,045      | ) | (0.8        | )
|                                    |  |             |   |             |  
|Net loss                            |  | (31,751     | ) | (12.6       | )
|                                    |  |             |   |             |  

Sales
in fiscal 2002 of $252,092 decreased $27,748 compared with fiscal 2001. Of this decline, $20,258 was due to the sale of the Company's nets and nonwovens business at the end of
fiscal 2001 and the remaining decline in sales of $7,490 was related to the OPP films business. OPP films sales declined 2.7 percent compared with fiscal 2001 due to a 5.3 percent
decrease in average selling price, partially offset by a 2.6 percent increase in sales volume. The decline in average selling price year over year reflects unfavorable industry-wide
conditions that existed during fiscal 2002. Specifically, the North American OPP films industry had substantial excess capacity caused in part by inventory de-stocking throughout the
supply chain during fiscal 2002. In the second half of fiscal 2002, due to recovery in demand, the Company was able successfully to implement two price increases.

Sales
outside the United States were $41,473, or 16.5 percent of sales, and $49,705, or 17.8 percent of sales, for fiscal 2002 and 2001, respectively, and generated $3,449
of operating profit in fiscal 2002 and an operating loss in fiscal 2001 of $901. Operating profit margins on foreign sales increased in fiscal 2002 due principally to improved pricing, a favorable
sales mix, and lower manufacturing costs.

Gross
profit was $43,993 in fiscal 2002, compared with $57,121, in fiscal 2001. Gross margin for the OPP films business alone was 17.5 percent of sales in fiscal 2002 compared
with 19.9 percent of sales in fiscal 2001. Gross profit declined $13,128 in fiscal 2002 as compared to fiscal 2001, of which $5,392 was related to the divestiture of the nets and nonwovens
business and the remaining $7,736 was due to the OPP films business. The decline in OPP films gross profit in fiscal 2002 was due to the decline in sales discussed above, $1,492 of
start-up costs and $3,400 in temporary plant shutdown charges incurred in the fourth fiscal quarter of 2002 offset, in part, by more favorable manufacturing costs. The $1,492 of
start-up costs related to construction of a new OPP film line in fiscal 2002. This line was purchased in

14

---

1999
and moved to the Company's Varennes, Canada plant. When fully operational, this line is expected to be able to produce certain high-end specialty OPP films as described in Phase Two
of the Company's Business Strategy in Item 1 "Business" above.

Selling,
general and administrative expenses were $32,085, or 12.7 percent of sales, in fiscal 2002, compared with $28,639, or 10.2 percent of sales, in fiscal 2001. The
increase of $3,446 includes a $1,313 increase in bad debt expense, increases in professional fees, increases in salary and benefits and marketing expenses related to the development of a number of new
highly differentiated products. The bad debt expense increase reflected additional reserves against certain Latin American receivables and the write-off of certain domestic receivables
determined to be uncollectable.

Research
and development expense was $6,605, or 2.6 percent of sales, in fiscal 2002 compared with $6,419, or 2.3 percent of sales in fiscal 2001, reflecting the Company's
strategy to develop a number of new, highly differentiated products.

Other
operating expenses in fiscal 2001 include the loss on sale of assets, QPF acquisition and integration costs, and share incentive plan costs. Effective September 30, 2001,
the Company sold its specialty nets and nonwovens business. The gross proceeds of the transaction were $23,212. The Company recorded a loss of $7,054 on the sale of this business, reflecting the
difference between the selling price and the net book value of the specialty nets and nonwovens assets, as well as transaction costs such as legal, banking, incentive compensation and accounting costs
incurred in connection with the sale of the business, aggregating $4,438. The Company incurred $2,548 of costs which were directly related to the acquisition and integration of the QPF business such
as legal, incentive compensation, accounting and product trial costs. The Company recorded a non-cash charge of $861 related to the share incentive plan for non-executive
employees.

Restructuring
charges in fiscal 2002, of $9,002, comprised primarily of severance costs and lease obligations, reflected the costs associated with the closure of the corporate office in
Peabody, Massachusetts, a realignment of the Company's business units and a reorganization of key roles and responsibilities. This reorganization eliminated 50 full time positions and provided annual
cost savings in excess of $6,000.

In
fiscal 2002, the Company incurred $950 in costs to complete the transition of the acquired QPF business.

Interest
expense increased $1,399 to $29,147 in fiscal 2002 due to a higher average outstanding debt balance, offset in part by a lower interest rate on the senior unsecured debt and a
modest increase in interest income earned on cash and cash equivalents.

Income
tax benefit for fiscal 2002 was $2,045, representing a tax refund received in fiscal 2002 due to the change in the tax law in fiscal 2002 increasing the loss carryback period.
Income tax expense for fiscal 2001 was $10,264, reflecting the impact of a $16,079 valuation allowance for certain state and federal deferred tax assets.

Liquidity and Capital Resources

On October 3, 2003, the Company entered into a $100,000, five-year credit facility (the "Credit Facility") with GE Commercial Finance (GECF).
This Credit Facility includes a $50,000 revolving line of credit, replacing the Company's existing credit facility, and adds a $50,000 term loan. Approximately $39,000 of the term loan proceeds were
utilized to repurchase all of the equipment leased pursuant to sale-leaseback transactions, with the remaining funds used to pay down the existing credit facility. As of
September 30, 2003, the Company was not in compliance with the EBITDA covenant under its previous credit facility; however that credit facility was replaced on October 3, 2003 with the
Credit Facility described above.

15

---

The
Credit Facility contains covenants which limit capital expenditures, require certain minimum EBITDA levels, require certain minimum levels of availability and require certain minimum
fixed charge coverage ratios. The term loan is to be repaid through quarterly principal payments of $1,563 for five years together with a final principal payment of $18,750 due in October 2008.

The
Company has $275,000 of 10.75% Senior Notes due 2011 (the "Senior Notes") outstanding. The Senior Notes are unsecured obligations of the Company. The Senior Notes contain customary
covenants and related provisions, including a default provision based on the acceleration of debt under other significant debt instruments.

In
fiscal 2004, the Company expects a loss of approximately $9,000 to $13,000. AET expects to generate operating cash flow, after capital expenditures and term loan principal repayments,
of approximately $5,000 to $9,000, and to report an operating profit of approximately $23,000 to $27,000 inclusive of $27,000 for depreciation and amortization. The Company's estimates are based upon
the ability to raise the general level of selling prices for the Company's products to offset increases in raw material costs, without an adverse impact on sales volume; improve in the sales mix; and
successfully commercialize of the Company's new, high-margin Platinum Products utilizing new technology platforms and assets. In addition, the Company has programs in place to reduce
inventories to more normalized levels, which should generate $10,000 to $15,000 in working capital as further discussed below.

Management
believes the cash flows from the Company's operations in fiscal 2004, and the expected availability under the Credit Facility, will be adequate to fund its operations and will
provide the Company with the ability to fund its planned and committed capital expenditures and meet its cash flow obligations. The Company's primary non-operating cash obligations in
fiscal 2004 will consist of capital expenditures of approximately $8,700 and repayments under the term loan facility of $6,250.

Operating Activities

Operating activities for fiscal 2003 used $19,540 of cash, which was the result of net profit before depreciation and other non-cash charges of
$3,880, and cash used from changes in working capital of $23,420 due to the following:

Increase in inventory

$
(19,224
)Decrease in accounts receivable


6,332Increase in prepaid expenses and other current assets


(506
)Decrease in accounts payable and accrued expenses


(16,553
)Other


6,531Cash used for working capital

$
(23,420
)


Inventory
increased in fiscal 2003 due to continued soft end use demand in addition to the Company's volume loss of low margin business precipitated by its leadership in raising selling
prices to cover escalating raw material prices. End use demand for snacks and beverages was adversely impacted by the continued economic weakness and unseasonably cool and wet weather conditions
during the spring and early summer, particularly on the East Coast of the United States. The Company has implemented plans to reduce inventory by shutting down certain production assets. The Company
estimates that inventory will return to historical carrying levels by fiscal year-end 2004. Accounts receivable decreased as a result of the reduction in sales from the fourth quarter of
fiscal 2002. Prepaid expenses and other assets increased primarily due to contributions made to the Company's retirement plans that are described in Note 13 to the consolidated financial
statements. Accounts payable and accrued expenses decreased primarily due to utilization of reserves for the 2002 restructuring and restatement related expenses. Additionally, accruals for customer
rebates were reduced by

16

---

approximately
$3,600 due to lower sales on these programs. Approximately $5,000 relates to the reclassification of deferred gains, relating to sale-leaseback transactions, to other
liabilities.

Operating
activities for fiscal 2002 used $4,021 of cash, which was the result of net loss before depreciation and other non-cash charges of $12,548, and cash generated from
changes in working capital of $8,527 due to the following:

Decrease in inventory

$
2,358Increase in accounts receivable


(607
)Increase in prepaid expenses and other current assets


(856
)Increase in accounts payable and accrued expenses


5,503Other


2,129Cash generated from working capital

$
8,527


Inventory
decreased in fiscal 2002 due to temporary plant shutdowns taken in the fourth fiscal quarter specifically aimed at reducing inventory levels. Prepaid expenses and other assets
increased primarily due to contributions made to the Company's retirement plans that are described in Note 13 to the consolidated financial statements. Accounts payable and accrued expenses
increased primarily due to the restructuring reserve recorded in September 2002 as described in Note 7 to the consolidated financial statements.

Operating
activities for fiscal 2001 generated $4,425 of cash, which was the result of net income before depreciation and other non-cash charges of $11,855 and an increase in
working capital requiring cash of $7,430 due to the following:

Decrease in inventory

$
8,836Increase in accounts receivable


(1,438
)Increase in prepaid expenses and other current assets


(3,240
)Decrease in accounts payable and accrued expenses


(6,460
)Other


(5,128
)Cash used for working capital

$
(7,430
)


Inventory
decreased primarily as the result of a decline in the cost of polypropylene resin, the Company's primary raw material. Accounts receivable increased due to increased sales
volumes in fiscal 2001. Prepaid expenses and other assets increased primarily due to contributions made to the Company's retirement plans that are described in Note 14 to the consolidated
financial statements. Accounts payable and accrued expenses decreased due to reductions in the cost of polypropylene resin, as well as a decline in accrued interest arising from the change in the
semi-annual interest payment on the Senior Notes from an April and October payment schedule to a January and July payment schedule.

Investing Activities

In fiscal 2003, investing activities used $15,828 of cash as a result of the following:

Additions to property, plant and equipment, net

$
(17,938
)Proceeds from sale of property, plant, and equipment


2,110$
(15,828
)


17

---

In
fiscal 2003, the Company expended $17,938, primarily for additions to manufacturing facilities and related equipment and received proceeds of $2,110 from the sale of property, plant,
and equipment.

In
fiscal 2002, investing activities used cash of $972. In March 2002, the Company purchased certain leased equipment for $17,156. The Company sold and leased back, under a
7 year operating lease, a portion of that equipment (aggregating $7,989) and realized proceeds of $18,225. In addition to that equipment, the Company expended $26,756, primarily for additions
to its manufacturing facilities and related equipment and received proceeds of $1,503 from the sale of property, plant and equipment. The net proceeds from the sale of the speciality nets and
nonwovens division in September 2001 of $23,212 were received in the first quarter of fiscal 2002.

In
fiscal 2001, investing activities used cash of $43,529 for capital expenditures and acquisition of QPF assets. Capital expenditures of $21,785 relate primarily to additions to
manufacturing facilities and related equipment. In June 2001, the Company acquired certain assets including machinery and equipment, intellectual property and inventory from QPF L.L.C. for
$21,744.

Financing Activities

In fiscal 2003, financing activities generated $20,483 of cash due primarily to borrowings under the revolving credit facility, of which $6,500 was used to redeem
outstanding industrial revenue bonds. The Company incurred debt issuance costs of $1,588.

In
fiscal 2002, financing activities generated $378 of cash. Proceeds of stock options during the year aggregated $993. The Company incurred debt issuance costs of $615.

In
fiscal 2001, financing activities generated $58,043 of cash due primarily to $270,859 raised from the issuance of the Senior Notes and $203,000 utilized to pay off debt.

Contractual Obligations

Below is a summarized list of the Company's contractual obligations relating to long-term debt and non-cancelable operating leases,
employment and severance agreements at September 30, 2003.

|                                                  |                                     | Total                         |   | Less than
1 year |         | 1-3 years |        | 4-5 years |   | Thereafter
|------------------------------------------------- | ----------------------------------- | ----------------------------- | - | ---------------- | ------- | --------- | ------ | --------- | - | ----------
|Contractual Obligations (payments due by period): |                                     |                               |   |                  |         |           |        |           |   |           
|                                                  | Long-term debt (including interest) |                               | $ | 511,500          |         | $         | 29,562 |           | $ | 59,125    
|                                                  | Operating leases                    |                               |   | 45,571           |         |           | 12,457 |           |   | 22,292    
|                                                  | Employment agreements               |                               |   | 4,994            |         |           | 2,278  |           |   | 2,716     
|                                                  | Severance agreements                |                               |   | 699              |         |           | 600    |           |   | 99        
|                                                  |                                     |                               |   |                  |         |           |        |           |   |           
|                                                  |                                     | Total Contractual Obligations |   | $                | 562,764 |           | $      | 44,897    |   | $         
|                                                  |                                     |                               |   |                  |         |           |        |           |   |           

Long-term debt obligations include annual interest payments of $29.6 million on the Company's Senior Notes totaling
$236.5 million over the remaining term of the Senior Notes and principal repayment of $275 million on the Senior Notes at maturity. The Senior Notes mature on July 1, 2011.
Included in the operating lease obligation is $40.7 million of future lease payments due on sale-leaseback transactions as of September 30, 2003. On October 3, 2003,
the Company repurchased all of the assets included in these sale-leaseback transactions. In addition to the contractual obligations detailed above, the Company is obligated, under the 1999
Supplemental Executive Retirement Plan, to make benefit payments to certain executive employees. The provisions of this plan are discussed in Footnote 13 to the Consolidated Financial Statements.

18

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Inflation

Management regularly reviews the prices charged for its products. When market conditions allow, price adjustments are made to reflect changes in demand or product
costs due to fluctuations in the costs of materials and labor and inflation. The costs of raw materials make up a significant portion of the Company's costs and have historically fluctuated. It cannot
be assumed, however, that future market conditions will support any correlation between raw material cost fluctuations and finished product films pricing.

Seasonal Nature of Some OPP Films Markets

Some of the end-use markets for OPP films are seasonal. For example, demand in the snack food, soft drink and candy markets are generally higher in
the spring and summer. As a result, sales and net income are generally higher in the Company's second and third fiscal quarters, although
actual results can be influenced by numerous factors, such as raw material costs, competitive prices and other factors mentioned in this prospectus.

New Accounting Pronouncements

A summary of the impact of certain new accounting pronouncements on the Company's business follows.

In
June 2001, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset
retirement costs. The Company adopted SFAS 143 in fiscal 2003. The adoption of SFAS 143 had no material impact on the Company's financial position or results of operations.

In
October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and also supersedes the accounting and certain reporting provisions of APB Opinion No. 30, "Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a
business. SFAS No. 144 was adopted by the Company in fiscal 2003. The Company's adoption of SFAS No. 144 did not have a material impact on its financial position or results of
operations.

In
April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS No. 145, among other things, amends prior statements to require that gains and losses from the extinguishment of debt generally be classified within continuing operations. SFAS
No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provision
of SFAS No. 145 related to the rescission of Statement No. 4 applied in fiscal years beginning after May 15, 2002 but could be adopted earlier. The provisions of SFAS
No. 145 related to Statement No. 13 applies to transactions occurring after May 15, 2002. The Company adopted SFAS No. 145 in fiscal 2002 which resulted in the
reclassification of the amount previously recognized as an extraordinary loss on early extinguishment of debt of $1,977 in fiscal 2001 to increase interest expense by $3,089 and decrease income tax
expense by $1,112.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires recording costs associated with
exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were

19

---

accrued
upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of SFAS No. 146 is required for exit activities initiated after
December 31, 2002. The Company's adoption of SFAS No. 146 in fiscal 2003 did not have a material impact on its financial position or results of operations.

In
November 2002, the FASB issued FASB Interpretation Number (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for guarantees Including Guarantees of Indebtedness of
Others." FIN 45 requires entities to establish liabilities for certain types of guarantees, and expands financial statement disclosures for others. The accounting requirements of FIN 45 are effective
for guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 did not have any impact on the Company's financial position or results of operations.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment to SFAS No. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company has elected to continue accounting for stock-based compensation in accordance with APB Opinion No. 25. However,
the Company has provided the additional disclosures as required by SFAS No. 148.

In
January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003,
and must be applied in the first period beginning after December 15, 2003 for entities in which an enterprise holds a variable interest entity that it acquired before February 1, 2003.
The Company currently has no entities which have these characteristics. FASB has been addressing various implementation issues that could potentially broaden the application of FIN 46 to entities
outside its originally interpreted scope and has issued and proposed several FASB staff positions. The Company does not expect that the FASB proposed positions will have a material impact on its
consolidated financial statements.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS No. 149 clarifies under what circumstances a contract with an initial net
investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to language used in FIN 45, and
amends certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after
June 30, 2003. All provisions of SFAS No. 149, except those related to forward purchases or sales of "when-issued" securities, should be applied prospectively. The Company
currently has no instruments that meet the definition of a derivative, and therefore, the adoption of SFAS No. 149 had no impact on the Company's financial position or results of operations.
The Company adopted SFAS No. 149 on July 1, 2003 on a prospective basis in accordance with the new statement.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity.

20

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SFAS
No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise generally effective at the beginning of the first interim period beginning
after June 15, 2003. On October 29, 2003, the FASB deferred indefinitely a provision of SFAS No. 150 that would have required certain minority interests in less than
100 percent owned subsidiaries to be classified as liabilities. The Company currently has no financial instruments which meet these requirements.

Critical Accounting Policies

The Company's discussion and analysis of its financial condition and results of operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect
the reported amounts of assets and liabilities, the disclosure of contingent liabilities and the reported amounts of revenues and expenses. On an ongoing basis, the Company evaluates its estimates and
judgments, including those related to revenue recognition, bad debts, inventories, and intangible assets. Estimates and judgments are based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. The Company believes the following
critical accounting policies affect its more significant estimates and judgments used in preparation of its consolidated financial statements.

Revenue Recognition.Revenue is recognized on product sales at the point in time when persuasive evidence of an arrangement
exists, the price is fixed and determinable, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains purchase authorizations from its
customers for a specified amount of product at a specified price with delivery terms at the point of shipment. While the Company does provide its customers with a right of return,
revenue is not deferred. Rather, a reserve for sales returns is provided in accordance with SFAS No. 48 based on significant historical experience.

Asset Valuation.Asset valuation includes assessing the recorded value of certain assets, including accounts receivable,
inventories, property, plant and equipment, goodwill, and intangible assets. Asset valuation is governed by SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets", SFAS No. 141, "Business Combinations", SFAS No. 142 "Goodwill and Other Intangible Assets" and Accounting Research Bulletin No. 43, among others. Management uses a
variety of factors to assess valuation depending on the asset. For example, accounts receivable are evaluated based upon an aging schedule. The recoverability of inventories is based primarily upon
the age of inventory held and market conditions. Property, plant and equipment, intangible and other assets are evaluated utilizing various factors, including the expected period the asset will be
utilized and forecasted cash flows. Changes in judgments on any of these factors could impact the value of the asset.

Concentrations of Credit Risk.The Company's financial instruments that are exposed to concentrations of credit risk consist
primarily of trade receivables. The Company performs ongoing credit evaluations of its customers' financial condition and generally require no collateral from its customers. The Company's allowance
for doubtful accounts is calculated based primarily upon historical bad debt experience and current market conditions. Over the past four years, annual bad debt expense has averaged approximately $750
and ranged from $400 in fiscal year 2001 to $1,713 in fiscal 2002. The significant financial deterioration of any significant customers, including a filing for bankruptcy, could impact their ability
to satisfy their receivables with the Company. While the Company believes its allowance for bad debts at September 30, 2003 of $1,864 is adequate, an unanticipated increase in customer
bankruptcies or other financial difficulties would require the Company to increase its provision for bad debts and ultimately increase its allowance for future bad debts.

Inventories.Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost or market
with cost determined using a weighted average-cost method. The Company

21

---

determines
the market value of its raw ingredients, finished product and packaging inventories based upon references to current market prices for such items as of the end of each reporting period and
record a write down of inventory cost to market, when applicable. Polypropylene, the Company's major raw material, is petroleum based and prices can fluctuate significantly and, as discussed above,
increases in raw material prices cannot always be passed on to customers. Additionally, from time to time, the Company has been able to utilize secondary markets to liquidate excess inventories. If
raw material prices were to increase and the Company were unable to raise its prices or if the Company's ability to liquidate excess inventories was significantly diminished, additional inventory
write downs may be necessary.

Excess of Cost Over Fair Value of Net Assets Acquired.The excess of cost over fair value of net assets acquired (goodwill)
is evaluated annually for impairment in accordance with SFAS 142. The Company has one reporting unit and estimate fair value based on a variety of market factors, including discounted cash flow
analysis, market capitalization, and other market-based data. No impairment of goodwill was recorded during 2003. The Company's market capitalization and net assets at September 30, 2003 were
$31,954 and $34,357, respectively. However, based on its discounted cash flow projections and other market-related data the Company believes that at September 30, 2003 the fair value of the
Company exceeds its net assets. If the projected cash flows and other projected operating results are not achieved, the Company would decrease the estimated fair value of its business and a full or
partial impairment of its goodwill balance of $9,874 would be necessary.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Short-Term and Long-Term Debt

The Company is exposed to interest rate risk primarily through its borrowing activities. The Company's policy has been to utilize United States dollar denominated
borrowings to fund working capital and investment needs. Short-term debt, if required, is used to meet working capital requirements, while long-term debt is generally used to
finance long-term investments. There is inherent rollover risk for borrowings as they mature and are renewed at current market rates. At September 30, 2003, the Company maintained a
revolving credit facility which bore interest at a variable rate. Average borrowings under this facility were approximately $14,335 for the year ended September 30, 2003. A 10 percent
increase in market rates would not have had a material impact on fiscal 2003 results of operations. At September 30, 2003, the Company had short-term debt and long-term
debt outstanding of $28,670 and $271,790, respectively. The short-term debt bears interest at the lender's variable rate, LIBOR, plus 2.75%. The long-term debt bears interest
at a fixed rate of 10.75%.

On
October 3, 2003, the Company replaced its existing revolving credit facility with a $100 million credit facility with GE Commercial Finance (GECF) as detailed in
Footnote 6 to the Consolidated Financial Statements.

The
Company does not enter into financial instrument transactions for trading or other speculative purposes or to manage interest rate exposure.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required under this item is set forth on pages F-1 through F-18 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

22

---



ITEM 9a. CONTROLS AND PROCEDURES

The Company's principal executive officer and its principal financial officer undertook an evaluation of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report and concluded that the Company's controls and procedures were
effective.

There
were no changes in the Company's internal control over financial reporting during the period covered by this report that materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting. The Company is committed to ongoing periodic reviews and enhancements of its controls and their effectiveness and will report to the
Company's shareholders on these reviews and enhancements in the Company's annual and quarterly reports filed under the Exchange Act.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required under this Item 10 with respect to Executive Officers of the Company is set forth in Item 4a on pages    of this report.

The
directors of AET are as follows:

|Director Name         |  | Age |  | Position              |  | Since       
|--------------------- |  | --- |  | --------------------- |  | ------------
|Amin J. Khoury        |  | 64  |  | Chairman of the Board |  | October 1986
|Nader A. Golestaneh* |  | 43  |  | Director              |  | October 1986
|Richard G. Hamermesh* |  | 55  |  | Director              |  | October 1986
|Mark M. Harmeling    |  | 51  |  | Director              |  | October 1986
|Joseph J. O'Donnell   |  | 59  |  | Director              |  | October 1986
|Joseph C. Day*        |  | 58  |  | Director              |  | May 2003    

---

*  Member
Audit Committee

  Member
Stock Option and Compensation Committee

All
directors hold office until the next annual meeting of stockholders or until their successors are duly elected and qualified.

Business Experience of Directors

Amin J. KhouryFounder and Chairman of the Board of Directors of the Company since
October 1986; from October 1986 to August 1993, and since October 2002, Chief Executive Officer of the Company; President of the Company from August 1988 through
November 1992; Founder and Chairman of the Board of Directors of BE Aerospace, Inc., a manufacturer of aircraft cabin interior products; Director of Brooks Automation, Inc., a
leader in semiconductor tool and factory automation solutions for the global semiconductor industry; Director of Synthes-Stratec, Inc., one of the world's leading orthopedic trauma products
companies.

Nader A. GolestanehDirector of the Company since 1986; since 1990, President of Centremark Properties, Inc., a real
estate management and development company; since 1986, attorney in private practice in Boston, Massachusetts.

Richard G. HamermeshDirector of the Company since 1986; since 2000, professor of Management Practice at the Harvard Business
School; co-founded in 1987 and served until 2000 as a

23

---

Managing
Partner for the Center for Executive Development, an independent executive education and training firm; and Director of BE Aerospace, Inc., a manufacturer of aircraft cabin interior
products.

Mark M. HarmelingDirector of the Company since 1986; since 2001, partner of TA Realty Associates, a real estate advisory
firm; from 1991 to 2000, President of Bay State Realty Advisors, a real estate consulting firm; from 1997 to 1999, an executive of the A. G. Spanos Corporation, a leading developer of multifamily
residential complexes; from 1985 to 1991, President of Intercontinental Real Estate Corporation, a real estate holding and development corporation; Director of Universal Holding Corporation, an
insurance holding company.

Joseph J. O'DonnellDirector of the Company since 1986; since 1978, Chairman of the Board and President of Boston Concessions
Group, Inc., a company that manages food service operations in approximately 40 states in the leisure and recreation markets.

Joseph C. DayDirector of the Company since 2003; since 2002, Member of the Executive Committee of the Original Equipment
Suppliers Association; since 2002, Member of the Board of Trustees of Beaumont Hospital; from 1988 to 2002, Chairman, Chief Executive Officer and Director of Freudenberg-NOK General
Partnership, a manufacturer of original equipment and after market automotive components; from 1994 to 2002, Member of the Board of Directors of ASC, Inc.; from 1984 to 2000, Director or
Chairman or Chair of Executive Committee of the Wiremold Co.; since 2002, Director, Chair of Executive Committee and Chair of Restructuring Committee of Venture Industries.

AET
has adopted a code of ethics that applies to its principal executive officer, principal financial officer and principal accounting officer, as well as to its directors, other
officers and employees. AET's Code of Conduct and Ethics is available on its website at www.aetfilms.com.

ITEM 11. EXECUTIVE COMPENSATION

"Executive Compensation" described in the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2004 Annual Meeting of
Stockholders is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

"Security Ownership Information of Certain Beneficial Owners and Management" and "Equity Compensation Plan" described in the Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the 2004 Annual Meeting of Stockholders is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

"Employment Contracts" described in the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2004 Annual Meeting of
Stockholders is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

"Audit Matters" described in the Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2004 Annual Meeting of
Stockholders is incorporated herein by reference.

24

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed as part of this report:

A.    Financial Statements

Consolidated Balance Sheets, September 30, 2003 and 2002

Consolidated
Statements of Operations for the Years Ended September 30, 2003, 2002 and 2001

Consolidated
Statements of Stockholders' Equity for the Years Ended September 30, 2003, 2002, and 2001

Consolidated
Statements of Cash Flows for the Years Ended September 30, 2003, 2002, and 2001

Notes
to Consolidated Financial Statements



Schedule IIValuation and Qualifying Accounts for the Years Ended September 30, 2003, 2002, and 2001

All
other schedules are omitted as the required information is not applicable or is included in the financial statements or related notes.

B.    Exhibits

|          |  |                                                                                                                                             
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|3.1(a)    |  | Amended and Restated Certificate of Incorporation.                                                                                          
|3.1.1*    |  | Amendment dated February 26, 1992 to Amended and Restated Certificate of Incorporation.                                                     
|3.1.2(j)  |  | Amendment dated March 17, 1999 to Amended and Restated Certificate of Incorporation.                                                        
|3.2*      |  | Amended and Restated By-Laws.                                                                                                               
|4.3(a)    |  | Specimen Common Stock Certificate.                                                                                                          
|4.4*      |  | Rights Agreement dated as of March 2, 1998 between the Company and BankBoston, N.A., as Rights Agent.                                       
|10.1.1(e) |  | Amendment No. 4 to the Credit Agreement dated as of March 30, 2002.                                                                         
|10.1.2(d) |  | Amendment No. 5 to the Credit Agreement dated as of June 30, 2002.                                                                          
|10.2(q)   |  | Amended and Restated Credit Agreement dated as of September 20, 2002 between the Registrant and JPMorgan Chase Bank as Administrative Agent.
|10.2.1(n) |  | Amended and Restated Credit Agreement dated as of January 1, 2003 between the Registrant and JPMorgan Chase Bank as Administrative Agent.   
|10.3(o)   |  | Credit Agreement dated as of October 3, 2003 between the Registrant and General Electric Capital Corporation as Arranger and Lender.        
|10.4(b)   |  | 1986 Stock Option Plan.                                                                                                                     
|10.4.1(i) |  | Amendment dated December 7, 1999 to the 1986 Stock Option Plan.                                                                             
|10.5(c)   |  | 1991 Stock Option Plan.                                                                                                                     
|10.5.1(i) |  | Amendment dated December 7, 1999 to the 1991 Stock Option Plan, as amended.                                                                 
|10.6(b)   |  | 1991 Stock Option Plan for Directors.                                                                                                       
|10.6.1(i) |  | Amendment dated August 4, 1999 to the 1991 Stock Option Plan for Directors.                                                                 
|10.7(r)   |  | 1994 Stock Option Plan.                                                                                                                     
|10.7.1(i) |  | Amendment dated December 7, 1999 to the 1994 Stock Option Plan.                                                                             
|10.8(g)   |  | 2001 Stock Option Plan for Directors.                                                                                                       
|10.9(l)   |  | 2001 Share Incentive Plan.                                                                                                                  
|          |  |                                                                                                                                             

25

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|10.10(d)   |  | Amended and Restated Employment Agreement dated as of August 1, 2002 between the Registrant and David N. Terhune.                                                                                                                                        
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.11(d)   |  | Amended and Restated Employment Agreement dated as of August 1, 2002 between the Registrant and Amin J. Khoury.                                                                                                                                          
|10.12(d)   |  | Amended and Restated Employment Agreement dated as of August 1, 2002 between the Registrant and Thomas E. Williams.                                                                                                                                      
|10.13(q)   |  | Agreement between Registrant and Thomas E. Williams dated September 30, 2002.                                                                                                                                                                            
|10.13.1*   |  | Agreement between Registrant and Thomas E. Williams dated December 11, 2003.                                                                                                                                                                             
|10.14(f)   |  | Amended and Restated Executive Deferred Compensation Retirement Plan dated August 10, 2001.                                                                                                                                                              
|10.14.1(q) |  | Amendment to Executive Deferred Compensation Retirement Plan dated December 9, 2002.                                                                                                                                                                     
|10.14.2*   |  | Rabbi Trust dated December 13, 1996 with respect to the Executive Deferred Compensation Retirement Plan.                                                                                                                                                 
|10.15(e)   |  | Amended and Restated 1999 Supplemental Executive Retirement Plan dated March 29, 2002.                                                                                                                                                                   
|10.15.1(d) |  | Amended and Restated 1999 Supplemental Executive Retirement Plan dated March 29, 2002, as amended as of August 1, 2002.                                                                                                                                  
|10.15.2(q) |  | Amendment to 1999 Supplemental Executive Retirement Plan dated December 9, 2002.                                                                                                                                                                         
|10.15.3(i) |  | 1999 Deferred Compensation Plan Trust dated November 30, 1999.                                                                                                                                                                                           
|10.16*     |  | Equipment Lease Agreement dated as of December 29, 1997 between Registrant and LaSalle National Leasing Corporation.                                                                                                                                     
|10.16.1(h) |  | Letter Agreement dated April 28, 1999 amending Equipment Lease Agreement dated as of December 29, 1997.                                                                                                                                                  
|10.16.2(p) |  | Waiver and Rider No. 5 to Equipment Lease Agreement dated as of January 10, 2003 between the Registrant and Banc of America Leasing & Capital, LLC, as successor-in-interest to LaSalle National Leasing Corporation and
NationsBanc Leasing Corporation.
|10.16.3(p) |  | Waiver and Rider No. 5 to Equipment Lease Agreement dated as of January 10, 2003 between the Registrant and The CIT Group/Equipment Finance, Inc.                                                                                                        
|10.16.4(p) |  | Waiver and Rider No. 5 to Equipment Lease Agreement dated as of January 10, 2003 between the Registrant and Fifth Third Leasing Corporation.                                                                                                             
|10.16.5(p) |  | Waiver and Rider No. 5 to Equipment Lease Agreement dated as of January 10, 2003 between the Registrant and First Union Commercial Corporation, as successor by merger to CoreStates Leasing, Inc., the assignee of Lasalle
National Leasing Corporation.
|10.16.6(p) |  | Waiver and Rider No. 5 to Equipment Lease Agreement dated as of January 10, 2003 between the Registrant and Key Equipment Finance, f/k/a KeyCorp Leasing.                                                                                                
|10.16.7(p) |  | Waiver and Rider No. 5 to Equipment Lease Agreement dated as of January 10, 2003 between the Registrant and LaSalle National Leasing Corporation.                                                                                                        
|10.16.8(p) |  | Waiver and Rider No. 5 to Equipment Lease Agreement dated as of January 10, 2003 between the Registrant and PNC Leasing, LLC, successor in interest by assignment from Lasalle National Leasing Corporation.                                             
|10.17(e)   |  | Master Lease Agreement dated as of March 27, 2002 between Registrant and General Electric Capital Corporation.                                                                                                                                           
|10.17.1(p) |  | Waiver to Master Lease Agreement dated as of January 10, 2003 between the Registrant and General Electric Capital Corporation. 10.18(m) Form of Exchange Note due 2001 (filed as an Exhibit to Item 10.22).                                              
|10.19(m)   |  | Indenture dated as of June 19, 2001 by and among the Registrant, Applied Extrusion Technologies (Canada), Inc. and the Wells Fargo Bank Minnesota, National Association, as Trustee.                                                                     
|10.20.1(q) |  | Employment Modification Agreement dated as of June 24, 2002 between the Registrant and Terry E. Smith                                                                                                                                                    
|           |  |                                                                                                                                                                                                                                                          

26

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|10.20.2(p) |  | Employment Agreement dated as of April 1, 2003 between the Registrant and Terry E. Smith.                                                                                                                                                          
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.21(p)   |  | Employment Agreement dated as of April 1, 2003 between the Registrant and Brian P. Crescenzo.                                                                                                                                                      
|10.22(k)   |  | 1996 Employee Stock Purchase Plan.                                                                                                                                                                                                                 
|21*        |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                    
|23*        |  | Independent Auditors' Consent  Deloitte & Touche LLP.                                                                                                                                                                                             
|32.1*      |  | Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Amin J. Khoury, Principal Executive Officer of Applied Extrusion
Technologies, Inc.    
|32.2*      |  | Certification pursuant to Section 1350, Chapter 63 of Title 18, United States Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Brian P. Crescenzo, Principal Financial Officer of Applied
Extrusion Technologies, Inc.
|99.1*      |  | Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995.                                                                                                                         

---

27

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The
above-referenced exhibits are, as indicated, either filed herewith or have heretofore been filed with the Commission under the Securities Act of 1933, as amended and the Exchange Act
and are referred to and incorporated herein by reference to such filings.

C. Reports on Form 8-K



28

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

| |  | APPLIED EXTRUSION TECHNOLOGIES, INC.
| |  | ------------------------------------
| |  | By:                                 

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:

|/s/AMIN J. KHOURYAmin J. Khoury
Chairman of the Board and Chief Executive Officer
December 22, 2003 |  | /s/JOSEPH J. O'DONNELLJoseph J. O'Donnell
Director
December 22, 2003  
|--------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------
|/s/MARK M. HARMELINGMark M. Harmeling
Director
December 22, 2003                                    |  | /s/RICHARD G. HAMERMESHRichard G. Hamermesh
Director
December 22, 2003
|/s/NADER A. GOLESTANEHNader A. Golestaneh
Director
December 22, 2003                                |  | /s/JOSEPH C. DAYJoseph C. Day
Director
December 22, 2003              

29

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE

|Consolidated Financial Statements: |                                                                                                       | 
|---------------------------------- | ----------------------------------------------------------------------------------------------------- | 
|                                   | Consolidated Balance Sheets, September 30, 2003 and 2002                                              | 
|                                   | Consolidated Statements of Operations for the Years Ended September 30, 2003, 2002 and 2001           | 
|                                   | Consolidated Statements of Stockholders' Equity for the Years Ended September 30, 2003, 2002 and 2001 | 
|                                   | Consolidated Statements of Cash Flows for the Years Ended September 30, 2003, 2002 and 2001           | 
|                                   | Notes to Consolidated Financial Statements for the years ended September 30, 2003, 2002 and 2001      | 
|Financial Statement Schedule:      |                                                                                                       | 
|                                   | Schedule IIValuation and Qualifying Accounts for the Years Ended September 30, 2003, 2002 and 2001   | 
|                                   | Independent Auditors' Report                                                                          | 

F-1

---



APPLIED EXTRUSION TECHNOLOGIES, INC.        CONSOLIDATED BALANCE SHEETS        September 30, 2003 and 2002        (In thousands, except per share amount)

|                                             |                                                                                                                                       | 2003                                       |         | 2002    |        
|-------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ------- | -------
|ASSETS                                       |                                                                                                                                       |                                            |         |         |        
|Current assets:                              |                                                                                                                                       |                                            |         |         |        
|                                             | Cash and cash equivalents                                                                                                             |                                            | $       | 2,835   |        
|                                             | Accounts receivable, net of allowance for doubtful accounts of $1,864 and $1,783 at September 30, 2003 and 2002, respectively         |                                            |         | 33,407  |        
|                                             | Inventory                                                                                                                             |                                            |         | 52,517  |        
|                                             | Prepaid expenses and other assets                                                                                                     |                                            |         | 2,995   |        
|                                             |                                                                                                                                       |                                            |         |         |        
|                                             |                                                                                                                                       | Total current assets                       |         |         | 91,754 
|Property, plant and equipment, net           |                                                                                                                                       |                                            | 281,384 |         |        
|Goodwill, net                                |                                                                                                                                       |                                            | 9,874   |         |        
|Other intangibles, net                       |                                                                                                                                       |                                            | 10,505  |         |        
|Other assets                                 |                                                                                                                                       |                                            | 14,178  |         |        
|                                             |                                                                                                                                       |                                            |         |         |        
|                                             |                                                                                                                                       | Total assets                               |         | $       | 407,695
|                                             |                                                                                                                                       |                                            |         |         |        
|LIABILITIES AND STOCKHOLDERS' EQUITY         |                                                                                                                                       |                                            |         |         |        
|Current liabilities:                         |                                                                                                                                       |                                            |         |         |        
|                                             | Accounts payable                                                                                                                      |                                            | $       | 9,485   |        
|                                             | Accrued expenses and other current liabilities                                                                                        |                                            |         | 18,008  |        
|                                             | Accrued interest                                                                                                                      |                                            |         | 7,544   |        
|                                             | Current portion of long-term debt                                                                                                     |                                            |         | 28,670  |        
|                                             |                                                                                                                                       |                                            |         |         |        
|                                             |                                                                                                                                       | Total current liabilities                  |         |         | 63,707 
|Long-term debt                               |                                                                                                                                       |                                            | 271,790 |         |        
|Long-term liabilities                        |                                                                                                                                       |                                            | 18,339  |         |        
|Deferred gain on sale leaseback transactions |                                                                                                                                       |                                            | 19,502  |         |        
|Commitments and contingencies                |                                                                                                                                       |                                            |         |         |        
|Stockholders' equity:                        |                                                                                                                                       |                                            |         |         |        
|                                             | Preferred stock, $.01 par value; authorized, 1,000 shares, of which 300 are designated Junior Preferred Stock; no shares issued       |                                            |         |         |        
|                                             | Common stock, $.01 par value; authorized, 30,000 shares, 13,016 and 13,048 shares issued at September 30, 2003 and 2002, respectively |                                            |         | 130     |        
|                                             | Additional paid-in capital                                                                                                            |                                            |         | 103,204 |        
|                                             | Accumulated deficit                                                                                                                   |                                            |         | (73,742 | )      
|                                             | Accumulated other comprehensive income (loss)                                                                                         |                                            |         | 7,018   |        
|                                             |                                                                                                                                       |                                            |         |         |        
|                                             |                                                                                                                                       |                                            | 36,610  |         |        
|                                             | Treasury stock, at cost, and other, 183 shares at September 30, 2003 and 2002.                                                        |                                            |         | (2,253  | )      
|                                             |                                                                                                                                       |                                            |         |         |        
|                                             |                                                                                                                                       | Total stockholders' equity                 |         |         | 34,357 
|                                             |                                                                                                                                       |                                            |         |         |        
|                                             |                                                                                                                                       | Total liabilities and stockholders' equity |         | $       | 407,695
|                                             |                                                                                                                                       |                                            |         |         |        

See
notes to consolidated financial statements.

F-2

---



APPLIED EXTRUSION TECHNOLOGIES, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        Years Ended September 30, 2003, 2002 and 2001        (In thousands, except per share
amounts)

|                                  |                                       | 2003                     |         | 2002   |        | 2001    |       
|--------------------------------- | ------------------------------------- | ------------------------ | ------- | ------ | ------ | ------- | ------
|Sales                             |                                       | $                        | 247,364 |        | $      | 252,092 |       
|Cost of sales                     |                                       |                          | 203,154 |        |        | 208,099 |       
|                                  |                                       |                          |         |        |        |         |       
|Gross profit                      |                                       |                          | 44,210  |        |        | 43,993  |       
|Operating expenses:               |                                       |                          |         |        |        |         |       
|                                  | Selling, general and administrative   |                          |         | 22,989 |        |         | 32,085
|                                  | Research and development              |                          |         | 7,209  |        |         | 6,605 
|                                  | Restructuring charges                 |                          |         |       |        |         | 9,002 
|                                  | Loss on sale of assets                |                          |         |       |        |         |      
|                                  | QPF acquisition and integration costs |                          |         |       |        |         | 950   
|                                  |                                       |                          |         |        |        |         |       
|                                  |                                       | Total operating expenses |         |        | 30,198 |         |       
|Operating profit (loss)           |                                       |                          | 14,012  |        |        | (4,649  | )     
|Interest expense, net:            |                                       |                          |         |        |        |         |       
|                                  | Interest expense                      |                          |         | 29,997 |        |         | 29,820
|                                  | Interest income                       |                          |         | 85     |        |         | 673   
|                                  |                                       |                          |         |        |        |         |       
|                                  |                                       | Interest expense, net    |         |        | 29,912 |         |       
|Loss before income taxes          |                                       |                          | (15,900 | )      |        | (33,796 | )     
|Income tax expense (benefit)      |                                       |                          | 1,053   |        |        | (2,045  | )     
|                                  |                                       |                          |         |        |        |         |       
|Net loss                          |                                       | $                        | (16,953 | )      | $      | (31,751 | )     
|                                  |                                       |                          |         |        |        |         |       
|Loss per common share             |                                       |                          |         |        |        |         |       
|                                  | Basic and diluted                     |                          | $       | (1.33  | )      | $       | (2.55 
|Average common shares outstanding |                                       |                          |         |        |        |         |       
|                                  | Basic and diluted                     |                          |         | 12,741 |        |         | 12,465

See
notes to consolidated financial statements.

F-3

---



APPLIED EXTRUSION TECHNOLOGIES, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        Years Ended September 30, 2003, 2002 and 2001        (In thousands)

|                            |                                                    | Voting
Common Stock                     |                                         |   |     |   |   |         |     |   |         |         |        
|--------------------------- | -------------------------------------------------- | --------------------------------------- | --------------------------------------- | - | --- | - | - | ------- | --- | - | ------- | ------- | -------
|
|
|Balance, September 30, 2000 |                                                    | 12,019                                  |                                         | $ | 120 |   | $ | 100,266 |     | $ | 1,374   |         | $      
|                            | Comprehensive loss:                                |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            |                                                    | Net loss                                |                                         |   |     |   |   |         |     |   |         |         | (26,412
|                            | Other Comprehensive loss:                          |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            |                                                    | Foreign currency translation adjustment |                                         |   |     |   |   |         |     |   |         |         |        
|                            |                                                    |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            | Total comprehensive loss                           |                                         |                                        |   |     |  |   |         |    |   |         | (26,412 | )      
|                            | Profit sharing contribution                        |                                         | 91                                      |   |     | 1 |   |         | 170 |   |         |         |        
|                            | Stock issued for share incentive plan              |                                         | 593                                     |   |     | 6 |   |         | 830 |   |         |         |        
|                            | Stock issued for employee purchases                |                                         | 77                                      |   |     | 1 |   |         | 202 |   |         |         |        
|                            | Treasury shares and other                          |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            | Exercise of stock options                          |                                         | 16                                      |   |     |   |   |         | 109 |   |         |         |        
|                            | Tax benefits of early disposition of stock options |                                         |                                         |   |     |   |   |         | 3   |   |         |         |        
|                            |                                                    |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|Balance, September 30, 2001 |                                                    | 12,796                                  |                                         | $ | 128 |   | $ | 101,580 |     | $ | (25,038 | )       | $      
|                            | Comprehensive loss:                                |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            |                                                    | Net loss                                |                                         |   |     |   |   |         |     |   |         |         | (31,751
|                            |                                                    | Other comprehensive loss:               |                                         |   |     |   |   |         |     |   |         |         |        
|                            |                                                    |                                         | Foreign currency translation adjustment |   |     |   |   |         |     |   |         |         |        
|                            |                                                    |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            | Total comprehensive loss                           |                                         |                                        |   |     |  |   |         |    |   |         | (31,751 | )      
|                            | Profit sharing contribution                        |                                         | 57                                      |   |     |   |   |         | 427 |   |         |         |        
|                            | Treasury shares and other                          |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            | Exercise of stock options                          |                                         | 195                                     |   |     | 2 |   |         | 991 |   |         |         |        
|                            | Stock compensation                                 |                                         |                                         |   |     |   |   |         | 252 |   |         |         |        
|                            |                                                    |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|Balance, September 30, 2002 |                                                    | 13,048                                  |                                         | $ | 130 |   | $ | 103,250 |     | $ | (56,789 | )       | $      
|                            | Comprehensive loss:                                |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            |                                                    | Net loss                                |                                         |   |     |   |   |         |     |   |         |         | (16,953
|                            |                                                    | Other comprehensive loss:               |                                         |   |     |   |   |         |     |   |         |         |        
|                            |                                                    |                                         | Foreign currency translation adjustment |   |     |   |   |         |     |   |         |         |        
|                            |                                                    |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|                            | Total comprehensive loss                           |                                         |                                        |   |     |  |   |         |    |   |         | (16,953 | )      
|                            | Share incentive plan stock                         |                                         | (32                                     | ) |     |   |   |         | (46 | ) |         |         |        
|                            |                                                    |                                         |                                         |   |     |   |   |         |     |   |         |         |        
|Balance, September 30, 2003 |                                                    | 13,016                                  |                                         | $ | 130 |   | $ | 103,204 |     | $ | (73,742 | )       | $      
|                            |                                                    |                                         |                                         |   |     |   |   |         |     |   |         |         |        

See notes to consolidated financial statements.

F-4

---



APPLIED EXTRUSION TECHNOLOGIES, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        Years Ended September 30, 2003, 2002 and 2001        (In thousands)

|                                                   |                                                                          | 2003                                                                           |                                           | 2002                                                |        | 2001    |        
|-------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | ----------------------------------------- | --------------------------------------------------- | ------ | ------- | -------
|OPERATING ACTIVITIES:                              |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   | Net loss                                                                 |                                                                                | $                                         | (16,953                                             | )      | $       | (31,751
|                                                   | Adjustments to reconcile net loss to net cash from operating activities: |                                                                                |                                           |                                                     |        |         |        
|                                                   |                                                                          | Provision for doubtful accounts                                                |                                           |                                                     | 900    |         |        
|                                                   |                                                                          | Depreciation and amortization                                                  |                                           |                                                     | 24,928 |         |        
|                                                   |                                                                          | Amortization of sale-leaseback gains                                           |                                           |                                                     | (4,949 | )       |        
|                                                   |                                                                          | Deferred taxes                                                                 |                                           |                                                     |       |         |        
|                                                   |                                                                          | Stock issued for retirement plans, share incentive plan and other compensation |                                           |                                                     | (46    | )       |        
|                                                   |                                                                          | Loss on sale of assets                                                         |                                           |                                                     |       |         |        
|                                                   |                                                                          | Write-off of deferred debt issuance costs included in interest expense         |                                           |                                                     |       |         |        
|                                                   |                                                                          | Changes in assets and liabilities, net of assets acquired and divested:        |                                           |                                                     |        |         |        
|                                                   |                                                                          |                                                                                | Accounts receivable                       |                                                     |        | 6,332   |        
|                                                   |                                                                          |                                                                                | Inventory                                 |                                                     |        | (19,224 | )      
|                                                   |                                                                          |                                                                                | Prepaid expenses and other current assets |                                                     |        | (506    | )      
|                                                   |                                                                          |                                                                                | Accounts payable and accrued expenses     |                                                     |        | (16,553 | )      
|                                                   |                                                                          |                                                                                | Other                                     |                                                     |        | 6,531   |        
|                                                   |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   |                                                                          |                                                                                |                                           | Net cash (used in) provided by operating activities |        |         | (19,540
|INVESTING ACTIVITIES:                              |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   | Additions to property, plant and equipment                               |                                                                                |                                           | (17,938                                             | )      |         | (26,756
|                                                   | Proceeds from sale of property, plant and equipment                      |                                                                                |                                           | 2,110                                               |        |         | 1,503  
|                                                   | Repurchase of leased assets                                              |                                                                                |                                           |                                                    |        |         | (17,156
|                                                   | Proceeds from sale-leaseback                                             |                                                                                |                                           |                                                    |        |         | 18,225 
|                                                   | Collection of receivable from sale of division                           |                                                                                |                                           |                                                    |        |         | 23,212 
|                                                   | Acquisition of assets                                                    |                                                                                |                                           |                                                    |        |         |       
|                                                   |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   |                                                                          |                                                                                |                                           | Net cash from investing activities                  |        |         | (15,828
|FINANCING ACTIVITIES:                              |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   | Debt issuance costs                                                      |                                                                                |                                           | (1,687                                              | )      |         | (615   
|                                                   | Proceeds from issuance of stock, net                                     |                                                                                |                                           |                                                    |        |         | 993    
|                                                   | Proceeds from issuance of bonds                                          |                                                                                |                                           |                                                    |        |         |       
|                                                   | Redemption of $150,000 senior notes                                      |                                                                                |                                           |                                                    |        |         |       
|                                                   | Redemption of industrial revenue bonds                                   |                                                                                |                                           | (6,500                                              | )      |         |       
|                                                   | Borrowings (repayments) under line of credit agreement, net              |                                                                                |                                           | 28,670                                              |        |         |       
|                                                   |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   |                                                                          |                                                                                |                                           | Net cash from financing activities                  |        |         | 20,483 
|                                                   | Effect of exchange rate changes on cash                                  |                                                                                |                                           | 162                                                 |        |         | (3     
|                                                   |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   | Change in cash and cash equivalents, net                                 |                                                                                |                                           | (14,723                                             | )      |         | (4,618 
|                                                   | Cash and cash equivalents, beginning                                     |                                                                                |                                           | 17,558                                              |        |         | 22,176 
|                                                   |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   | Cash and cash equivalents, ending                                        |                                                                                | $                                         | 2,835                                               |        | $       | 17,558 
|                                                   |                                                                          |                                                                                |                                           |                                                     |        |         |        
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                          |                                                                                |                                           |                                                     |        |         |        
|                                                   | Cash paid during the period for:                                         |                                                                                |                                           |                                                     |        |         |        
|                                                   |                                                                          | Interest, including capitalized interest                                       |                                           | $                                                   | 30,391 |         | $      
|                                                   |                                                                          | Income taxes                                                                   |                                           |                                                     |       |         |        

See notes to consolidated financial statements.

F-5

---



APPLIED EXTRUSION TECHNOLOGIES, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        Years Ended September 30, 2003, 2002 and 2001  (In thousands, except per share amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Applied Extrusion Technologies, Inc. and its subsidiaries (collectively "AET" or the "Company") operate in a single business segment, which consists of the
development and manufacture of oriented polypropylene ("OPP") films used in consumer product labeling and flexible packaging applications.

Principles of consolidation.The accompanying consolidated financial statements include the accounts
of Applied Extrusion Technologies, Inc. and its subsidiaries. All intercompany accounts and transactions have been eliminated.

Accounting estimateswere made in connection with the preparation of the Company's consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America. These estimates affect reported amounts and disclosure of assets, liabilities,
revenues and expenses during the reporting period. Actual results could differ from these estimates.

Cash and cash equivalentsconsist of cash and highly liquid debt instruments such as commercial paper
and money market securities purchased with an original or remaining maturity of less than three months.

Marketable Securities.The Company classifies the marketable securities held in trusts for its
deferred compensation plan and its supplemental executive retirement plan as "trading" securities under Statement of Financial Accounting Standard ("SFAS") No. 115. In accordance with the
provisions of this statement, the investment balance is stated at fair market value, based on quoted market prices. Unrealized gains and losses are reflected in earnings; realized gains and losses are
computed using the specific-identification method. As the assets held in the trusts reflect amounts due to employees or beneficiaries, but available for general creditors of the Company in the event
the Company becomes insolvent, the Company has recorded the investment balances in other assets and has established a corresponding long-term liability.

The
marketable securities held in trusts consist of investments in mutual funds and debt securities at September 30, 2003 and 2002. Unrealized gains (losses) included in earnings
were $126, $(448) and $(163) fiscal 2003, 2002 and 2001.

Fair Value of Financial Instruments.As of September 30, 2003 and 2002 respectively the fair
value of all financial instruments, except for Senior Notes as defined herein payable, approximate their carrying amounts in the consolidated balance sheets. This is due to the short term maturity of
such instruments and the floating interest rate associated with certain instruments which have the effect of repricing such instruments regularly. Senior Notes payable, with carrying values of
$271,790 and $277,876 at September 30, 2003 and 2002 respectively have estimated fair values of $220,000 and $188,375 at September 30, 2003 and 2002 respectively.

Derivative Instruments.The Company records all derivatives as either assets or liabilities on the
balance sheet at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge
accounting. The Company does not have any derivative instruments at September 30, 2003 and 2002.

Inventoryis stated at the lower of cost or market, with cost determined using an average-cost method.

F-6

---

Property, plant and equipmentare stated at cost. For financial reporting purposes, depreciation is provided using the
straight-line method over estimated useful lives. Estimated useful lives are 39 years for building and improvements and 5 to 15 years for machinery and equipment. Leasehold
improvements are amortized using the straight-line method over the lesser of the estimated life of the improvement or the remaining lease term. Expenditures for routine maintenance and
repairs are charged to expense as incurred. The Company capitalizes interest associated with significant construction of property, plant and equipment.

Intangibles and deferred finance chargesinclude intellectual property, customer lists, goodwill and costs associated with the issuance of
debt. Amortization of intangibles is being recognized using the straight-line method based upon the economic useful lives of the assets, principally over ten years. Amortization of
deferred finance charges over the term of the related debt, is included in net interest expense.

On
October 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 changes the accounting for goodwill and intangible assets
with indefinite lives from an amortization method to an impairment approach. Other intangible assets will continue to be amortized over their estimated useful lives. Amortization of goodwill, all of
which relates to AET's acquisition of certain assets of QPF, L.L.C. completed on June 30, 2001, ceased on October 1, 2001. Goodwill amortization expense in 2001 was not material.

The
Company has completed its annual impairment test of goodwill required by SFAS No. 142 and no impairment was indicated for the years ended September 30, 2003 and 2002.

Stock Based Compensation.The Company maintains common stock option plans for key employees,
directors and consultants under which the exercise price is generally not less than the fair value of the shares at the date of grant. The options generally vest at a rate of 25 percent per
year. Vested employee options generally expire within three months of employment termination or three years after the death of the employee. Vested director options generally expire within three
months of the resignation or within six months of the death of a director. All options expire upon the occurrence of the tenth anniversary of the grant date or upon other termination events specified
in the plans. As of September 30, 2003, options to purchase 796 shares of Company common stock were available for issuance.

The
Company accounts for stock-based compensation to employees using the intrinsic value method. Accordingly, no compensation cost has been recognized for fixed stock option grants since
the options granted to date have exercise prices per share of not less than the fair value of the Company's common stock at the date of the grant.

If
compensation cost for stock option grants and the Company's Employee Stock Purchase Plan had been determined based on the fair value of the grant for fiscal 2003, 2002 and 2001, the

F-7

---

Company's
fiscal 2003, 2002 and 2001 net loss and loss per share on a pro forma basis would have been as follows:

2003

2002

2001Net Loss:As reported

$
(16,953
)
$
(31,751
)
$
(26,412
)Pro forma


(18,108
)

(33,292
)

(27,824
)Basic and Diluted Loss per Share:As reported


(1.33
)

(2.55
)

(2.23
)Pro forma


(1.42
)

(2.67
)

(2.35
)


Income Taxes.The Company recognizes deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not to be realized. The provision for income taxes in the consolidated
statements of operations is the actual computed tax obligation or receivable for the period, plus or minus the change during the period in net deferred income tax assets and liabilities.

Revenue Recognition.Revenue is recognized on product sales at the point in time when persuasive
evidence of an arrangement exists, the price is fixed and determinable, delivery has occurred and there is reasonable assurance of collection of the sales proceeds. The Company generally obtains
purchase authorizations from its customers for a specified amount of product at a specified price with delivery terms at the point of shipment. The Company provides its customers with a right of
return. A reserve for sales returns, based on significant historical experience, has been recorded.

Foreign Operations.Assets and liabilities of foreign operations are translated into U.S. dollars at
the exchange rate on the balance sheet date. The results of foreign subsidiary operations are translated using average rates of exchange during each reporting period. Gains and losses upon translation
are
deferred and reported as a component of other comprehensive income. Foreign currency transaction gains or losses are recorded directly in the statement of operations.

Earnings Per Share.SFAS No. 128, "Earnings Per Share," requires two presentations of earnings
per share, "basic" and "diluted". Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding
less contingently returnable shares (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to
include the number of additional common shares that would have been outstanding if the potentially

F-8

---

dilutive
common shares had been issued. Shares used in the calculation of basic and diluted earnings per share are calculated as follows:

September 30,
2003

September 30,
2002

September 30,
2001Weighted-average shares outstanding

12,741

12,748

12,420Less:Contingently returnable shares



283

566Average common shares outstanding  basic and diluted

12,741

12,465

11,854


The
Company has excluded 3,104, 2,785, and 3,176 of outstanding stock options from the computation of diluted earnings per share in 2003, 2002, and 2001, respectively, as they are
anti-dilutive.

Impairment of Long-lived Assets.The Company periodically assesses the recoverability of
its long-lived assets by comparing the undiscounted cash flows expected to be generated by those assets to their carrying value. If the sum of the undiscounted cash flows is less than the
carrying value of the assets, an impairment charge is recognized based on comparison of the fair market value of those assets to the carrying value.

Comprehensive Income (Loss).Comprehensive income includes all changes in equity during the period
except those resulting from transactions with owners of the Company. The only item that the Company currently records as comprehensive income or loss, other than net income or loss, is the change in
the cumulative translation adjustment resulting from the changes in exchange rates and the effect of those changes upon translation of the financial statements of the Company's foreign operations.

Certain New Accounting Pronouncements.In June 2001, the Financial Accounting Standards Board
(the "FASB") issued Statement of Financial Accounting Standards (SFAS) No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company adopted SFAS 143 in fiscal 2003. The adoption of
SFAS 143 had no material impact on the Company's financial position or results of operations.

In
October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and also supersedes the accounting and certain reporting provisions of APB Opinion No. 30, "Reporting the Results of
OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a
business. SFAS No. 144 was adopted by the Company in fiscal 2003. The Company's adoption of SFAS No. 144 did not have a material impact on its financial position or results of
operations.

F-9

---

In
April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections."
SFAS No. 145, among other things, amends prior statements to require that gains and losses from the extinguishment of debt generally be classified within continuing operations. SFAS
No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provision
of SFAS No. 145 related to the rescission of Statement No. 4 applied in fiscal years beginning after May 15, 2002 but could be adopted earlier. The provisions of SFAS
No. 145 related to Statement No. 13 applies to transactions occurring after May 15, 2002. The Company adopted SFAS No. 145 in fiscal 2002 which resulted in the
reclassification of the amount
previously recognized as an extraordinary loss on early extinguishment of debt of $1,977 in fiscal 2001 to increase interest expense by $3,089 and decrease income tax expense by $1,112.

In
June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires recording costs associated with
exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is
generally before an actual liability has been incurred. Adoption of SFAS No. 146 is required for exit activities initiated after December 31, 2002. The Company's adoption of SFAS
No. 146 in fiscal 2003 did not have a material impact on its financial position or results of operations.

In
November 2002, the FASB issued FASB Interpretation Number (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for guarantees Including Guarantees of Indebtedness of
Others." FIN 45 requires entities to establish liabilities for certain types of guarantees, and expands financial statement disclosures for others. The accounting requirements of FIN 45 are effective
for guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 did not have any impact on the Company's financial position or results of operations.

In
December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment to SFAS No. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company has elected to continue accounting for stock-based compensation in accordance with APB Opinion No. 25.

In
January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003,
and must be applied in the first period beginning after December 15, 2003 for entities in which an enterprise holds a variable interest entity that it acquired before February 1, 2003.
The Company currently has no entities which have these characteristics. FASB

F-10

---

has
been addressing various implementation issues that could potentially broaden the application of FIN 46 to entities outside its originally interpreted scope and has issued and proposed several FASB
staff positions. The Company does not expect that the FASB proposed positions will have a material impact on its consolidated financial statements.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS No. 149 clarifies under what circumstances a
contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component, amends the definition of an underlying to conform it to
language used in FIN 45, and amends certain other existing pronouncements. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. All provisions of SFAS No. 149, except those related to forward purchases or sales of "when-issued" securities, should be
applied prospectively. The Company currently has no instruments that meet the definition of a derivative, and therefore, the adoption of SFAS No. 149 had no impact on the Company's financial
position or results of operations. The Company adopted SFAS No. 149 on July 1, 2003 on a prospective basis in accordance with the new statement.

In
May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise generally effective at the beginning of the first interim period beginning after June 15, 2003. On
October 29, 2003, the FASB deferred indefinitely a provision of SFAS No. 150 that would have required certain minority interests in less than 100 percent owned subsidiaries to be
classified as liabilities. The Company currently has no financial instruments which meet these requirements.

Reclassifications.Certain amounts in the 2002 and 2001 consolidated financial statements have been
reclassified to conform to the 2003 presentation.

2. ACQUISITIONS AND DIVESTITURES

On June 30, 2001, the Company completed its acquisition of certain assets of QPF, L.L.C. ("QPF"). The purchase price for the QPF assets was $21,744. Assets
acquired included: machinery and equipment; intellectual property; intangibles; and inventory of the business. The excess of the purchase price over the fair value of the identifiable assets acquired
and liabilities assumed was $11,344, which has been recorded as goodwill. In 2002, goodwill was reduced by $1,470 relating to a reduction in an inventory disposal reserve. In conjunction with the QPF
acquisition, the Company incurred certain costs of $950 and $2,548 in fiscal 2002 and 2001, respectively, which have been included in the statement of operations. In fiscal 2002, these costs were
product trial costs. In fiscal 2001, the costs were directly related to the acquisition and integration of the QPF business and included legal, incentive compensation, accounting and product trial
costs.

F-11

---

Effective
September 30, 2001, the Company sold its specialty nets and nonwovens business. The gross proceeds of the transaction were $23,212. The Company recorded a loss of $7,054
on the sale of these assets, reflecting the difference between the selling price and the net book value of the specialty nets and nonwovens assets, as well as transaction costs, aggregating $4,438,
such as legal, banking, incentive compensation and accounting costs incurred in connection with the sale of the business.

3. INVENTORY

Inventory consisted of the following at September 30:

2003

2002Raw materials

$
7,412

$
7,796Finished goods


45,105


24,735$
52,517

$
32,531


4. PROPERTY, PLANT, EQUIPMENT AND LEASE COMMITMENTS

Property, plant and equipment consisted of the following at September 30:

2003

2002Land

$
1,712

$
1,684Buildings and improvements


51,770


48,430Machinery and equipment


321,581


296,649375,063


346,763Less accumulated depreciation


133,195


109,834241,868


236,929Construction in progress


39,516


39,987$
281,384

$
276,916


Approximately
$80,173 of fixed assets are located outside of the United States. Depreciation expense for the years ended September 30, 2003, 2002 and 2001 was
$22,731, $19,759 and $20,499 respectively.

The
Company leases certain property and equipment under agreements generally with terms of five to ten years and which may include certain renewal options. They also include early buyout
options. The Company is a party to sale and leaseback transactions entered into in January 1998 and March 2002, for which the Company recognizes rental expense over ten year and five
year terms, respectively. Rental expense for the years ended September 30, 2003, 2002 and 2001 was approximately $13,040, $13,969 and $14,572, respectively.

On
October 3, 2003, the Company repurchased all of the equipment leased pursuant to the sale-leaseback transactions. The minimum annual rental commitments under
non-cancelable operating

F-12

---

leases
both inclusive and exclusive of the sale-leaseback lease amounts are as follows for each of the five years subsequent to September 30, 2003:

Including Sale-
Leaseback
Commitments

Excluding Sale-
Leaseback
Commitments2004

$
12,457

$
2,0872005


11,249


8792006


11,043


6732007


8,760


4262008


1,575


333Thereafter


155


155$
45,239

$
4,553


5. INTANGIBLES AND DEFERRED FINANCE CHARGES

A summary of the components of intangibles and deferred finance charges are as follows:

2003Description

Lives

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
AmountIntangible assets with defined lives:Customer lists

5-15 years

$
3,911

$
2,563

$
1,348Deferred finance charges

2-10 years


11,980


2,823


9,157Intangible assets with indefinite lives:Goodwill




9,874





9,874Total



$
25,765

$
5,386

$
20,379


2002Description

Lives

Gross Carrying
Amount

Accumulated
Amortization

Net Carrying
AmountIntangible assets with defined lives:Customer lists

5-15 years

$
3,911

$
1,942

$
1,969Deferred finance charges

2-10 years


10,401


1,327


9,074Intangible assets with indefinite lives:Goodwill




9,874





9,874Total



$
24,186

$
3,269

$
20,917


F-13

---



Amortization
expense in fiscal 2003, 2002 and 2001 was $2,118, $1,591 and $1,545, respectively. The estimated annual amortization expense for the five fiscal years subsequent to
September 30, 2003 are as follows:

2004

$
2,5662005


1,5742006


1,4552007


1,1102008


1,010


On October 3, 2003, the Company replaced its existing revolving credit facility as described in Note 6 to the consolidated financial
statements. As a result, $909 of deferred financing charges related to this existing credit facility will be expensed in fiscal 2004.

6. LONG-TERM DEBT

Long-term debt consisted of the following at September 30:

2003

2002Industrial Revenue Bond payable November 4, 2004 at the lenders' variable rate plus .25% (2.1% at September 30, 2002)

$


$
6,500Senior Notes payable on June 19, 2011 with 10.75% interest due semiannually on January 1 and July 1


271,790


271,376Revolving credit facility of $50,000 bearing interest at rates ranging from LIBOR plus 2.25 to 3.0% or prime plus 1.0 to 1.5% (5.25% at September 30, 2003)


28,670


300,460


277,876Less current portion


28,670


Total long-term debt

$
271,790

$
277,876


On
June 19, 2001 the Company issued $275,000 of 10.75% Senior Notes due 2011 (the "Senior Notes"). The Senior Notes are unsecured senior obligations of AET. The indenture for the
Senior Notes contains customary covenants and related provisions, including a cross default provision based on the acceleration of debt under other significant debt instruments. The issue price of
each Senior Note was $984.94 per $1,000 principal amount at maturity. The bond discount is being amortized to interest expense over the life of the notes. The Company used a portion of the proceeds
from the Senior Notes to redeem the $150,000 11.5% Senior Notes due April 7, 2002. In conjunction with the redemption of these notes, the Company recorded a loss on the early extinguishment of
debt of $3,089, which is comprised of unamortized debt issuance costs and interest incurred during the 30-day call period and is recorded in interest expense.

F-14

---

At
September 30, 2003, the Company was not in compliance with the EBITDA covenant under its $50 million credit facility. This credit facility was replaced on
October 3, 2003 by a $100 million credit facility (the "Credit Facility) with GE Commercial Finance (GECF). The credit facility includes a $50 million revolving line of credit and
a $50 million term loan, both of which expire on October 2, 2008. Approximately $39 million of the term loan proceeds were utilized to repurchase all of the equipment leased
pursuant to sale-leaseback transactions with the remaining funds used to pay
down the existing credit facility. In anticipation of the Credit Facility, the Industrial Revenue Bonds due in 2004 were retired on September 28, 2003.

The
Credit Facility is secured by most of the assets of the Company and contains covenants which limit capital expenditures, require certain minimum EBITDA levels, require certain
minimum levels of availability and require certain minimum fixed charge coverage ratios. The term loan is to be repaid through quarterly principal payments of $1.563 million for five years
together with a final principal payment of $18.75 million due in October 2008.

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accrued expenses consisted of the following at September 30:

2003

2002Accrued restructuring

$
838

$
6,791Deferred gain on sale-leasebacks





4,949Payroll & benefits


3,919


5,273Market development, primarily customer rebates


3,919


7,480Taxes and other


9,332


8,855$
18,008

$
33,348


Restructurings

In September 2003, the Company recorded a $639 restructuring charge as a result of the elimination of 40 full-time positions. The Company made
payments of $90 related to this restructuring during fiscal year 2003 resulting in a balance of $549 as of September 30, 2003, of which $450 is included in accrued expense and other liabilities
and $99 is included in long-term liabilities.

In
September 2002, the Company recorded a $9,002 restructuring charge associated with the Company's decision to close the Boston-based corporate office, a realignment of the
Company's business units and the reorganization of key roles and responsibilities. The reorganization eliminated 50 full-time positions. In 2003, the Company reduced the estimated costs to
be incurred under the 2002 restructuring by $736 to reflect lower than anticipated costs of facility closure and other expenses. The

F-15

---

following
is a summary of the restructuring reserve as of September 30, 2003 of which $389 is included in accrued expenses and other liabilities and $697 is included in long-term
liabilities.

Employee
Severance
Costs

Facility
Closure
Costs

Other
Costs

TotalRestructuring Charge

$
6,509

$
1,983

$
510

$
9,002Payments/utilization for the period


(2,288
)







(2,288
)Balance as of September 30, 2002

$
4,221

$
1,983

$
510

$
6,714Payments/utilization for the period


(4,071
)

(1,047
)

(510
)

(5,628
)Balance as of September 30, 2003

$
150

$
936

$


$
1,086


The
Company announced a major restructuring of its Covington, Virginia manufacturing facility in 1998. The restructuring included the shutdown of certain assets and the
elimination of approximately 200 full-time manufacturing and plant administrative positions. The Company recorded a charge of $14,980 in the fourth quarter of 1998 comprised of
approximately $8,207 for ongoing operating lease commitments related to idled leased equipment, $4,100 in severance and outplacement costs, and $2,673 in other charges. The following is a summary of
the restructuring reserve as of September 30, 2003. The Company has included $2,629 in long-term liabilities.

Lease
CommitmentsBalance as of September 30, 2001


3,867Payments/utilization for the period


(619
)Balance as of September 30, 2002


3,248Payments/utilization for the period


(619
)Balance as of September 30, 2003

$
2,629


8. INCOME TAXES

The provision for income taxes consisted of the following for the years ended September 30:

2003

2002

2001Current:U.S. Federal





(2,045
)

State








Total current

$


$
(2,045
)
$
Deferred:U.S. Federal





2,045


(5,007
)State








(808
)Valuation Allowance


1,053


(2,045
)

16,079Total deferred


1,053





10,264Total

$
1,053

$
(2,045
)
$
10,264


F-16

---

The
components of the net deferred tax asset were as follows at September 30:

2003

2002Current Deferred Tax:Accounts receivable

$
727

$
695Inventory


1,612


968Other liabilities


7,055


8,242Valuation allowance


(9,394
)

(9,074
)Net Current Deferred Tax Asset

$
0

$
831Non Current Deferred Tax:Property, plant and equipment


(46,702
)

(44,020
)Other assets


9,511


12,993Tax credits and loss carryforwards


68,173


54,171Valuation allowance


(30,982
)

(23,975
)Net Non-Current Deferred Tax Liability


0


(831
)Total Net Deferred Tax Asset

$
0

$
0


At
September 30, 2003, the Company has, for income tax reporting purposes, federal net operating loss carryforwards of $165,926 (expiration commencing in 2006 through 2023) and
state net operating loss carryforwards of $162,632 (limited by certain state tax statutes and expiration). The Company also has
research and development credit carryforwards of $443, alternative minimum tax credit carryforwards of $2,672 and state investment tax credits of $319 (expiration commencing in 2005).

The
Company has recorded a full valuation allowance in 2003 and 2002 against the deferred tax assets due to the uncertainty of realizing these assets.

The
income tax expense of $1,053 in 2003 represents an adjustment to the valuation allowance against deferred taxes. The income tax benefit in 2002 of $2,045 represents a reversal of a
previously reserved alternative minimum tax asset refunded in fiscal 2002 due to the change in the tax law increasing the loss carryback period.

A
reconciliation of the statutory federal income tax rate to the effective rate of the provisions for income taxes for the years ended September 30, 2003, 2002 and 2001 is as
follows:

2003

2002

2001Statutory tax rate

35.0
%
35.0
%
35.3
%State income taxes, net of federal tax benefits

4.0
%
4.0
%
3.7
%Subtotal

39.0
%
39.0
%
39.0
%Valuation allowance

(45.6
)%
(32.9
)%
(102.6
)%Total

(6.6
)%
6.1
%
(63.6
)%


F-17

---

9. STOCKHOLDERS' EQUITY

Tax benefits resulting from stock compensation expense allowable for U.S. federal income tax purposes in excess of the expense recorded in the consolidated
statements of operations have been credited to additional paid-in capital.

In
March 1998, the Company adopted a shareholder rights plan, and the Board of Directors declared a dividend consisting of one right, called a "Junior Preferred Stock Purchase
Right" (a "Right") to each share of Common Stock outstanding on March 9, 1998. Each share of Common Stock issued after that date will be issued with an attached Right. Each Right entitles the
holder, upon the occurrence of certain events, to purchase 1/100th of a share of Preferred Stock at an initial exercise price of $36, subject to adjustments for stock dividends, splits and similar
events. The Rights are exercisable only if a person or group acquires 20 percent or more of AET's Common Stock or announces an intention to commence a tender or exchange offer, the consummation
of which would result in ownership by such person or group of 20 percent or more of AET's Common Stock. The Rights may be redeemed by the Board of Directors at any time prior to the expiration
of the rights plan on March 2, 2008 at a redemption price of $.01 each, and may be amended by the Board at any time prior to becoming exercisable. At September 30, 2003, there were
13,016 Junior Preferred Stock Purchase Rights outstanding.

10. STOCK OPTIONS

The fair value of each stock option grant is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2003, 2002 and 2001: expected volatility of approximately 75 percent, risk-free interest rates of approximately 4 percent, no distribution of
dividends, and expected lives of 5 to 10 years. The weighted-average grant date fair value of options granted during the year was $1.65, $3.56 and $2.41 for 2003, 2002 and 2001 respectively.

F-18

---

Information
concerning the Company's option plans is as follows:

Shares
Under Option

Range of
Exercise Prices

Weighted-
Average Exercise Price

ExercisableAs of September 30, 2000

3,394

4.57-14.88

7.39

2,192Granted

1,158

1.69-7.34

4.86Exercised

(16
)
5.66-7.25

6.80Canceled

(1,360
)
3.00-12.00

7.61As of September 30, 2001

3,176

1.69-14.88

6.37

1,655Granted

125

3.03-7.65

5.63Exercised

(195
)
2.13-6.75

5.10Canceled

(321
)
1.69-9.00

5.66As of September 30, 2002

2,785

1.69-14.88

6.51

1,807Granted

560

1.70-3.00

2.89Exercised





Canceled

(241
)
1.72-8.38

6.46As of September 30, 2003

3,104

1.69-14.88

5.86

2,018


The
following table summarizes information regarding stock options outstanding at September 30, 2003:

Options Exercisable

Options OutstandingRange of
Exercise Price

Outstanding
as of
09/30/03

Weighted
Average Remaining
Contractual Life in Years

Weighted-Average
Exercise Price

Exercisable
as of
09/30/03

Weighted-Average
Exercise Price$
1.00-5.00

1,000

7.2

$
2.99

300

$
3.495.01-7.50

1,290

5.8


6.31

951


6.367.51-10.00

736

2.7


8.19

689


8.2110.01-12.50

24

3.7


11.75

24


11.7512.51-15.00

54

2.2


13.84

54


13.843,104

5.5

$
5.86

2,018

$
6.83


11. EMPLOYEE AGREEMENTS

The Company has entered into employment agreements extending for periods of up to three years with certain key officers of the Company. These officers, who in
some cases also serve on the Board of Directors and are stockholders of the Company, are also eligible for performance bonuses. Total amounts payable under these agreements is $4,994.

F-19

---

12. COMMITMENTS AND CONTINGENCIES

From time to time, the Company becomes involved in litigation that is incidental to its business. Management does not believe that the outcome of currently
pending matters, either individually or in
the aggregate, will have a material impact on financial position in the results of operations. See Note 4 for Operating Lease Commitments.

13. EMPLOYEE BENEFIT PLANS

Substantially all employees with more than three months of service (as defined) are eligible to participate in a Company savings and profit sharing plan. The plan
provides for Board-approved matching contributions in varying amounts based on employee contribution percentages up to 3.5 percent of gross salary in Company common stock or cash, which are
fully accrued in the accompanying consolidated financial statements. The plan also provides for profit sharing contributions at the discretion of the Board of Directors. There were no contributions in
2003 and 2002. Contributions were made in 2001with Company common stock, valued at $171 and $1,311 of cash.

The
Company has a non-qualified deferred compensation plan for certain management employees. This plan allows these employees to defer a portion of their salary and bonus
until retirement or termination of their employment. At its election, the Company can make contributions to this plan representing a percentage of employee compensation. The employee can elect to have
their deferred compensation invested in Company common stock or selected money market and mutual funds. A total of 43 shares of Company stock are held in treasury under this plan as of
September 30, 2003. Company contributions made to the plan were $456, $544 and $448 in 2003, 2002 and 2001, respectively. The deferred compensation liability was $3,840 and $3,213 as of
September 30, 2003 and 2002, respectively, which has been included in long-term liabilities. The assets under the plan include Company stock of $107 and $206, which is included as
treasury stock and investments in money market and mutual funds of $3,733 and $3,007, which is included in other assets as of September 30, 2003 and 2002, respectively.

In
April 1999, the Company implemented a Supplemental Executive Retirement Plan, which has been amended, under which certain executive employees will receive benefits monthly or
lump sum equal to between 50 and 75% of the average of their compensation over the three highest years, which need not be consecutive, for a period of 10 years after retirement. The plan
includes provisions which require certain minimum tangible net worth and interest coverage ratio levels which, if not achieved, could result in the immediate termination of the plan and distribution
of funds to the participants. The plan is unfunded; however, the Company has designated $9,192 in various investments, which are included in other assets, to provide for the eventual funding of the
liability.

F-20

---

The
following table sets forth the supplemental executive retirement plan's funded status and obligation as of September 30, 2003 and 2002:

2003

2002Change in benefit obligation:Benefit obligation at beginning of year

$
7,751

$
4,098Service cost


732


2,111Interest cost


247


299Plan amendment





348Actuarial loss


493


895Benefit obligation at end of year


9,223

$
7,751Funded Status:Projected benefit obligation in excess of plan assets

$
9,223

$
7,751Unrecognized actuarial gain (loss)


(14
)

479Net benefit liability

$
9,209

$
8,230


The
components of net periodic benefit costs for 2003, 2002 and 2001 are as follows:

2003

2002

2001Service cost

$
732

$
2,111

$
1,637Interest cost


247


299


139Recognized actuarial (gain)/loss





(123
)

Net periodic benefit cost

$
979

$
2,287

$
1,776


For
measurement purposes, the annual rate of increase in compensation costs was assumed to be 0% and 4.0% in 2003 and 2002, respectively. The discount rates used in determining the
periodic benefit obligation were 3% and 6% in 2003 and 2002, respectively.

14. CONCENTRATION OF CREDIT RISK AND EXPORT SALES

The Company sells its products under normal credit terms to a diverse base of customers in the packaging film conversion and consumer product markets, as well as
other industries. The Company performs ongoing credit evaluations of its customers, and generally does not require collateral, although letters of credit may be required on certain foreign sales. A
significant amount of sales were to converters of packaging films for end users in the beverage, candy and snack food industries. One converter customer accounted for approximately 15 percent
of sales in fiscal 2003, 16 percent of sales in 2002 and 18 percent of sales in 2001. One other customer accounted for approximately 11 percent of sales in fiscal 2003 but less
than 10 percent of sales in fiscal 2002 and 2001. No other customer accounted for more than 10 percent of sales in 2003, 2002 and 2001.

F-21

---

Information
by geographic location was as follows for the years ended September 30:

2003

2002

2001Sales:United States

$
198,647

$
210,619

$
230,135Foreign


48,717


41,473


49,705$
247,364

$
252,092

$
279,840Operating profit (loss):United States

$
9,288

$
(8,098
)
$
12,501Foreign


4,724


3,449


(901
)$
14,012

$
(4,649
)
$
11,600


No
individual country, other than the United States, comprised more than 10 percent of consolidated sales or operating profit.

15. SELECTED QUARTERLY DATA (UNAUDITED)

Summarized quarterly financial data for fiscal 2003 and 2002 were as follows:

Net Sales

Gross Profit

Net Income (Loss)

Earnings
(Loss)
Per Share
Basic

Earnings
(Loss)
Per Share
DilutedSeptember 30, 20021st quarter

$
55,477

$
10,326

$
(4,740
)
(.38
)
(.38
)2nd quarter


63,563


11,948


(3,851
)
(.31
)
(.31
)3rd quarter


68,282


15,167


(570
)
(.05
)
(.05
)4th quarter


64,770


6,552


(22,590
)
(1.80
)
(1.80
)September 30, 20031st quarter

$
59,361

$
12,182

$
(3,258
)
(.26
)
(.26
)2nd quarter


62,850


12,719


(3,110
)
(.24
)
(.24
)3rd quarter


67,012


12,262


(1,261
)
(.10
)
(.10
)4th quarter


58,141


7,047


(9,324
)
(.73
)
(.73
)


F-22

---



APPLIED EXTRUSION TECHNOLOGIES, INC.        SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS        Years Ended September 30, 2003, 2002 and 2001  (In thousands)

|Description                      |      | Balance at
beginning
of period |   | Additions
charged
to costs and
expenses |  | Deductions |       | Balance at
end of
period
|-------------------------------- | ---- | ------------------------------ | - | --------------------------------------- |  | ---------- | ----- | ------------------------
|Allowance for doubtful accounts: |      |                                |   |                                         |  |            |       |                         
|                                 | 2003 |                                | $ | 1,783                                   |  | $          | 900   |                         
|                                 | 2002 |                                |   | 1,801                                   |  |            | 1,713 |                         
|                                 | 2001 |                                |   | 1,856                                   |  |            | 400   |                         

F-23

---



INDEPENDENT AUDITORS' REPORT

To
the Board of Directors and Stockholders of
Applied Extrusion Technologies, Inc.:

We
have audited the accompanying consolidated balance sheets of Applied Extrusion Technologies, Inc. and its subsidiaries as of September 30, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2003. Our audits also included the financial statement
schedule listed in Item 15A. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the
financial statements and the financial statement schedule based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Applied Extrusion Technologies, Inc. and its
subsidiaries at September 30, 2003 and 2002, and the results its operations and its cash flows for each of the three years in the period ended September 30, 2003, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the information shown therein.

/s/DELOITTE & TOUCHE LLP

---

Deloitte & Touche LLP

Philadelphia,
Pennsylvania
December 22, 2003

F-24

---

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