UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q


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





FOR
THE QUARTERLY PERIOD ENDED May 31, 2008





OR





o
            
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934





COMMISSION
FILE NUMBERS 333-137067, 333-121479, 333-84294





AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


AAC
GROUP HOLDING CORP.


AMERICAN
ACHIEVEMENT CORPORATION


(Exact
name of registrant as specified in its charter)


DELAWARE
            
            20-4833998DELAWARE
            
            20-1854833DELAWARE
            
            13-4126506(State
      or other jurisdiction of incorporation or
            
            (I.R.S.
      Employer Identification Number)organization)





7211
CIRCLE S ROAD


AUSTIN,
TEXAS 78745


(Address
of principal executive offices) (Zip Code)


Registrants’
Telephone Number, Including Area Code (512) 444-0571





Indicate
by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject
to such filing requirements for the past 90 days. Yes o No þ.





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):


Large
accelerated filer o    
Accelerated filer o    
Non-accelerated filer þ





Indicate
by check mark whether the registrants are shell companies (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ





Number of
shares outstanding of American Achievement Group Holding Corp. as of June 30,
2008: 505,460 shares of common stock.





Number of
shares outstanding of AAC Group Holding Corp. as of June 30, 2008: 100 shares of
common stock.


Number of
shares outstanding of American Achievement Corporation as of June 30, 2008:
100 shares of common stock.





This Form
10-Q is a combined quarterly report being filed separately by three registrants:
American Achievement Group Holding Corp., AAC Group Holding Corp., and American
Achievement Corporation. Unless the context indicates otherwise, any reference
in this report to “Parent Holdings” refers to American Achievement Group Holding
Corp., “Intermediate Holdings” refers to AAC Group Holding Corp., and “AAC”
refers to American Achievement Corporation, the indirect wholly-owned operating
subsidiary of Intermediate Holdings. The “Company”, “we”, “us”, and “our” refer
to American Achievement Group Holding Corp. and AAC Group Holding Corp. together
with American Achievement Corporation.

















FOR
THE QUARTERLY PERIOD ENDED MAY 31, 2008


INDEX








PAGEPART I.
      FINANCIAL INFORMATIONItem 1.
      Unaudited Condensed Consolidated Financial Statements and
      NotesUnaudited Condensed Consolidated Balance Sheets — As of May
      31, 2008 and August 25, 2007
            
            
            3Unaudited Condensed Consolidated Statements of Operations —
      For the Three and Nine Months Ended May 31, 2008 and May 26,
      2007
            
            
            6Unaudited Condensed Consolidated Statement of Cash Flows – For
      the Nine Months Ended May 31, 2008 and May 26, 2007
            9Notes to Condensed Consolidated Financial Statements
      (unaudited)
            
            
            12Item 2. Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
            
            
            23Item 3. Quantitative and Qualitative Disclosures About
      Market Risk
            
            
            31Item 4. Controls and Procedures
            
            
            32PART
      II. OTHER INFORMATIONItem 1. Legal Proceedings
            
            
            33Item 1A. Risk Factors
            
            
            33Item 6. Exhibits
            
            
            33SIGNATURES
            
            
            34Certification
      of CEO Pursuant to Section 302Certification
      of CFO Pursuant to Section 302Certification
      of CEO Pursuant to Section 906Certification
      of CFO Pursuant to Section 906














Explanatory
Note





This
combined Form 10-Q is separately filed by American Achievement Group Holding
Corp., AAC Group Holding Corp., and American Achievement Corporation. Each
Registrant hereto is filing on its own behalf all of the information contained
in this quarterly report that relates to such Registrant. Each Registrant hereto
is not filing any information that does not relate to such Registrant, and
therefore makes no representation as to any such information.





Unless
the context indicates otherwise, any reference in this report to “Parent
Holdings” refers to American Achievement Group Holding Corp., “Intermediate
Holdings” refers to AAC Group Holding Corp., and “AAC” refers to American
Achievement Corporation, the indirect wholly-owned operating subsidiary of
Intermediate Holdings. The “Company”, “we”, “us”, and “our” refer to American
Achievement Group Holding Corp., and AAC Group Holding Corp. together with
American Achievement Corporation.





2
 Index





AMERICAN ACHIEVEMENT GROUP HOLDING CORP.


Condensed Consolidated Balance Sheets


(unaudited)








Parent
      HoldingsMay
      31, 2008
            
            
            August
      25, 2007(in
      thousands)ASSETSCash
      and cash equivalents
            
            $
            13,891
            
            
            $
            1,454Accounts
      receivable, net of allowance for doubtful accounts of $2,611 and $1,875,
      respectively
            
            
            75,306
            
            
            
            43,039Inventories
            
            
            20,803
            
            
            
            31,158Deferred
      tax assets
            
            
            3,731
            
            
            
            3,731Prepaid
      expenses and other current assets, net
            
            
            14,455
            
            
            
            18,317Total
      current assets
            
            
            128,186
            
            
            
            97,699Property,
      plant and equipment, net
            
            
            70,668
            
            
            
            70,653Goodwill
            
            
            171,073
            
            
            
            173,277Other
      intangible assets, net
            
            
            99,786
            
            
            
            107,855Other
      assets, net
            
            
            20,056
            
            
            
            26,582Total
      assets
            
            $
            489,769
            
            
            $
            476,066LIABILITIES
      AND STOCKHOLDERS’ DEFICITBook
      overdraft
            
            $
            1,663
            
            
            $
            5,082Accounts
      payable
            
            
            8,990
            
            
            
            10,590Customer
      deposits
            
            
            25,410
            
            
            
            11,771Accrued
      expenses
            
            
            35,154
            
            
            
            20,361Deferred
      revenue
            
            
            496
            
            
            
            4,460Accrued
      interest
            
            
            2,391
            
            
            
            5,550Current
      portion of long-term debt
            
            
            841
            
            
            
            900Total
      current liabilities
            
            
            74,945
            
            
            
            58,714Long-term
      debt, net of current portion
            
            
            548,206
            
            
            
            537,680Mandatory
      redeemable preferred stock
            
            
            7,500
            
            
            
            7,500Deferred
      tax liabilities
            
            
            4,481
            
            
            
            9,736Other
      long-term liabilities
            
            
            8,703
            
            
            
            6,619Total
      liabilities
            
            
            643,835
            
            
            
            620,249Commitments
      and contingenciesStockholders’
      deficit:Common
      stock
            
            
            5
            
            
            
            5Additional
      paid-in capital
            
            
            (123,880
            )
            
            
            (124,045
            )Accumulated
      deficit
            
            
            (33,122
            )
            
            
            (23,297
            )Accumulated
      other comprehensive income
            
            
            2,931
            
            
            
            3,154Total
      stockholders’ deficit
            
            
            (154,066
            )
            
            
            (144,183
            )Total
      liabilities and stockholders’ deficit
            
            $
            489,769
            
            
            $
            476,066

















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





3
 Index





AAC
GROUP HOLDING CORP.


Condensed
Consolidated Balance Sheets


(unaudited)








Intermediate
      HoldingsMay
      31, 2008
            
            
            August
      25, 2007(in
      thousands)ASSETSCash
      and cash equivalents
            
            $
            13,596
            
            
            $
            1,168Accounts
      receivable, net of allowance for doubtful accounts of $2,611 and $1,875,
      respectively
            
            
            75,306
            
            
            
            43,039Inventories
            
            
            20,803
            
            
            
            31,158Deferred
      tax assets
            
            
            3,731
            
            
            
            3,731Prepaid
      expenses and other current assets, net
            
            
            14,455
            
            
            
            18,317Total
      current assets
            
            
            127,891
            
            
            
            97,413Property,
      plant and equipment, net
            
            
            70,668
            
            
            
            70,653Goodwill
            
            
            171,073
            
            
            
            173,277Other
      intangible assets, net
            
            
            99,786
            
            
            
            107,855Other
      assets, net
            
            
            13,541
            
            
            
            18,931Total
      assets
            
            $
            482,959
            
            
            $
            468,129LIABILITIES
      AND STOCKHOLDERS’ EQUITYBook
      overdraft
            
            $
            1,663
            
            
            $
            5,082Accounts
      payable
            
            
            8,990
            
            
            
            10,590Customer
      deposits
            
            
            25,410
            
            
            
            11,771Accrued
      expenses
            
            
            33,503
            
            
            
            20,299Deferred
      revenue
            
            
            496
            
            
            
            4,460Accrued
      interest
            
            
            2,391
            
            
            
            5,550Current
      portion of long-term debt
            
            
            841
            
            
            
            900Total
      current liabilities
            
            
            73,294
            
            
            
            58,652Long-term
      debt, net of current portion
            
            
            352,064
            
            
            
            361,836Deferred
      tax liabilities
            
            
            24,617
            
            
            
            19,731Other
      long-term liabilities
            
            
            2,935
            
            
            
            3,034Total
      liabilities
            
            
            452,910
            
            
            
            443,253Commitments
      and contingenciesStockholders’
      equity:Common
      stock
            
            
            -
            
            
            
            -Additional
      paid-in capital
            
            
            24,309
            
            
            
            24,144Accumulated
      earnings (deficit)
            
            
            2,809
            
            
            
            (2,422
            )Accumulated
      other comprehensive income
            
            
            2,931
            
            
            
            3,154Total
      stockholders’ equity
            
            
            30,049
            
            
            
            24,876Total
      liabilities and stockholders’ equity
            
            $
            482,959
            
            
            $
            468,129

















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








4
 Index





AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Balance Sheets


(unaudited)








AACMay
      31, 2008
            
            
            August
      25, 2007(in
      thousands)ASSETSCash
      and cash equivalents
            
            $
            13,032
            
            
            $
            620Accounts
      receivable, net of allowance for doubtful accounts of $2,611 and $1,875,
      respectively
            
            
            75,306
            
            
            
            43,039Inventories
            
            
            20,803
            
            
            
            31,158Deferred
      tax assets
            
            
            3,731
            
            
            
            3,731Prepaid
      expenses and other current assets, net
            
            
            14,455
            
            
            
            18,317Total
      current assets
            
            
            127,327
            
            
            
            96,865Property,
      plant and equipment, net
            
            
            70,668
            
            
            
            70,653Goodwill
            
            
            171,073
            
            
            
            173,277Other
      intangible assets, net
            
            
            99,786
            
            
            
            107,855Other
      assets, net
            
            
            11,613
            
            
            
            16,669Total
      assets
            
            $
            480,467
            
            
            $
            465,319LIABILITIES
      AND STOCKHOLDERS’ EQUITYBook
      overdraft
            
            $
            1,663
            
            
            $
            5,082Accounts
      payable
            
            
            8,990
            
            
            
            10,590Customer
      deposits
            
            
            25,410
            
            
            
            11,771Accrued
      expenses
            
            
            33,488
            
            
            
            20,284Deferred
      revenue
            
            
            496
            
            
            
            4,460Accrued
      interest
            
            
            2,391
            
            
            
            5,550Current
      portion of long-term debt
            
            
            841
            
            
            
            900Total
      current liabilities
            
            
            73,279
            
            
            
            58,637Long-term
      debt, net of current portion
            
            
            224,841
            
            
            
            243,982Deferred
      tax liabilities
            
            
            37,883
            
            
            
            30,639Other
      long-term liabilities
            
            
            2,907
            
            
            
            3,006Total
      liabilities
            
            
            338,910
            
            
            
            336,264Commitments
      and contingenciesStockholders’
      equity:Common
      stock
            
            
            -
            
            
            
            -Additional
      paid-in capital
            
            
            109,211
            
            
            
            109,046Accumulated
      earnings
            
            
            29,415
            
            
            
            16,855Accumulated
      other comprehensive income
            
            
            2,931
            
            
            
            3,154Total
      stockholders’ equity
            
            
            141,557
            
            
            
            129,055Total
      liabilities and stockholders’ equity
            
            $
            480,467
            
            
            $
            465,319

















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








5
 Index





AMERICAN ACHIEVEMENT GROUP HOLDING CORP.


Condensed
Consolidated Statements of Operations


(unaudited)








Parent
      HoldingsFor
      the three months ended
            
            
            For
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007
            
            
            May
      31, 2008
            
            
            May
      26, 2007(in
      thousands)Net
      sales
            
            $
            157,142
            
            
            $
            143,822
            
            
            $
            269,710
            
            
            $
            252,967Cost
      of sales
            
            
            62,432
            
            
            
            56,994
            
            
            
            114,614
            
            
            
            105,645Gross
      profit
            
            
            94,710
            
            
            
            86,828
            
            
            
            155,096
            
            
            
            147,322Selling,
      general and administrative expenses
            
            
            51,683
            
            
            
            46,117
            
            
            
            112,773
            
            
            
            104,331Operating
      income
            
            
            43,027
            
            
            
            40,711
            
            
            
            42,323
            
            
            
            42,991Interest
      expense, net
            
            
            16,972
            
            
            
            15,611
            
            
            
            48,598
            
            
            
            44,585Income
      (loss) before income taxes
            
            
            26,055
            
            
            
            25,100
            
            
            
            (6,275
            )
            
            
            (1,594
            )Provision
      (benefit) for income taxes
            
            
            7,377
            
            
            
            9,448
            
            
            
            (835
            )
            
            
            -Income
      (loss) from continuing operations
            
            
            18,678
            
            
            
            15,652
            
            
            
            (5,440
            )
            
            
            (1,594
            )Discontinued
      Operations:Loss
      from discontinued segment
            
            
            (72
            )
            
            
            (797
            )
            
            
            (7,200
            )
            
            
            (2,491
            )Benefit
      for income taxes
            
            
            (28
            )
            
            
            (312
            )
            
            
            (2,815
            )
            
            
            (974
            )Loss
      from discontinued operations
            
            
            (44
            )
            
            
            (485
            )
            
            
            (4,385
            )
            
            
            (1,517
            )Net
      income (loss)
            
            $
            18,634
            
            
            $
            15,167
            
            
            $
            (9,825
            )
            
            $
            (3,111
            )











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







6
 Index





AAC
GROUP HOLDING CORP.


Condensed
Consolidated Statements of Operations


(unaudited)








Intermediate
      HoldingsFor
      the three months ended
            
            
            For
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007
            
            
            May
      31, 2008
            
            
            May
      26, 2007(in
      thousands)Net
      sales
            
            $
            157,142
            
            
            $
            143,822
            
            
            $
            269,710
            
            
            $
            252,967Cost
      of sales
            
            
            62,432
            
            
            
            56,994
            
            
            
            114,614
            
            
            
            105,645Gross
      profit
            
            
            94,710
            
            
            
            86,828
            
            
            
            155,096
            
            
            
            147,322Selling,
      general and administrative expenses
            
            
            50,094
            
            
            
            46,117
            
            
            
            111,184
            
            
            
            104,331Operating
      income
            
            
            44,616
            
            
            
            40,711
            
            
            
            43,912
            
            
            
            42,991Interest
      expense, net
            
            
            8,469
            
            
            
            8,558
            
            
            
            24,990
            
            
            
            25,573Income
      before income taxes
            
            
            36,147
            
            
            
            32,153
            
            
            
            18,922
            
            
            
            17,418Provision
      for income taxes
            
            
            16,846
            
            
            
            13,363
            
            
            
            9,306
            
            
            
            7,251Income
      from continuing operations
            
            
            19,301
            
            
            
            18,790
            
            
            
            9,616
            
            
            
            10,167Discontinued
      Operations:Loss
      from discontinued segment
            
            
            (72
            )
            
            
            (797
            )
            
            
            (7,200
            )
            
            
            (2,491
            )Benefit
      for income taxes
            
            
            (28
            )
            
            
            (312
            )
            
            
            (2,815
            )
            
            
            (974
            )Loss
      from discontinued operations
            
            
            (44
            )
            
            
            (485
            )
            
            
            (4,385
            )
            
            
            (1,517
            )Net
      income
            
            $
            19,257
            
            
            $
            18,305
            
            
            $
            5,231
            
            
            $
            8,650











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








7
 Index





AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Statements of Operations


(unaudited)








AACFor
      the three months ended
            
            
            For
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007
            
            
            May
      31, 2008
            
            
            May
      26, 2007(in
      thousands)Net
      sales
            
            $
            157,142
            
            
            $
            143,822
            
            
            $
            269,710
            
            
            $
            252,967Cost
      of sales
            
            
            62,432
            
            
            
            56,994
            
            
            
            114,614
            
            
            
            105,645Gross
      profit
            
            
            94,710
            
            
            
            86,828
            
            
            
            155,096
            
            
            
            147,322Selling,
      general and administrative expenses
            
            
            50,094
            
            
            
            46,117
            
            
            
            111,184
            
            
            
            104,331Operating
      income
            
            
            44,616
            
            
            
            40,711
            
            
            
            43,912
            
            
            
            42,991Interest
      expense, net
            
            
            5,022
            
            
            
            5,622
            
            
            
            15,303
            
            
            
            16,952Income
      before income taxes
            
            
            39,594
            
            
            
            35,089
            
            
            
            28,609
            
            
            
            26,039Provision
      for income taxes
            
            
            16,012
            
            
            
            13,846
            
            
            
            11,664
            
            
            
            10,273Income
      from continuing operations
            
            
            23,582
            
            
            
            21,243
            
            
            
            16,945
            
            
            
            15,766Discontinued
      Operations:Loss
      from discontinued segment
            
            
            (72
            )
            
            
            (797
            )
            
            
            (7,200
            )
            
            
            (2,491
            )Benefit
      for income taxes
            
            
            (28
            )
            
            
            (312
            )
            
            
            (2,815
            )
            
            
            (974
            )Loss
      from discontinued operations
            
            
            (44
            )
            
            
            (485
            )
            
            
            (4,385
            )
            
            
            (1,517
            )Net
      Income
            
            $
            23,538
            
            
            $
            20,758
            
            
            $
            12,560
            
            
            $
            14,249














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











8
 Index





AMERICAN ACHIEVEMENT GROUP HOLDING CORP.


Condensed
Consolidated Statements of Cash Flows


(unaudited)








Parent
      HoldingsFor
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007(in
      thousands)Cash
      flows from operating activities:Net
      loss
            
            $
            (9,825
            )
            
            $
            (3,111
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Write-offs
      related to discontinued segment
            
            
            5,542
            
            
            
            -Gains
      on sales of property, plant and equipment
            
            
            (12
            )
            
            
            -Depreciation
      and amortization
            
            
            18,393
            
            
            
            18,311Deferred
      income taxes
            
            
            (5,108
            )
            
            
            (2,406
            )Amortization
      of deferred financing fees
            
            
            2,617
            
            
            
            2,620Accretion
      of interest on 10.25% senior discount notes
            
            
            9,369
            
            
            
            8,304Accretion
      of Senior PIK notes
            
            
            20,298
            
            
            
            15,927Allowance for
      doubtful accounts
            
            
            736
            
            
            
            851Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (33,003
            )
            
            
            (33,446
            )Inventories
            
            
            10,539
            
            
            
            7,780Prepaid
      expenses and other current assets, net
            
            
            2,750
            
            
            
            (6,717
            )Other
      assets, net
            
            
            2,198
            
            
            
            852Customer
      deposits
            
            
            13,639
            
            
            
            22,694Deferred
      revenue
            
            
            (3,964
            )
            
            
            (1,937
            )Accounts
      payable, accrued expenses, and other long-term liabilities
            
            
            11,863
            
            
            
            10,529Net
      cash provided by operating activities
            
            
            46,032
            
            
            
            40,251Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (11,037
            )
            
            
            (7,928
            )Proceeds
      from sales of property, plant, and equipment
            
            
            61
            
            
            
            -Business
      acquisitions, net of cash acquired
            
            
            -
            
            
            
            (5,954
            )Net
      cash used in investing activities
            
            
            (10,976
            )
            
            
            (13,882
            )Cash
      flows from financing activities:Payments
      on revolving credit facility
            
            
            (21,905
            )
            
            
            (25,150
            )Proceeds
      from revolving credit facility
            
            
            14,100
            
            
            
            15,850Payments
      on term loan
            
            
            (11,395
            )
            
            
            (12,190
            )Deferred
      financing fees
            
            
            -
            
            
            
            (179
            )Change
      in book overdraft
            
            
            (3,419
            )
            
            
            (889
            )Net
      cash used in financing activities
            
            
            (22,619
            )
            
            
            (22,558
            )Net
      increase in cash and cash equivalents
            
            
            12,437
            
            
            
            3,811Cash
      and cash equivalents, beginning of period
            
            
            1,454
            
            
            
            3,404Cash
      and cash equivalents, end of period
            
            $
            13,891
            
            
            $
            7,215Supplemental
      disclosures of cash flow information:Cash
      paid for interest
            
            $
            17,475
            
            
            $
            18,992Cash
      paid for income taxes
            
            
            914
            
            
            
            501










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








9
 Index





AAC
GROUP HOLDING CORP.


Condensed
Consolidated Statements of Cash Flows


(unaudited)








Intermediate
      HoldingsFor
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007(in
      thousands)Cash
      flows from operating activities:Net
      income
            
            $
            5,231
            
            
            $
            8,650Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Write-offs
      related to discontinued segment
            
            
            5,542
            
            
            
            -Gains
      on sales of property, plant and equipment
            
            
            (12
            )
            
            
            -Depreciation
      and amortization
            
            
            18,393
            
            
            
            18,311Deferred
      income taxes
            
            
            5,033
            
            
            
            4,845Amortization
      of deferred financing fees
            
            
            1,481
            
            
            
            1,483Accretion
      of interest on 10.25% senior discount notes
            
            
            9,369
            
            
            
            8,304Allowance for
      doubtful accounts
            
            
            736
            
            
            
            851Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (33,003
            )
            
            
            (33,446
            )Inventories
            
            
            10,539
            
            
            
            7,780Prepaid
      expenses and other current assets, net
            
            
            2,750
            
            
            
            (6,717
            )Other
      assets, net
            
            
            2,198
            
            
            
            852Customer
      deposits
            
            
            13,639
            
            
            
            22,694Deferred
      revenue
            
            
            (3,964
            )
            
            
            (1,937
            )Accounts
      payable, accrued expenses, and other long-term liabilities
            
            
            8,091
            
            
            
            8,635Net
      cash provided by operating activities
            
            
            46,023
            
            
            
            40,305Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (11,037
            )
            
            
            (7,928
            )Proceeds
      from sales of property, plant and equipment
            
            
            61
            
            
            
            -Business
      acquisitions, net of cash acquired
            
            
            -
            
            
            
            (5,954
            )Net
      cash used in investing activities
            
            
            (10,976
            )
            
            
            (13,882
            )Cash
      flows from financing activities:Payments
      on revolving credit facility
            
            
            (21,905
            )
            
            
            (25,150
            )Proceeds
      from revolving credit facility
            
            
            14,100
            
            
            
            15,850Payments
      on term loan
            
            
            (11,395
            )
            
            
            (12,190
            )Deferred
      financing fees
            
            
            -
            
            
            
            (16
            )Change
      in book overdraft
            
            
            (3,419
            )
            
            
            (889
            )Net
      cash used in financing activities
            
            
            (22,619
            )
            
            
            (22,395
            )Net
      increase in cash and cash equivalents
            
            
            12,428
            
            
            
            4,028Cash
      and cash equivalents, beginning of period
            
            
            1,168
            
            
            
            2,904Cash
      and cash equivalents, end of period
            
            $
            13,596
            
            
            $
            6,932Supplemental
      disclosures of cash flow information:Cash
      paid for interest
            
            $
            17,475
            
            
            $
            18,992Cash
      paid for income taxes
            
            
            914
            
            
            
            501








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


10
 Index





AMERICAN
ACHIEVEMENT CORPORATION


Condensed
Consolidated Statements of Cash Flows


(unaudited)








AACFor
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007(in
      thousands)Cash
      flows from operating activities:Net
      income
            
            $
            12,560
            
            
            $
            14,249Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Write-offs
      related to discontinued segment
            
            
            5,542
            
            
            
            -Gains
      on sales of property, plant and equipment
            
            
            (12
            )
            
            
            -Depreciation
      and amortization
            
            
            18,393
            
            
            
            18,311Deferred
      income taxes
            
            
            7,391
            
            
            
            7,867Amortization
      of deferred financing fees
            
            
            1,147
            
            
            
            1,148Allowance for
      doubtful accounts
            
            
            736
            
            
            
            851Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (33,003
            )
            
            
            (33,446
            )Inventories
            
            
            10,539
            
            
            
            7,780Prepaid
      expenses and other current assets, net
            
            
            2,750
            
            
            
            (6,717
            )Other
      assets, net
            
            
            2,198
            
            
            
            852Customer
      deposits
            
            
            13,639
            
            
            
            22,694Deferred
      revenue
            
            
            (3,964
            )
            
            
            (1,937
            )Accounts
      payable, accrued expenses, and other long-term liabilities
            
            
            8,091
            
            
            
            8,635Net
      cash provided by operating activities
            
            
            46,007
            
            
            
            40,287Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (11,037
            )
            
            
            (7,928
            )Proceeds
      from sales of property, plant and equipment
            
            
            61
            
            
            
            -Business
      acquisitions, net of cash acquired
            
            
            -
            
            
            
            (5,954
            )Net
      cash used in investing activities
            
            
            (10,976
            )
            
            
            (13,882
            )Cash
      flows from financing activities:Payments
      on revolving credit facility
            
            
            (21,905
            )
            
            
            (25,150
            )Proceeds
      from revolving credit facility
            
            
            14,100
            
            
            
            15,850Payments
      on term loan
            
            
            (11,395
            )
            
            
            (12,190
            )Deferred
      financing fees
            
            
            -
            
            
            
            (16
            )Change
      in book overdraft
            
            
            (3,419
            )
            
            
            (889
            )Net
      cash used in financing activities
            
            
            (22,619
            )
            
            
            (22,395
            )Net
      increase in cash and cash equivalents
            
            
            12,412
            
            
            
            4,010Cash
      and cash equivalents, beginning of period
            
            
            620
            
            
            
            2,381Cash
      and cash equivalents, end of period
            
            $
            13,032
            
            
            $
            6,391Supplemental
      disclosures of cash flow information:Cash
      paid for interest
            
            $
            17,475
            
            
            $
            18,992Cash
      paid for income taxes
            
            
            914
            
            
            
            501











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





11
 Index
 AMERICAN ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)





1.
Summary of Organization and Significant Accounting Policies





Registrants





The
consolidated financial statements of American Achievement Group Holding Corp.
(“Parent Holdings”) include the accounts of its wholly-owned subsidiary, AAC
Group Holding Corp. (“Intermediate Holdings”) and its indirect wholly-owned
subsidiary, American Achievement Corporation (“AAC”), all of which are separate
public reporting companies. The consolidated financial statements of
Intermediate Holdings include the accounts of its indirect wholly-owned
subsidiary, AAC. Parent Holdings, Intermediate Holdings, and AAC are treated as
entities under common control. Parent Holdings, Intermediate Holdings and AAC
together with their consolidated subsidiaries are referred to as the “Company.”
Unless separately stated, the notes herein relate to Parent Holdings,
Intermediate Holdings and AAC.





Description
of Business





The
Company is a manufacturer and supplier of class rings, yearbooks and other
graduation-related scholastic products for the high school and college markets
and of recognition products, such as letter jackets, and affinity jewelry
designed to commemorate significant events, achievements and affiliations. The
Company markets its products and services primarily in the United States and
operates in four reporting segments; class rings, yearbooks, graduation products
and other. The Company’s corporate office is located in Austin, Texas and its
manufacturing facilities are located in Austin, Dallas, El Paso and Waco, Texas;
Louisville, Kentucky; Manhattan, Kansas; and Juarez, Mexico.





As
described in Note 4, on October 26, 2007 the Company decided to shut down its
achievement publications segment. This segment sold achievement publications in
the specialty directory publishing industry nationwide.





Consolidation





The
consolidated financial statements include the accounts of the Company and its
majority owned subsidiaries.  All significant intercompany accounts
and transactions have been eliminated in consolidation.





Parent
Holdings conducts all of its business through Intermediate Holdings and AAC and
its subsidiaries. The consolidated financial statements of Parent Holdings
include the accounts of its direct wholly-owned subsidiary, Intermediate
Holdings and its indirect wholly-owned subsidiary, AAC. Parent Holdings’
consolidated financial statements are substantially identical to Intermediate
Holdings’ consolidated financial statements, with the exception of costs related
to the Transaction (see Note 2), the series A preferred stock, senior PIK
notes, additional interest expense related to its series A preferred stock and
senior PIK notes, amortization of deferred financing costs and the related
income taxes.





Intermediate
Holdings conducts all of its business indirectly through AAC and its
subsidiaries. The consolidated financial statements of Intermediate Holdings
include the accounts of its indirect wholly-owned subsidiary, AAC. Intermediate
Holdings’ consolidated financial statements are substantially identical to AAC’s
consolidated financial statements, with the exception of the 10.25% senior
discount notes, additional interest expense related to the 10.25% senior
discount notes, amortization of deferred financing costs and the related income
taxes.





The
accompanying unaudited condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments necessary for a fair presentation of the financial position and
results of operations for the periods presented have been included. Operating
results for the three and nine months ended May 31, 2008 are not necessarily
indicative of the results that may be expected for the fiscal year ending
August 30, 2008. The interim condensed consolidated financial statements
and accompanying notes included herein should be read in conjunction with the
consolidated financial statements for the year ended August 25, 2007
included in the Company’s Report on Form 10-K (File No. 333-84294,
333-121479 and 333-137067) filed on December 7, 2007.







12
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


Use
of Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.





Reclassifications





Certain
prior period amounts in the accompanying consolidated financial statements have
been reclassified to conform to the current year’s presentation. Deferred
financing costs in the amount of $16,028, $8,377, and $6,115 have been
reclassified from other intangible assets, net to other assets, net as of
August 25, 2007 for Parent Holdings, Intermediate Holdings, and AAC,
respectively.





Recent
Accounting Pronouncements





In
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements and
does not require any new fair value measurements. The provisions of SFAS 157 are
effective for the Company beginning with its fiscal year 2009. The Company has
not yet evaluated the impact this standard will have on its financial
statements.





In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans — An Amendment of
FASB Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”). SFAS 158
requires an employer to recognize the funded status of defined benefit
postretirement plan as an asset or liability in the balance sheet and to
recognize changes in that funded status in the year in which changes occur
through comprehensive income. Additionally, SFAS 158 requires an employer to
measure the funded status of each of its plans as of the date of its year-end
statement of financial position.  The Company adopted the recognition and
disclosure provisions of SFAS 158 in fiscal year 2007.  The
measurement date provisions of SFAS 158 will be effective for the Company
beginning with its fiscal year 2009. The Company has not yet evaluated the
impact that the measurement date provisions of this standard will have on its
financial statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits
entities to measure many financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings.  SFAS 159 will be
effective for the Company beginning with its fiscal year 2009.  The Company
has not yet evaluated the impact of SFAS 159 on its financial
statements.





2.
Stock Purchase Agreement





Pursuant
to a Stock Purchase Agreement dated May 15, 2008 among Herff Jones Inc. (the
“Buyer”),Parent
Holdings and the holders of all of Parent Holdings’ equity securities (the
“Equity Holders”), the Equity Holders have agreed to sell all of the equity in
Parent Holdings to the Buyer (the “Transaction”).  The Transaction is
subject to regulatory approvals and customary closing conditions.





In
connection with the Transaction, the Company entered into arrangements with
holders of a majority in principal amount of the senior PIK notes to launch a
consent solicitation with respect to proposed amendments to the indenture
governing the senior PIK notes.  Subsequent to May 31, 2008, the
Company entered into supplemental indentures incorporating proposed amendments
to the indentures governing the 10.25% senior discount notes and the 8.25%
senior subordinated notes and launched a consent solicitation with respect to
proposed amendments to the indenture governing the senior PIK notes (see
Notes 7 and 13).





13
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


3.
Comprehensive Loss





The
following amounts were included in determining comprehensive loss for the
three and nine months ended May 31, 2008 and May 26, 2007.





For
      the three months ended
            
            
            For
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007
            
            
            May
      31, 2008
            
            
            May
      26, 2007Parent
      HoldingsNet
      income (loss)
            
            $
            18,634
            
            
            $
            15,167
            
            
            $
            (9,825
            )
            
            $
            (3,111
            )Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax of $51 and $148 for the three and nine months ended May
      31, 2008, respectively
            
            
            (73
            )
            
            
            -
            
            
            
            (223
            )
            
            
            -Total
      comprehensive income (loss)
            
            $
            18,561
            
            
            $
            15,167
            
            
            $
            (10,048
            )
            
            $
            (3,111
            )





For
      the three months ended
            
            
            For
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007
            
            
            May
      31, 2008
            
            
            May
      26, 2007Intermediate
      HoldingsNet
      income
            
            $
            19,257
            
            
            $
            18,305
            
            
            $
            5,231
            
            
            $
            8,650Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax of $51 and $148 for the three and nine months ended May
      31, 2008, respectively
            
            
            (73
            )
            
            
            -
            
            
            
            (223
            )
            
            
            -Total
      comprehensive income
            
            $
            19,184
            
            
            $
            18,305
            
            
            $
            5,008
            
            
            $
            8,650





For
      the three months ended
            
            
            For
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007
            
            
            May
      31, 2008
            
            
            May
      26, 2007AACNet
      income
            
            $
            23,538
            
            
            $
            20,758
            
            
            $
            12,560
            
            
            $
            14,249Amortization
      of net actuarial gain and prior service costs - pension and postretirement
      plans, net of tax of $51 and $148 for the three and nine months ended May
      31, 2008, respectively
            
            
            (73
            )
            
            
            -
            
            
            
            (223
            )
            
            
            -Total
      comprehensive income
            
            $
            23,465
            
            
            $
            20,758
            
            
            $
            12,337
            
            
            $
            14,249





4.
Discontinued Operations





On
October 26, 2007, the Company announced a planned shutdown of the achievement
publications segment. Operations of this segment have ceased and have been
eliminated from the ongoing operations of the Company as a result of the
shutdown.  All activities in connection with the shutdown have been
completed, and the Company will not have any significant continuing involvement
in this segment going forward.





14
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


The
results of operations of the achievement publications business are reported as
discontinued operations in the condensed consolidated statements of operations
for all periods presented.  Prior to the shutdown, the achievement
publications business was included as the Company’s achievement publications
reporting segment.  Certain shared costs that were previously
allocated to the achievement publications segment were reallocated to the
remaining continuing segments. Net sales and loss from discontinued operations
for the three and nine months ended May 31, 2008 and May 26, 2007 are as
follows:





For
      the three months ended
            
            
            For
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007
            
            
            May
      31, 2008
            
            
            May
      26, 2007Discontinued
      operations:Net
      sales
            
            $
            -
            
            
            $
            341
            
            
            $
            1,758
            
            
            $
            1,631Operating
      loss
            
            $
            (72
            )
            
            $
            (797
            )
            
            $
            (7,200
            )
            
            $
            (2,491
            )Benefit
      for income taxes
            
            
            (28
            )
            
            
            (312
            )
            
            
            (2,815
            )
            
            
            (974
            )Loss
      from discontinued operations
            
            $
            (44
            )
            
            $
            (485
            )
            
            $
            (4,385
            )
            
            $
            (1,517
            )





The
Company recognized charges of $5.5 million during the first quarter of
2008, primarily related to the write-off of the remaining carrying value of
tangible and intangible assets upon shutdown of the achievement publications
segment.  These charges are included in the loss from discontinued
operations in the condensed consolidated statements of operations and in
write-offs related to the discontinued segment in the condensed consolidated
statements of cash flows.





Also
included in loss from discontinued operations for the nine months ended May 31,
2008 are $0.7 million of costs incurred for contract termination and
employee termination costs related to the shutdown.  The accruals
related to these costs are summarized in the following table:





Contract
      Termination Costs
            
            
            Employee
      Termination Costs
            
            
            TotalBalance,
      August 25, 2007
            
            $
            -
            
            
            $
            -
            
            
            $
            -Accrued
      costs
            
            
            491
            
            
            
            246
            
            
            
            737Payments
      made
            
            
            (190
            )
            
            
            (98
            )
            
            
            (288
            )Balance,
      November 24, 2007
            
            
            301
            
            
            
            148
            
            
            
            449Payments
      made
            
            
            (301
            )
            
            
            (45
            )
            
            
            (346
            )Balance,
      February 23, 2008
            
            
            -
            
            
            
            103
            
            
            
            103Payments
      made
            
            
            -
            
            
            
            (48
            )
            
            
            (48
            )Balance,
      May 31, 2008
            
            $
            -
            
            
            $
            55
            
            
            $
            55





5.
Inventories





May
      31, 2008
            
            
            August
      25, 2007Raw
      materials
            
            $
            8,747
            
            
            $
            19,357Work
      in process
            
            
            6,702
            
            
            
            4,853Finished
      goods
            
            
            6,105
            
            
            
            7,941Less
      — reserves
            
            
            (751
            )
            
            
            (993
            )$
            20,803
            
            
            $
            31,158





The
Company’s cost of sales includes depreciation of $4.0 million and $2.7 million
for the three months ended May 31, 2008 and May 26, 2007, respectively. Cost of
sales includes depreciation of $7.7 million and $7.1 million for the nine months
ended May 31, 2008 and May 26, 2007, respectively.


15
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)





6.
Goodwill and Other Intangible Assets





Goodwill




May
      31, 2008
            
            
            August
      25, 2007Class Rings
            
            $
            67,092
            
            
            $
            67,092Yearbooks
            
            
            65,241
            
            
            
            65,241Graduation
      Products
            
            
            23,781
            
            
            
            23,781Achievement
      Publications
            
            
            -
            
            
            
            2,193Other
            
            
            14,959
            
            
            
            14,970Total
            
            $
            171,073
            
            
            $
            173,277





Other
Intangible Assets





Estimated
            Gross
            
            Accumulated
            
            NetUseful
      Life
            Asset
            
            Amortization
            
            AssetAt
      May 31, 2008Trademarks
            Indefinite
            
            $
            36,826
            
            
            $
            -
            
            
            $
            36,826Patents
            14
      to 17 years
            
            
            7,317
            
            
            
            (1,849
            )
            
            
            5,468Customer
      lists and distribution contracts
            3
      to 12 years
            
            
            97,740
            
            
            
            (40,248
            )
            
            
            57,492Total
            
            
            $
            141,883
            
            
            $
            (42,097
            )
            
            $
            99,786At
      August 25, 2007Trademarks
            Indefinite
            
            $
            37,433
            
            
            $
            -
            
            
            $
            37,433Patents
            14
      to 17 years
            
            
            7,317
            
            
            
            (1,516
            )
            
            
            5,801Customer
      lists and distribution contracts
            3
      to 12 years
            
            
            102,968
            
            
            
            (38,347
            )
            
            
            64,621Total
            
            
            $
            147,718
            
            
            $
            (39,863
            )
            
            $
            107,855





Upon
shutdown of the achievement publications segment during the first quarter of
2008, the Company wrote off trademarks of $260 and customer lists of $5,828 and
associated accumulated amortization of $5,828 related to the discontinued
segment.





Total
amortization on other intangible assets was $3,153 and $8,407 for the three and
nine months ended May 31, 2008, respectively, and was $2,693 and $8,625 for the
three and nine months ended May 26, 2007, respectively, which is recorded as
selling, general and administrative expenses. Estimated annual amortization
expense is $11,195 for 2008, $10,249 for the years 2009 through 2011 and $9,816
for the year 2012.





16
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


7.
Long-term Debt




May
      31, 2008
            
            
            August
      25, 2007Parent HoldingsSenior
      PIK notes due October 1, 2012 (including $46,142 and $25,844 PIK interest,
      respectively)
            
            $
            196,142
            
            
            $
            175,84410.25%
      Senior discount notes due October 1, 2012 (net of unamortized discount of
      $4,277 and $13,646, respectively)
            
            
            127,223
            
            
            
            117,8548.25%
      Senior subordinated notes due April 1, 2012
            
            
            150,000
            
            
            
            150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
            
            
            -
            
            
            
            7,805Term
      loan due 2011
            
            
            75,682
            
            
            
            87,077Total
            
            
            549,047
            
            
            
            538,580Less
      current portion of long-term debt
            
            
            (841
            )
            
            
            (900
            )Total
      long-term debt
            
            $
            548,206
            
            
            $
            537,680






May
      31, 2008
            
            
            August
      25, 2007Intermediate
      Holdings10.25%
      Senior discount notes due October 1, 2012 (net of unamortized discount of
      $4,277 and $13,646, respectively)
            
            $
            127,223
            
            
            $
            117,8548.25%
      Senior subordinated notes due April 1, 2012
            
            
            150,000
            
            
            
            150,000Senior
      secured credit facility:Revolving
      credit facility due 2010
            
            
            -
            
            
            
            7,805Term
      loan due 2011
            
            
            75,682
            
            
            
            87,077Total
            
            
            352,905
            
            
            
            362,736Less
      current portion of long-term debt
            
            
            (841
            )
            
            
            (900
            )Total
      long-term debt
            
            $
            352,064
            
            
            $
            361,836






May
      31, 2008
              
              
              August
      25, 2007
 AAC8.25%
      Senior subordinated notes due April 1, 2012
              
              $
              150,000
              
              
              $
              150,000Senior
      secured credit facilityRevolving
      credit facility due 2010
              
              
              -
              
              
              
              7,805Term
      loan due 2011
              
              
              75,682
              
              
              
              87,077Total
              
              
              225,682
              
              
              
              244,882Less
      current portion of long-term debt
              
              
              (841
              )
              
              
              (900
              )Total
      long-term debt
              
              $
              224,841
              
              
              $
              243,982




17
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


In
connection with the Transaction, Parent Holdings has entered into arrangements
with holders of a majority in principal amount of the senior PIK notes to launch
a consent solicitation to provide all holders with the opportunity to consent to
the following amendments to the indenture governing the senior PIK notes: (i) an
amendment requiring Parent Holdings, upon consummation of the Transaction, to
redeem at a price of 101% the senior PIK notes held by any holder that timely
consents to the proposed amendments and (ii) an amendment, effective promptly
following the completion of the consent solicitation, to remove substantially
all of the restrictive and reporting covenants under the indenture for the
senior PIK notes.  The covenant removal would remain effective for
non-consenting notes even if the Transaction has not closed.  A
majority of the holders have already consented to these proposed amendments,
providing sufficient consents to approve such amendments.





Subsequent
to May 31, 2008, Intermediate Holdings and AAC entered into supplemental
indentures incorporating proposed amendments to the indentures governing the
10.25% senior discount notes and the 8.25% senior subordinated notes,
respectively, and Parent Holdings launched a consent solicitation with respect
to proposed amendments to the indenture governing the senior PIK notes (see
Note 13).





During
the nine months ended May 31, 2008, the Company paid down $11.4 million of the
term loan of the Amended Senior Credit Facility, of which approximately $0.9
were mandatory payments.





Availability
under the revolving credit facility is restricted to a total revolving
commitment of $40 million as defined in the credit agreement governing the
Amended Senior Credit Facility. Availability under the revolving credit facility
as of May 31, 2008 was approximately $38.2 million with $1.8 million in letters
of credit outstanding.





The
following table presents the amount of interest income included in interest
expense, net, for the three and nine months ended May 31, 2008 and May 26,
2007:





For
      the three months ended
            
            
            For
      the nine months endedMay
      31, 2008
            
            
            May
      26, 2007
            
            
            May
      31, 2008
            
            
            May
      26, 2007Parent
      Holdings
            
            $
            145
            
            
            $
            154
            
            
            $
            499
            
            
            $
            432Intermediate
      Holdings
            
            
            143
            
            
            
            151
            
            
            
            491
            
            
            
            420AAC
            
            
            140
            
            
            
            145
            
            
            
            475
            
            
            
            402





8.
Commitments and Contingencies





Pending
Litigation





The
Company is not a party to any pending legal proceedings other than ordinary
routine litigation incidental to its business. In management’s opinion, adverse
decisions on these ordinary legal proceedings, individually or in the aggregate,
would not have a materially adverse impact on the Company’s results of
operations, financial condition or cash flows.





Gold
Consignment Agreement





Under the
Company’s gold consignment financing arrangement, the Company has the ability to
have on consignment the lowest of the dollar value of 27,000 troy ounces of
gold, $14.2 million or a borrowing base, determined based upon a percentage of
gold located at the Company’s facilities and other approved locations, as
specified by the agreement.  Under the terms of the consignment
arrangement, the Company does not own the consigned gold nor does it have risk
of loss related to price variation on such inventory until the Company pays the
supplier for quantities purchased.  Accordingly, the Company does not
include the value of consigned gold in its inventory or the corresponding
liability for financial statement purposes.  As of May 31, 2008, the
Company held consigned gold valued at $4.9 million, while at August 25, 2007,
the Company held no gold on consignment.  The gold consignment
agreement does not have a stated period and it can be terminated by either party
upon 60 days written notice.





Plant
Closure





During
the third quarter of fiscal 2008, management revised its estimated future cash
flows for the San Angelo, Texas operating lease, which is no longer in use by
the Company.  The revision was based on a change in timing and amount
of the estimated sublease rentals that can reasonably be obtained in the current
market.  The cumulative effect of this change resulted in a reduction
of expense of $222, which was recorded in cost of sales. The consolidated
balance sheets as of May 31, 2008 and August 25, 2007 reflect a current
liability of $578 and $593 and a long-term liability of $158 and $368, included
in accrued liabilities and other long-term liabilities,
respectively.





18
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


9.
Income Taxes





As part
of the process of preparing consolidated financial statements, we must assess
the likelihood that our deferred income tax assets will be recovered through
future taxable income.  To the extent we believe that recovery is not
likely, a valuation allowance must be established.  Significant management
judgment is required in determining any valuation allowance recorded against net
deferred income tax assets.  Based on our estimates of taxable income in
each jurisdiction in which we operate and the period over which deferred income
tax assets will be recoverable, we have not recorded a valuation allowance as of
May 31, 2008 or August 25, 2007.  In the event that actual results differ
from these estimates or we make adjustments to these estimates in future
periods, we may need to establish a valuation allowance.  All tax years
after 2003 are open to examination.





In July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (“FIN 48”), which prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. In addition, FIN 48 provides guidance on derecognition,
classification, accounting in interim periods and disclosure requirements for
uncertain tax positions. The accounting provisions of FIN 48 are effective
for the Company beginning with its fiscal year 2008. As a result of the adoption
of FIN 48 on August 26, 2007 and as of May 31, 2008, no material
adjustments to the Company’s financial statements were required.





10.
Postretirement Pension and Medical Benefits





Commemorative
Brands, Inc. (“CBI”) provides certain healthcare and life insurance benefits for
former employees of L.G. Balfour Company, Inc. (“CBI Plan”). Certain hourly
employees of Taylor Publishing Company are covered under its defined benefit
pension plan (“TPC Plan”). The benefits under the CBI Plan and TPC Plan are
based primarily on the employees’ years of service and compensation near
retirement. The funding policies for these plans are consistent with the funding
requirements of federal laws and regulations.





In
September 2006, the FASB issued SFAS 158, which requires an employer
to recognize the funded status of defined benefit postretirement plan as an
asset or liability in the balance sheet and to recognize changes in that funded
status in the year in which changes occur through comprehensive income.
Additionally, SFAS 158 requires an employer to measure the funded status of each
of its plans as of the date of its year-end statement of financial position.
 The Company adopted the recognition and disclosure provisions of SFAS 158
in fiscal year 2007.  The measurement date provisions of SFAS 158 will
be effective for the Company beginning with its fiscal year 2009.





For
fiscal 2007, the measurement date for the CBI Plan was August 25, 2007, and the
measurement date for the TPC Plan was June 30, 2007.  The Company will
use a measurement date as of the end of its fiscal year for both plans on or
before fiscal 2009.





19
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


The net
periodic postretirement benefit cost includes the following
components:




For
      the three months ended
            
            For
      the three months endedMay
      31, 2008
            
            May
      26, 2007TPC
      Plan
            
            CBI
      Plan
            
            TPC
      Plan
            
            CBI
      PlanService
      costs, benefits attributed to service during the period
            
            $
            21
            
            
            $
            -
            
            
            $
            20
            
            
            $
            -Interest
      cost
            
            
            229
            
            
            
            27
            
            
            
            225
            
            
            
            27Expected
      return on assets
            
            
            (292
            )
            
            
            -
            
            
            
            (247
            )
            
            
            -Amortization
      of unrecognized net gain
            
            
            (9
            )
            
            
            (77
            )
            
            
            -
            
            
            
            (88
            )Amortization
      of unrecognized net prior service costs
            
            
            -
            
            
            
            (38
            )
            
            
            -
            
            
            
            (37
            )Net
      periodic postretirement benefit income
            
            $
            (51
            )
            
            $
            (88
            )
            
            $
            (2
            )
            
            $
            (98
            )For
      the nine months ended
            
            For
      the nine months endedMay
      31, 2008
            
            May
      26, 2007TPC
      Plan
            
            CBI
      Plan
            
            TPC
      Plan
            
            CBI
      PlanService
      costs, benefits attributed to service during the period
            
            $
            65
            
            
            $
            -
            
            
            $
            60
            
            
            $
            -Interest
      cost
            
            
            686
            
            
            
            81
            
            
            
            675
            
            
            
            81Expected
      return on assets
            
            
            (876
            )
            
            
            -
            
            
            
            (741
            )
            
            
            -Amortization
      of unrecognized net gain
            
            
            (27
            )
            
            
            (232
            )
            
            
            -
            
            
            
            (264
            )Amortization
      of unrecognized net prior service costs
            
            
            -
            
            
            
            (112
            )
            
            
            -
            
            
            
            (111
            )Net
      periodic postretirement benefit income
            
            $
            (152
            )
            
            $
            (263
            )
            
            $
            (6
            )
            
            $
            (294
            )





Amounts
recognized in other comprehensive income consist of:





For
      the three months ended May 31, 2008
            
            For
      the three months ended May 26, 2007TPC
      Plan
            
            
            CBI
      Plan
            
            
            TPC
      Plan
            
            
            CBI
      PlanNet
      gain
            
            $
            (9
            )
            
            $
            (77
            )
            
            
            n/a
            
            
            
            n/aPrior
      service cost
            
            
            -
            
            
            
            (38
            )
            
            
            n/a
            
            
            
            n/a$
            (9
            )
            
            $
            (115
            )For
      the nine months ended May 31, 2008
            
            For
      the nine months ended May 26, 2007TPC
      Plan
            
            
            CBI
      Plan
            
            
            TPC
      Plan
            
            
            CBI
      PlanNet
      gain
            
            $
            (27
            )
            
            $
            (232
            )
            
            
            n/a
            
            
            
            n/aPrior
      service cost
            
            
            -
            
            
            
            (112
            )
            
            
            n/a
            
            
            
            n/a$
            (27
            )
            
            $
            (344
            )





The
estimated net gain for the TPC Plan that will be amortized from accumulated
other comprehensive income into net periodic benefit cost during fiscal year
2008 is $36.  The estimated net gain and estimated prior service
credit for the CBI Plan that will be amortized from accumulated other income
into net periodic postretirement benefit cost during fiscal year 2008 are $310
and $149, respectively.





11.
Related-Party Transactions





On
March 25, 2004, AAC entered into a management agreement with an affiliate
of Fenway Partners pursuant to which AAC, among other things, agreed to pay such
affiliate an annual fee equal to the greater of $3.0 million or 5% of the
previous fiscal year’s EBITDA (as defined in the agreement). Amounts paid by the
Company under the management agreement totaled $850 and $2,549 for the three and
nine months ended May 31, 2008, respectively and $916 and $2,748 for the three
and nine months ended May 26, 2007, respectively.





As of May
31, 2008 and August 25, 2007, the Company had prepaid management fees of
approximately $204 and $250, respectively.





20
 Index
 AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.
 AAC
GROUP HOLDING CORP.
 AMERICAN
ACHIEVEMENT CORPORATION
 Notes to
Condensed Consolidated Financial Statements
 (Dollars
in thousands, unless otherwise stated)
 (unaudited)


12.
Business Segments
 
 The
Company is a manufacturer and supplier of class rings, yearbooks
and other graduation-related scholastic products for the high school and college
markets and of recognition products, such as letter jackets, and affinity
jewelry designed to commemorate significant events, achievements and
affiliations. The Company markets its products and services primarily in
the United States and operates in four reporting segments: class rings,
yearbooks, graduation products and other.


The
Company’s operating segments, on campus class rings and retail class rings, have
been aggregated into one reporting segment, class rings, in accordance with
paragraph 26.a. of SFAS 131. The other segment consists primarily of jewelry
commemorating family events such as the birth of a child, military and fan
affinity jewelry and related products, professional sports championship rings,
commercial printing and recognition products such as letter
jackets.





As
discussed in Note 4, the achievement publications business was shut down during
the first quarter of fiscal year 2008.  This business historically was
included as an additional reporting segment.  As all of the results of
operations of the achievement publications business are included in discontinued
operations, they are not presented in the tables below.  Assets of the
achievement publications segment were $83 and $7,610 as of May 31, 2008 and
August 25, 2007, respectively. Certain shared assets and costs that were
previously allocated to the achievement publications segment were reallocated to
the remaining continuing segments.





During
the third quarter of fiscal year 2008, Parent Holdings incurred certain costs
related to the Transaction, which are not allocated to the operating
segments.  Total unallocated costs included in Parent Holdings
operating income but not included in total segment operating income were $1,589
for the three and nine months ended May 31, 2008.








Class
            
            
            
            
            
            GraduationRings
            
            
            Yearbooks
            
            
            Products
            
            
            Other
            
            
            TotalThree
      Months Ended May 31, 2008Net
      sales
            
            $
            40,339
            
            
            $
            80,675
            
            
            $
            25,645
            
            
            $
            10,483
            
            
            $
            157,142Segment
      operating income
            
            
            4,812
            
            
            
            33,874
            
            
            
            5,961
            
            
            
            (31
            )
            
            $
            44,616Three
      Months Ended May 26, 2007Net
      sales
            
            $
            40,409
            
            
            $
            68,202
            
            
            $
            25,029
            
            
            $
            10,182
            
            
            $
            143,822Segment
      operating income
            
            
            7,266
            
            
            
            25,206
            
            
            
            6,826
            
            
            
            1,413
            
            
            $
            40,711Nine
      Months Ended May 31, 2008Net
      sales
            
            $
            105,855
            
            
            $
            92,630
            
            
            $
            44,587
            
            
            $
            26,638
            
            
            $
            269,710Segment
      operating income
            
            
            11,351
            
            
            
            25,081
            
            
            
            8,014
            
            
            
            (534
            )
            
            $
            43,912Nine
      Months Ended May 26, 2007Net
      sales
            
            $
            104,778
            
            
            $
            81,407
            
            
            $
            43,066
            
            
            $
            23,716
            
            
            $
            252,967Segment
      operating income
            
            
            15,759
            
            
            
            17,336
            
            
            
            7,809
            
            
            
            2,087
            
            
            $
            42,991







21
 Index
   Parent
      HoldingsClass
              
              
              
              
              
              GraduationRings
              
              Yearbooks
              
              Products
              
              Other
              
              TotalAs
      of May 31, 2008Segment
      assets
              
              $
              192,398
              
              
              $
              192,409
              
              
              $
              63,971
              
              
              $
              40,908
              
              
              $
              489,686As
      of August 25, 2007Segment
      assets
              
              $
              203,637
              
              
              $
              168,292
              
              
              $
              57,796
              
              
              $
              38,731
              
              
              $
              468,456


Intermediate
      HoldingsClass
            
            
            
            
            
            GraduationRings
            
            Yearbooks
            
            Products
            
            Other
            
            TotalAs
      of  May 31, 2008Segment
      assets
            
            $
            189,434
            
            
            $
            189,966
            
            
            $
            63,133
            
            
            $
            40,343
            
            
            $
            482,876As
      of August 25, 2007Segment
      assets
            
            $
            200,330
            
            
            $
            165,287
            
            
            $
            56,726
            
            
            $
            38,176
            
            
            $
            460,519





AACClass
            
            
            
            
            
            GraduationRings
            
            Yearbooks
            
            Products
            
            Other
            
            TotalAs
      of May 31, 2008Segment
      assets
            
            $
            188,350
            
            
            $
            189,072
            
            
            $
            62,826
            
            
            $
            40,136
            
            
            $
            480,384As
      of August 25, 2007Segment
      assets
            
            $
            199,160
            
            
            $
            164,223
            
            
            $
            56,347
            
            
            $
            37,979
            
            
            $
            457,709





13.
Subsequent Events





On July
9, 2008, after receiving requisite consents, Intermediate Holdings and AAC each
entered into a supplemental indenture incorporating proposed amendments to
the indentures governing the 10.25% senior discount notes and the 8.25% senior
subordinated notes, respectively.




In the
case of each supplemental indenture, the applicable amendments consist of (1) a
requirement that upon consummation of the Transaction the applicable company
shall redeem all of its outstanding notes which have delivered a valid consent
to the applicable amendments at a redemption price in cash equal to 102.8125%
and 102.3125% of the aggregate principal amount of the 10.25% senior discount
notes and the 8.25% senior subordinated notes, respectively, plus accrued and
unpaid interest, and (2) the removal of substantially all of the restrictive and
reporting covenants under the applicable indenture, as well as certain events of
default and related provisions, including without limitation, the covenant that
would otherwise require the applicable company to make an offer to purchase the
applicable notes upon consummation of the Transaction as currently provided in
the applicable indenture. The amendments will only be effective upon the
consummation of the Transaction. All
holders of the notes who delivered consents to these amendments on or prior
to July 15, 2008 are eligible to receive a consent fee equal to $5 for
each $1,000 principal amount of notes held.




On
July 11, 2008, Parent Holdings launched a consent solicitation with respect to
proposed amendments to the indenture governing the senior PIK notes.  In
connection with the Transaction, Parent Holdings entered into arrangements with
a majority of the holders of the senior PIK notes, pursuant to which the
majority holders have agreed to consent to the proposed amendments (see Note
7).


22
 Index





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





The
following discussion of our condensed consolidated financial condition and
results of operations should be read in conjunction with the information
contained in our condensed consolidated financial statements and accompanying
notes included elsewhere in this report. The condensed consolidated financial
statements and the notes thereto have been prepared in accordance with U.S.
Generally Accepted Accounting Principals. The following discussion includes
forward looking statements that involve certain risks and uncertainties. See
“Disclosure Regarding Forward Looking Statements.”





General





We are
one of the leading manufacturers and suppliers of class rings, yearbooks,
graduation products, and recognition products and affinity jewelry in the United
States. We market and sell yearbooks to the college, high school, junior high
school and elementary markets. We primarily sell our class rings and graduation
products, which include fine paper products and graduation accessories, in the
high school, college and junior high school markets. We also sell jewelry
commemorating family events such as the birth of a child, military and fan
affinity jewelry and related products, professional sports championship rings,
commercial printing and recognition products such as letter
jackets.





As fully
described under the “Significant Developments” section of Management’s
Discussion and Analysis of Financial Condition and Results of Operations, on
October 26, 2007, the Company decided to shut down the operations of its
achievement publications segment, which produced, marketed and sold publications
that recognize the achievements of top students at the high school and college
levels, as well as the nation’s most inspiring teachers.  All shutdown
activities were complete as of May 31, 2008.





Our
ability to meet our debt service and other obligations depends in significant
part on how successful we are in maintaining our core businesses and further
implementing our business strategy. Our business plan envisions several
long-term growth initiatives, including the development of new products. The
components of our strategy are subject to significant business, economic and
competitive uncertainties and contingencies.





Numerous
raw materials are used in the manufacture of our products. Gold and other
metals, precious, semiprecious and synthetic stones, paper products and ink
comprise the bulk of the raw materials we utilize in the largest segments of our
business. Prices of these materials, especially gold, continually fluctuate. We
purchase a majority of our gold from a single supplier, through our existing
gold consignment agreement. We may consign a portion of our gold and pay for
gold as our products are shipped to customers. We also purchase the majority of
our semi-precious and synthetic stones from a single supplier in Germany. The
prices for these stone purchases are denominated in Euros. We generally are able
to pass on price increases in gold and stones to our customers as such increases
are realized by us, however, this may not always be the case.




We face competition for
most of our principal products. While the class ring, graduation
products and yearbook markets were once highly concentrated and consisted
primarily of a few national manufacturers (of which we were one) advances in
technology and the emergence of international manufacturing have significantly
lowered the costs of entry. Major domestic mass merchant and jewelry chain
retailers now effectively compete in the class ring business and the traditional
yearbook and graduation products businesses now face considerable
competition from regional and local printers and internet-based purveyors of
yearbook and alternative web-based virtual products. Competition from
alternative sales channels is robust in virtually all market
categories.


We
experience seasonal fluctuations in our net sales tied primarily to the school
year. We recorded 46% of our fiscal year 2007 net sales in our third quarter.
Class ring sales are highest during October through December and early spring,
with many orders made for delivery to students before the winter holiday season.
Graduation product sales are predominantly made during February through April
prior to the April through June graduation season. Yearbook sales are highest
during the months of April through June, as yearbooks are typically shipped
prior to each school’s summer break. Our recognition and affinity product line
sales are seasonal. The recognition and affinity product line sales are highest
during the winter holiday season and in the period leading up to Mother’s Day.
We have experienced operating losses during our first and fourth fiscal
quarters, which includes the beginning of the school year and the summer months
when school is not in session, thus reducing related shipment of products. In
addition, our working capital requirements tend to exceed our operating cash
flows from May through September.





We also
have exposure to market risk relating to changes in interest rates on our
variable rate debt. Our senior secured credit facility (revolver and term loan)
and existing gold consignment agreement are variable rate
arrangements.





Historically,
growth in the class rings, yearbooks and graduation products market has been
driven primarily by demographics. The U.S. Department of Education projects that
the number of high school and college graduates will increase by an average of
6% and 22% nationally, respectively, over the time period from 2003 to 2016.
Additionally, the U.S. Census Bureau projects that the total U.S. population
will increase by 6% over the time period from 2007 to 2015. Both the increased
population, and the increased number of high school and college graduates should
expand the market for our products.


23
 Index


Company Background





Our
business was founded when the operations of ArtCarved, which were previously
owned by CJC Holdings, Inc., and the operations of Balfour, which were
previously owned by L.G. Balfour Company, Inc., were combined through various
asset purchase agreements in December 1996. AAC (formerly known as CBI
Holding Corp) was formed in June 2000 to serve as a holding company for
these operations as well as any future acquisitions. In June 2000, we acquired
the Taylor Senior Holding Company, the parent company of Taylor Publishing
Company (“Taylor”), whose primary business is designing and printing student
yearbooks. In July 2002, AAC acquired all the outstanding stock and
warrants of Milestone Marketing, a marketer of class rings and other graduation
products to the college market. In January 2004, AAC acquired C-B
Graduation Announcements, a marketer of graduation products to the college
market.  In April 2007, Commemorative Brands, Inc. (“CBI”), a wholly-owned
subsidiary of AAC, acquired all of the outstanding stock of BFJ Holdings, Inc.
and its wholly owned subsidiary, Powers Embroidery, Inc. (“Powers”), which
companies were immediately merged into and became an operating division of CBI.
Powers is a producer of quality letter jackets, chenille patches and other
school spirit embroidery merchandise and is located in Waco, Texas.





Basis
of Presentation





We
present financial information relating to Parent Holdings, Intermediate Holdings
and AAC and its subsidiaries in this discussion and analysis.  Parent
Holdings owns 100% of the shares of common stock of Intermediate
Holdings.  Intermediate Holdings owns 100% of the shares of common
stock of AAC Holding Corp., which is the holder of 100% of the shares of common
stock of AAC.





Other
than costs related to the Transaction (defined below), the series A
preferred stock, debt obligations, related deferred debt issuance costs,
associated accrued liabilities and related interest expense, net of taxes, all
other assets, liabilities, income, expenses and cash flows presented for all
periods represent those of Parent Holdings and Intermediate Holdings’
wholly-owned indirect subsidiary AAC and the direct and indirect subsidiaries of
AAC. Intermediate Holdings’ only direct subsidiary is AAC Holding Corp., whose
sole asset is the stock of AAC. AAC, Intermediate Holdings and Parent Holdings
are treated as entities under common control.





The
Company uses a 52/53-week fiscal year ending on the last Saturday of
August.





Significant
Developments





Stock Purchase
Agreement.Pursuant to a Stock Purchase Agreement dated May
15, 2008 among Herff Jones Inc. (the “Buyer”),Parent Holdings and the
holders of all of Parent Holdings’ equity securities (the “Equity Holders”), the
Equity Holders have agreed to sell all of the equity in Parent Holdings to the
Buyer (the “Transaction”).  The Transaction is subject to regulatory
approvals and customary closing conditions.





In
connection with the Transaction, Parent Holdings has entered into arrangements
with a holders of a majority in principal amount of the senior PIK notes to
launch a consent solicitation to provide all holders with the opportunity to
consent to the following amendments to the indenture governing the senior PIK
notes: (i) an amendment requiring Parent Holdings, upon consummation of the
Transaction, to redeem at a price of 101% the senior PIK notes held by any
holder that timely consents to the proposed amendments and (ii) an amendment,
effective promptly following the completion of the consent solicitation, to
remove substantially all of the restrictive and reporting covenants under the
indenture for the senior PIK notes.  The covenant removal would remain
effective for non-consenting notes even if the Transaction has not
closed.  A majority of the holders have already consented to these
proposed amendments, providing sufficient consents to approve such
amendments.  On July 11, 2008, Parent Holdings launched the consent
solicitation with respect to these proposed amendments to the indenture
governing the senior PIK notes.





On July
9, 2008, after receiving requisite consents, Intermediate Holdings and AAC each
entered into a supplemental indenture incorporating proposed amendments to
the indentures governing the 10.25% senior discount notes and the 8.25% senior
subordinated notes, respectively.





In the
case of each supplemental indenture, the applicable amendments consist of (1) a
requirement that upon consummation of the Transaction the applicable company
shall redeem all of its outstanding notes which have delivered a valid consent
to the applicable amendments at a redemption price in cash equal to 102.8125%
and 102.3125% of the aggregate principal amount of the 10.25% senior discount
notes and the 8.25% senior subordinated notes, respectively, plus accrued and
unpaid interest, and (2) the removal of substantially all of the restrictive and
reporting covenants under the applicable indenture, as well as certain events of
default and related provisions, including without limitation, the covenant that
would otherwise require the applicable company to make an offer to purchase the
applicable notes upon consummation of the Transaction as currently provided in
the applicable indenture. The amendments will only be effective upon the
consummation of the Transaction. All
holders of the notes who delivered consents to these amendments on or prior
to July 15, 2008 are eligible to receive a consent fee equal to $5 for
each $1,000 principal amount of notes held.





Discontinued
Operations.In the first quarter of fiscal 2008, we recorded
charges of approximately $5.5 million primarily related to the write-off of the
remaining carrying value of tangible and intangible assets of the achievement
publications segment and incurred approximately $0.7 million related to contract
termination and employee severance costs as a consequence of the decision
in October 2007 to shutdown the achievement publications business. These charges
are included in loss from discontinued operations for the nine months ended May
31, 2008 in the accompanying condensed consolidated statements of
operations.




The
results of operations of the achievement publications business are reported as
discontinued operations in the condensed consolidated income statements for all
periods presented.


24
 Index





Results
of Operations





Three
Months Ended May 31, 2008 Compared to Three Months Ended May 26,
2007





The
following tables set forth selected information for Parent Holdings,
Intermediate Holdings, and AAC from our condensed consolidated statements of
operations expressed on an actual basis and as a percentage of net
sales:





Parent
      HoldingsFor
      the Three
            
            
            %
      of
            
            
            For
      the Three
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            
            Months
      Ended
            
            
            NetMay
      31, 2008
            
            
            Sales
            
            
            May
      26, 2007
            
            
            SalesNet
      sales
            
            $
            157,142
            
            
            
            100.0
            %
            
            $
            143,822
            
            
            
            100.0
            %Cost
      of sales
            
            
            62,432
            
            
            
            39.7
            %
            
            
            56,994
            
            
            
            39.6
            %Gross
      profit
            
            
            94,710
            
            
            
            60.3
            %
            
            
            86,828
            
            
            
            60.4
            %Selling,
      general and administrative expenses
            
            
            51,683
            
            
            
            32.9
            %
            
            
            46,117
            
            
            
            32.1
            %Operating
      income
            
            
            43,027
            
            
            
            27.4
            %
            
            
            40,711
            
            
            
            28.3
            %Interest
      expense, net
            
            
            16,972
            
            
            
            10.8
            %
            
            
            15,611
            
            
            
            10.8
            %Income
      before income taxes
            
            
            26,055
            
            
            
            16.6
            %
            
            
            25,100
            
            
            
            17.5
            %Provision
      for income taxes
            
            
            7,377
            
            
            
            4.7
            %
            
            
            9,448
            
            
            
            6.6
            %Income
      from continuing operations
            
            
            18,678
            
            
            
            11.9
            %
            
            
            15,652
            
            
            
            10.9
            %Discontinued
      operations:Loss
      from discontinued segment
            
            
            (72)
            
            
            
            -
            %
            
            
            (797)
            
            
            
            (0.6)
            %Benefit
      for income taxes
            
            
            (28)
            
            
            
            -
            %
            
            
            (312)
            
            
            
            (0.2)
            %Loss
      from discontinued operations
            
            
            (44)
            
            
            
            -
            %
            
            
            (485)
            
            
            
            (0.4)
            %Net
      income
            
            $
            18,634
            
            
            
            11.9
            %
            
            $
            15,167
            
            
            
            10.5
            %





Intermediate
      HoldingsFor
      the Three
            
            
            %
      of
            
            
            For
      the Three
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            
            Months
      Ended
            
            
            NetMay
      31, 2008
            
            
            Sales
            
            
            May
      26, 2007
            
            
            SalesNet
      sales
            
            $
            157,142
            
            
            
            100.0
            %
            
            $
            143,822
            
            
            
            100.0
            %Cost
      of sales
            
            
            62,432
            
            
            
            39.7
            %
            
            
            56,994
            
            
            
            39.6
            %Gross
      profit
            
            
            94,710
            
            
            
            60.3
            %
            
            
            86,828
            
            
            
            60.4
            %Selling,
      general and administrative expenses
            
            
            50,094
            
            
            
            31.9
            %
            
            
            46,117
            
            
            
            32.1
            %Operating
      income
            
            
            44,616
            
            
            
            28.4
            %
            
            
            40,711
            
            
            
            28.3
            %Interest
      expense, net
            
            
            8,469
            
            
            
            5.4
            %
            
            
            8,558
            
            
            
            5.9
            %Income
      before income taxes
            
            
            36,147
            
            
            
            23.0
            %
            
            
            32,153
            
            
            
            22.4
            %Provision
      for income taxes
            
            
            16,846
            
            
            
            10.7
            %
            
            
            13,363
            
            
            
            9.3
            %Income
      from continuing operations
            
            
            19,301
            
            
            
            12.3
            %
            
            
            18,790
            
            
            
            13.1
            %Discontinued
      operations:Loss
      from discontinued segment
            
            
            (72)
            
            
            
            -
            %
            
            
            (797)
            
            
            
            (0.6)
            %Benefit
      for income taxes
            
            
            (28)
            
            
            
            -
            %
            
            
            (312)
            
            
            
            (0.2)
            %Loss
      from discontinued operations
            
            
            (44)
            
            
            
            -
            %
            
            
            (485)
            
            
            
            (0.4)
            %Net
      income
            
            $
            19,257
            
            
            
            12.3
            %
            
            $
            18,305
            
            
            
            12.7
            %


25
 Index





AACFor
      the Three
            
            
            %
      of
            
            
            For
      the Three
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            
            Months
      Ended
            
            
            NetMay
      31, 2008
            
            
            Sales
            
            
            May
      26, 2007
            
            
            SalesNet
      sales
            
            $
            157,142
            
            
            
            100.0
            %
            
            $
            143,822
            
            
            
            100.0
            %Cost
      of sales
            
            
            62,432
            
            
            
            39.7
            %
            
            
            56,994
            
            
            
            39.6
            %Gross
      profit
            
            
            94,710
            
            
            
            60.3
            %
            
            
            86,828
            
            
            
            60.4
            %Selling,
      general and administrative expenses
            
            
            50,094
            
            
            
            31.9
            %
            
            
            46,117
            
            
            
            32.1
            %Operating
      income
            
            
            44,616
            
            
            
            28.4
            %
            
            
            40,711
            
            
            
            28.3
            %Interest
      expense, net
            
            
            5,022
            
            
            
            3.2
            %
            
            
            5,622
            
            
            
            3.9
            %Income
      before income taxes
            
            
            39,594
            
            
            
            25.2
            %
            
            
            35,089
            
            
            
            24.4
            %Provision
      for income taxes
            
            
            16,012
            
            
            
            10.2
            %
            
            
            13,846
            
            
            
            9.6
            %Income
      from continuing operations
            
            
            23,582
            
            
            
            15.0
            %
            
            
            21,243
            
            
            
            14.8
            %Discontinued
      operations:Loss
      from discontinued segment
            
            
            (72)
            
            
            
            -
            %
            
            
            (797)
            
            
            
            (0.6)
            %Benefit
      for income taxes
            
            
            (28)
            
            
            
            -
            %
            
            
            (312)
            
            
            
            (0.2)
            %Loss
      from discontinued operations
            
            
            (44)
            
            
            
            -
            %
            
            
            (485)
            
            
            
            (0.4)
            %Net
      income
            
            $
            23,538
            
            
            
            15.0
            %
            
            $
            20,758
            
            
            
            14.4
            %




The
company uses a 52/53 week fiscal year. Fiscal year 2008 will consist of 53
weeks, whereas fiscal year 2007 consisted of 52 weeks. The additional week is
included in the third quarter of fiscal year 2008; therefore the three month
period ended May 31, 2008 consisted of fourteen weeks as compared to the three
month period ended May 26, 2007, which consisted of thirteen weeks. As a result,
the current reporting period reflects an extra week of net sales, expenses and
operating income as compared to the same period of last year.
  Net
Sales.Net sales
consist of product sales and are net of product returns and promotional
discounts. Net sales increased $13.3 million, or 9.2%, to $157.1 million
for the three months ended May 31, 2008 from $143.8 million for the three
months ended May 26, 2007. The following details the changes in net sales during
such periods by business segment.





Class Rings.Net sales
decreased $0.1 million to $40.3 million for the three months ended May
31, 2008 from $40.4 million for the three months ended May 26, 2007. Net sales
was impacted by the continued decline in retail class ring sales due to softness
in the retail market partially offset by higher on-campus average sales
price.





Yearbooks.Net sales
increased $12.5 million to $80.7 million for the three months ended
May 31, 2008 from $68.2 million for the three months ended May 26, 2007.
The
increase in net sales was primarily the result of higher shipments in the third
quarter of 2008 compared to 2007 resulting from timing of yearbook shipments
between the third and fourth quarters of 2008.  Graduation Products.Net
sales increased $0.6 million to $25.6 million for the three months ended
May 31, 2008 from $25.0 million for the three months ended May 26,
2007.  The increase is primarily due to an increase in high school
graduation products and diplomas, partially
offset by a decrease due to higher shipments in the third quarter of 2007
resulting from timing between the second and third quarters of
2007.  Other.Net sales increased
$0.3 million to $10.5 million for the three months ended May 31, 2008
from $10.2 million for the three months ended May 26, 2007. The increase in
net sales was primarily related to the acquisition of Powers in April 2007, an
increase in the sale of commercial and fine books and an increase in military
affinity rings, partially offset by a decrease in sales of other recognition and
affinity rings and licensing revenue.





Gross
Profit.Gross
margin represents gross profit as a percentage of net sales. Gross margin was
60.3% for the three months ended May 31, 2008, a 0.1 percentage point
decrease from 60.4% for the three months ended May 26, 2007. Overall, gross
profit increased $7.9 million. The increase in gross profit was a result
of an increase in yearbook sales, higher sales of commercial and fine
books, and the Powers acquisition, partially offset by lower sales in retail
class rings and recognition and affinity rings, the unfavorable exchange impact
on Euro denominated stone purchases and an increase in labor and other
manufacturing costs in the jewelry plant mainly related to productivity
projects.





Selling, General
and Administrative Expenses.Selling, general and
administrative expenses for Intermediate Holdings and AAC increased
$4.0 million, or 8.7%, to $50.1 million for the three months ended May
31, 2008 from $46.1 million for the three months ended May 26, 2007.
Included in selling, general and administrative expenses are two sub-categories:
selling and marketing expenses and general and administrative
expenses.





Selling
and marketing expenses increased $1.9 million to $38.0 million or
24.2% of net sales for the three months ended May 31, 2008 from
$36.1 million or 25.1% of net sales for the three months ended May 26,
2007, mainly due to the increased commissions directly related to the sales
increase of yearbooks, graduation products, and military affinity
jewelry.




26
 Index


General
and administrative expenses for the three months ended May 31, 2008 were $12.1
million, or 7.7% of net sales as compared to $10.0 million, or 7.0% of net sales
for the three months ended May 26, 2007. The increase in general and administrative
expenses of $2.1 million was primarily the result of the acquisition of Powers
in April 2007, increases of employee headcount, increases in other
administrative expenses and increases in consulting and other professional
fees. 
 For
Parent Holdings, selling, general and administrative expenses for the three
months ended May 31, 2008 also include $1.6 million of costs incurred in
connection with the Transaction.
 Operating
Income.As
a result of the foregoing, operating income for Intermediate Holdings and AAC
was $44.6 million ($43.0 million for Parent Holdings as a result of costs
related to the Transaction), or 28.4% of net sales for the three months ended
May 31, 2008 as compared with operating income of $40.7 million, or 28.3%
of net sales, for the three months ended May 26, 2007. The class rings segment
reported operating income of $4.8 million for the three months ended May
31, 2008 as compared with operating income of $7.3 million for the three
months ended May 26, 2007. The yearbooks segment reported operating income of
$33.9 million for the three months ended May 31, 2008 as compared with
operating income of $25.2 million for the three months ended May 26, 2007. The
graduation products segment reported operating income of $6.0 million for
the three months ended May 31, 2008 as compared with operating income of
$6.8 million for the three months ended May 26, 2007. The other segment
reported an operating loss of $0.1 million for the three months ended May 31,
2008 as compared with operating income of $1.4 million for the three months
ended May 26, 2007.





Interest Expense,
Net.For
Parent Holdings, net interest expense was $17.0 million for the three
months ended May 31, 2008 and $15.6 million for the three months ended May 26,
2007. The average debt outstanding of Parent Holdings for the three months ended
May 31, 2008 and the three months ended May 26, 2007 was $549 million and
$533 million, respectively. The weighted average interest rate on debt
outstanding of Parent Holdings for the three months ended May 31, 2008 and the
three months ended May 26, 2007 was 10.7% and 10.9%, respectively.





For
Intermediate Holdings, net interest expense was $8.5 million for the three
months ended May 31, 2008 and $8.6 million for the three months ended May
26, 2007. The average debt outstanding of Intermediate Holdings for the three
months ended May 31, 2008 and the three months ended May 26, 2007 was
$349 million and $359 million, respectively. The weighted average
interest rate on debt outstanding of Intermediate Holdings for the three months
ended May 31, 2008 and the three months ended May 26, 2007 was 8.4% and
9.0%, respectively.





For AAC,
net interest expense was $5.0 million for the three months ended May 31,
2008 and $5.6 million for the three months ended May 26, 2007. The average
debt outstanding of AAC for the three months ended May 31, 2008 and the three
months ended May 26, 2007 was $227 million and $245 million, respectively.
The weighted average interest rate on debt outstanding of AAC for the three
months ended May 31, 2008 and the three months ended May 26, 2007 was 7.5% and
8.5%, respectively.





Provision for
IncomeTaxes.For the three months ended
May 31, 2008 and the three months ended May 26, 2007, Parent Holdings recorded
an income tax provision of $7.4 million and $9.4 million, respectively,
which represents an effective tax rate of 28% and 38%,
respectively.  The effective tax rates vary from the statutory federal
rate due to the impact of state income taxes and the non-deductibility of a
portion of interest on high-yield debt.





For the
three months ended May 31, 2008 and the three months ended May 26, 2007,
Intermediate Holdings recorded an income tax provision of $16.8 million and
$13.4 million, respectively, which represents an effective tax rate of 47%
and 42%, respectively. The effective tax rates vary from the statutory federal
rate due to the impact of state income taxes and the non-deductibility of a
portion of interest on high-yield debt.





For the
three months ended May 31, 2008 and the three months ended May 26, 2007, AAC
recorded an income tax provision of $16.0 million and $13.8 million,
respectively, which represents an effective tax rate of 40% and 39%,
respectively.




Loss from
Discontinued Operations.  As described in “Significant
Developments,” the results of operations of the achievement publications
business are reported as discontinued operations.  Loss from
discontinued operations before income taxes during the three months ended May
31, 2008 and May 26, 2007 was $0.1 million and $0.8 million.





27
 Index


Nine
months Ended May 31, 2008 Compared to Nine months Ended May 26,
2007





The
following tables set forth selected information for Parent Holdings,
Intermediate Holdings, and AAC from our condensed consolidated statements of
operations expressed on an actual basis and as a percentage of net
sales:





Parent
      HoldingsFor
      the Nine
            
            
            %
      of
            
            
            For
      the Nine
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            
            Months
      Ended
            
            
            NetMay
      31, 2008
            
            
            Sales
            
            
            May
      26, 2007
            
            
            SalesNet
      sales
            
            $
            269,710
            
            
            
            100.0
            %
            
            $
            252,967
            
            
            
            100.0
            %Cost
      of sales
            
            
            114,614
            
            
            
            42.5
            %
            
            
            105,645
            
            
            
            41.8
            %Gross
      profit
            
            
            155,096
            
            
            
            57.5
            %
            
            
            147,322
            
            
            
            58.2
            %Selling,
      general and administrative expenses
            
            
            112,773
            
            
            
            41.8
            %
            
            
            104,331
            
            
            
            41.2
            %Operating
      income
            
            
            42,323
            
            
            
            15.7
            %
            
            
            42,991
            
            
            
            17.0
            %Interest
      expense, net
            
            
            48,598
            
            
            
            18.0
            %
            
            
            44,585
            
            
            
            17.6
            %Loss
      before income taxes
            
            
            (6,275)
            
            
            
            (2.3)
            %
            
            
            (1,594)
            
            
            
            (0.6)
            %Benefit
      for income taxes
            
            
            (835)
            
            
            
            (0.3)
            %
            
            
            -
            
            
            
            -
            %Loss
      from continuing operations
            
            
            (5,440)
            
            
            
            (2.0)
            %
            
            
            (1,594)
            
            
            
            (0.6)
            %Discontinued
      operations:Loss
      from discontinued segment
            
            
            (7,200)
            
            
            
            (2.6)
            %
            
            
            (2,491)
            
            
            
            (1.0)
            %Benefit
      for income taxes
            
            
            (2,815)
            
            
            
            (1.0)
            %
            
            
            (974)
            
            
            
            (0.4)
            %Loss
      from discontinued operations
            
            
            (4,385)
            
            
            
            (1.6)
            %
            
            
            (1,517)
            
            
            
            (0.6)
            %Net
      loss
            
            $
            (9,825)
            
            
            
            (3.6)
            %
            
            $
            (3,111)
            
            
            
            (1.2)
            %





Intermediate
      HoldingsFor
      the Nine
            
            
            %
      of
            
            
            For
      the Nine
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            
            Months
      Ended
            
            
            NetMay
      31, 2008
            
            
            Sales
            
            
            May
      26, 2007
            
            
            SalesNet
      sales
            
            $
            269,710
            
            
            
            100.0
            %
            
            $
            252,967
            
            
            
            100.0
            %Cost
      of sales
            
            
            114,614
            
            
            
            42.5
            %
            
            
            105,645
            
            
            
            41.8
            %Gross
      profit
            
            
            155,096
            
            
            
            57.5
            %
            
            
            147,322
            
            
            
            58.2
            %Selling,
      general and administrative expenses
            
            
            111,184
            
            
            
            41.2
            %
            
            
            104,331
            
            
            
            41.2
            %Operating
      income
            
            
            43,912
            
            
            
            16.3
            %
            
            
            42,991
            
            
            
            17.0
            %Interest
      expense, net
            
            
            24,990
            
            
            
            9.3
            %
            
            
            25,573
            
            
            
            10.1
            %Income
      before income taxes
            
            
            18,922
            
            
            
            7.0
            %
            
            
            17,418
            
            
            
            6.9
            %Provision
      for income taxes
            
            
            9,306
            
            
            
            3.5
            %
            
            
            7,251
            
            
            
            2.9
            %Income
      from continuing operations
            
            
            9,616
            
            
            
            3.5
            %
            
            
            10,167
            
            
            
            4.0
            %Discontinued
      operations:Loss
      from discontinued segment
            
            
            (7,200)
            
            
            
            (2.6)
            %
            
            
            (2,491)
            
            
            
            (1.0)
            %Benefit
      for income taxes
            
            
            (2,815)
            
            
            
            (1.0)
            %
            
            
            (974)
            
            
            
            (0.4)
            %Loss
      from discontinued operations
            
            
            (4,385)
            
            
            
            (1.6)
            %
            
            
            (1,517)
            
            
            
            (0.6)
            %Net
      income
            
            $
            5,231
            
            
            
            1.9
            %
            
            $
            8,650
            
            
            
            3.4
            %





AACFor
      the Nine
            
            
            %
      of
            
            
            For
      the Nine
            
            
            %
      of(in
      thousands)
            
            Months
      Ended
            
            
            Net
            
            
            Months
      Ended
            
            
            NetMay
      31, 2008
            
            
            Sales
            
            
            May
      26, 2007
            
            
            SalesNet
      sales
            
            $
            269,710
            
            
            
            100.0
            %
            
            $
            252,967
            
            
            
            100.0
            %Cost
      of sales
            
            
            114,614
            
            
            
            42.5
            %
            
            
            105,645
            
            
            
            41.8
            %Gross
      profit
            
            
            155,096
            
            
            
            57.5
            %
            
            
            147,322
            
            
            
            58.2
            %Selling,
      general and administrative expenses
            
            
            111,184
            
            
            
            41.2
            %
            
            
            104,331
            
            
            
            41.2
            %Operating
      income
            
            
            43,912
            
            
            
            16.3
            %
            
            
            42,991
            
            
            
            17.0
            %Interest
      expense, net
            
            
            15,303
            
            
            
            5.7
            %
            
            
            16,952
            
            
            
            6.7
            %Income
      before income taxes
            
            
            28,609
            
            
            
            10.6
            %
            
            
            26,039
            
            
            
            10.3
            %Provision
      for income taxes
            
            
            11,664
            
            
            
            4.3
            %
            
            
            10,273
            
            
            
            4.1
            %Income
      from continuing operations
            
            
            16,945
            
            
            
            6.3
            %
            
            
            15,766
            
            
            
            6.2
            %Discontinued
      operations:Loss
      from discontinued segment
            
            
            (7,200)
            
            
            
            (2.6)
            %
            
            
            (2,491)
            
            
            
            (1.0)
            %Benefit
      for income taxes
            
            
            (2,815)
            
            
            
            (1.0)
            %
            
            
            (974)
            
            
            
            (0.4)
            %Loss
      from discontinued operations
            
            
            (4,385)
            
            
            
            (1.6)
            %
            
            
            (1,517)
            
            
            
            (0.6)
            %Net
      income
            
            $
            12,560
            
            
            
            4.7
            %
            
            $
            14,249
            
            
            
            5.6
            %





28
 Index


The
company uses a 52/53 week fiscal year. Fiscal year 2008 will consist of 53
weeks, whereas fiscal year 2007 consisted of 52 weeks. The additional week is
included in the third quarter of fiscal year 2008; therefore the nine month
period ended May 31, 2008 consisted of forty weeks as compared to the nine month
period ended May 26, 2007, which consisted of thirty-nine weeks. As a result,
the current reporting period reflects an extra week of net sales, expenses and
operating income as compared to the same period of last year.
  Net
Sales.Net sales
consist of product sales and are net of product returns and promotional
discounts. Net sales increased $16.7 million, or 6.6%, to $269.7 million
for the nine months ended May 31, 2008 from $253.0 million for the nine
months ended May 26, 2007. The following details the changes in net sales during
such periods by business segment.





Class Rings.Net sales
increased $1.1 million to $105.9 million for the nine months ended May
31, 2008 from $104.8 million for the nine months ended May 26, 2007. The
increase in net sales was primarily due to higher average sales price of
on-campus class rings during the nine months ended May 31, 2008 partially offset
by lower retail unit sales as compared to the nine months ended May 26, 2007 due
to softness in the retail market.





Yearbooks.Net sales
increased $11.2 million to $92.6 million for the nine months ended May
31, 2008 from $81.4 million for the nine months ended May 26, 2007. 
The increase in net sales was primarily the result of higher shipments in the
third quarter of 2008 compared to 2007 resulting from timing of yearbook
shipments between the third and fourth quarters of 2008. Graduation Products.Net
sales increased $1.5 million to $44.6 million for the nine months ended May
31, 2008 from $43.1 million for the nine months ended May 26, 2007. The increase
in net sales is primarily due to an increase in high school graduation products
and diplomas.





Other.Net sales increased
$2.9 million to $26.6 million for the nine months ended May 31, 2008
from $23.7 million for the nine months ended May 26, 2007. The increase in
net sales was primarily related to the acquisition of Powers in April 2007, an
increase in the sale of commercial books and an increase in military affinity
rings,





Gross
Profit.Gross
margin represents gross profit as a percentage of net sales. Gross margin was
57.5% for the nine months ended May 31, 2008, a 0.7 percentage point
decrease from 58.2% for the nine months ended May 26, 2007.  Overall, gross
profit increased $7.8 million. The increase in gross profit was a result of the
increase in sales of yearbooks, on-campus class rings, graduation products, the
Powers acquisition, and commercial books.  The increase was partially
offset by a decline in retail class rings and other recognition and affinity
ring sales, as well as  unfavorable exchange impact on Euro
denominated stone purchases and higher consulting expenses, labor expenses, and
other manufacturing costs in the jewelry plant mainly related to productivity
projects.





Selling, General
and Administrative Expenses.Selling, general and
administrative expenses for Intermediate Holdings and AAC increased
$6.9 million, or 6.6%, to $111.2 million for the nine months ended May
31, 2008 from $104.3 million for the nine months ended May 26, 2007.
Included in selling, general and administrative expenses are two sub-categories:
selling and marketing expenses and general and administrative
expenses.





Selling
and marketing expenses increased $2.9 million to $78.6 million or
29.1% of net sales for the nine months ended May 31, 2008 from
$75.7 million or 29.9% of net sales for the nine months ended May 26,
2007 due to increased commission expenses directly related to net sales
increases of yearbooks, graduation products, on-campus class rings and military
rings, increased advertising and promotion costs in class rings and
recognition and affinity jewelry, increased marketing research and development
expenditures, and as a result of the acquisition of Powers in April
2007.





General
and administrative expenses for the nine months ended May 31, 2008 were $32.6
million, or 12.1% of net sales as compared to $28.6 million, or 11.3% of net
sales for the nine months ended May 26, 2007. The increase in general and
administrative expenses was primarily the result of the acquisition of Powers in
April 2007, increased employee headcount, increases in other administrative
expenses and increases in consulting and other professional fees.





For
Parent Holdings, selling, general and administrative expenses for the nine
months ended May 31, 2008 also include $1.6 million of costs incurred in
connection with the Transaction.





Operating
Income.As
a result of the foregoing, operating income for Intermediate Holdings and AAC
was $43.9 million ($42.3 million for Parent Holdings as a result of costs
related to the Transaction), or 16.3% of net sales, for the nine months ended
May 31, 2008 as compared with operating income of $43.0 million, or 17.0%
of net sales, for the nine months ended May 26, 2007. The class rings segment
reported operating income of $11.4 million for the nine months ended May
31, 2008 as compared with operating income of $15.8 million for the nine
months ended May 26, 2007. The yearbooks segment reported operating income of
$25.0 million for the nine months ended May 31, 2008 as compared with
operating income of $17.3 million for the nine months ended May 26, 2007. The
graduation products segment reported operating income of $8.0 million for
the nine months ended May 31, 2008 as compared with operating income of
$7.8 million for the nine months ended May 26, 2007. The other segment
reported an operating loss of $0.5 million for the nine months ended May 31,
2008 as compared with operating income of $2.1 million for the nine months ended
May 26, 2007.





Interest Expense,
Net.For
Parent Holdings, net interest expense was $48.6 million for the nine months
ended May 31, 2008 and $44.6 million for the nine months ended May 26, 2007. The
average debt outstanding of Parent Holdings for the nine months ended May 31,
2008 and the nine months ended May 26, 2007 was $555 million and
$539 million, respectively. The weighted average
interest rate on debt outstanding of Parent Holdings for the nine months ended
May 31, 2008 and the nine months ended May 26, 2007 was 10.7% and 10.6%,
respectively.


29
 Index




For
Intermediate Holdings, net interest expense was $25.0 million for the nine
months ended May 31, 2008 and $25.6 million for the nine months ended May
26, 2007. The average debt outstanding of Intermediate Holdings for the nine
months ended May 31, 2008 and the nine months ended May 26, 2007 was
$361 million and $369 million, respectively. The weighted average
interest rate on debt outstanding of Intermediate Holdings for the nine months
ended May 31, 2008 and the nine months ended May 26, 2007 was 8.5% and 8.7%,
respectively.





For AAC,
net interest expense was $15.3 million for the nine months ended May 31,
2008 and $17.0 million for the nine months ended May 26, 2007. The average
debt outstanding of AAC for the nine months ended May 31, 2008 and the nine
months ended May 26, 2007 was $239 million and $258 million, respectively.
The weighted average interest rate on debt outstanding of AAC for the nine
months ended May 31, 2008 and the nine months ended May 26, 2007 was 7.6% and
8.1%, respectively.





Provision
(Benefit) for IncomeTaxes.For the nine months ended
May 31, 2008 and the nine months ended May 26, 2007, Parent Holdings recorded an
income tax benefit of $0.8 million and $0.0 million, respectively, which
represents an effective tax rate of 13% and 0%, respectively.  The
effective tax rates vary from the statutory federal rate due to the impact of
state income taxes and the non-deductibility of a portion of interest on
high-yield debt.





For the
nine months ended May 31, 2008 and the nine months ended May 26, 2007,
Intermediate Holdings recorded an income tax provision of $9.3 million and
$7.3 million, respectively, which represents an effective tax rate of 49%
and 42%, respectively. The effective tax rates vary from the statutory federal
rate due to the impact of state income taxes and the non-deductibility of a
portion of interest on high-yield debt.





For the
nine months ended May 31, 2008 and the nine months ended May 26, 2007, AAC
recorded an income tax provision of $11.7 million and $10.3 million,
respectively, which represents an effective tax rate of 41% and 39%,
respectively.





The effective
rates for the nine months ended May 31, 2008 and the nine months
ended May 26, 2007 represent an estimate of the annual federal and state
income tax rate.





Loss from
Discontinued Operations.  As described in “Significant
Developments,” the results of operations of the achievement publications
business are reported as discontinued operations.  Loss from
discontinued operations before income taxes during the nine months ended May 31,
2008 was $7.2 million and includes charges of $5.5 million primarily related to
the write-off of the remaining carrying value of tangible and intangible assets
of the achievement publications segment and charges of approximately $0.7
million related to contract termination and employee severance costs.  Loss
from discontinued operations before income taxes during the nine months ended
May 26, 2007 was $2.5 million.





Liquidity
and Capital Resources





Operating
Activities. Operating activities provided $46.0 million of cash for
the nine months ended May 31, 2008 compared to cash provided of
$40.3 million for the nine months ended May 26, 2007. The $5.7 million
increase in cash provided by operating activities was mainly attributable to
lower working capital requirements and lower cash usage as a result of the
achievement publications segment shutdown.





Investing
Activities.Capital expenditures for
the nine months ended May 31, 2008 were $11.0 million compared to
capital expenditures of $7.9 million for the nine months ended May 26,
2007. Our projected capital expenditures for the entire fiscal year 2008 are
expected to be approximately $14.0 million.





Financing
Activities.  During the nine months ended May 31, 2008, the
Company paid down $11.4 million of the term loan of the Amended Senior Credit
Facility, of which approximately $0.9 million were mandatory payments.
 In addition, net revolver payments were $7.8 million.





During
the nine months ended May 26, 2007, the Company paid down $12.2 million of
the term loan of the Amended Senior Credit Facility, of which approximately $1.6
million were mandatory payments.  In addition, net revolver payments
were $9.3 million.





Capital
Resources. We have a significant amount of indebtedness. On May 31,
2008, Parent Holdings had total indebtedness of $556.5 million, of which $196.1
million was senior PIK notes, $127.2 million was 10.25% senior discount notes,
$150.0 million was 8.25% senior subordinated notes, $75.7 million was
indebtedness under the existing senior secured credit facility and $7.5 million
was our mandatory redeemable series A preferred stock. We also have up to
$38.2 million in available revolving loan borrowings under our senior
secured credit facility. We are currently in compliance with financial covenants
in all of the agreements governing our outstanding
indebtedness.


30
 Index


We expect
that cash generated from operating activities and availability under the senior
secured credit facility will be our principal sources of liquidity. Based on our
current level of operations and anticipated cost savings and operational
improvements, we believe our cash flow from operations, available cash and
available borrowings under the senior secured credit facility will be adequate
to meet our liquidity needs for at least the next twelve months.





Off
Balance-Sheet Obligations





Gold Consignment
Agreement.Under an agreement with a supplier, we have an ability to have
on consignment gold with aggregate value less than or equal to the lowest of:
(i) the dollar value of 27,000 troy ounces of gold, (ii) $14.2 million
or (iii) a borrowing base, calculated based on a percentage of the gold held at
our facilities and other approved locations, as specified by the agreement.
Under the terms of this arrangement, we do not own the consigned gold nor do we
have risk of loss related to price variance on such inventory until we pay for
quantities purchased. Accordingly, we do not reflect the value of consigned gold
in our inventory, nor do we reflect the corresponding liability for financial
statement purposes. As of May 31, 2008, we held consigned gold valued at $4.9
million, while at August 25, 2007, we held no gold on consignment.





The
agreement can be terminated by either party with 60 days prior written
notice.





Letters of
Credit.  As of May 31, 2008 and August 25, 2007, we had
commitments for $1.8 million and $2.3 million on letters of credit outstanding,
respectively.





Seasonality





The
seasonal nature of our various businesses tends to be tempered by our broad
product mix. Class ring sales are highest during October through December and
early spring, with many orders made for delivery to students before the winter
holiday season. Graduation product sales are predominantly made during February
through April prior to the April through June graduation season. Yearbook sales
are highest during the months of April through June, as yearbooks are typically
shipped prior to each school’s summer break. Our recognition and affinity
product line sales are also seasonal. The recognition and affinity product line
sales are highest during the winter holiday season and in the period leading up
to Mother’s Day.





As a
result of the foregoing, we have historically experienced operating losses
during our first and fourth fiscal quarters, which includes the beginning of the
school year and the summer months when school is not in session, thus reducing
related shipment of products. In addition, our working capital requirements tend
to exceed our operating cash flows from May through September.





Recent
Accounting Pronouncements





In
September 2006, the FASB issued Statement on Financial Accounting Standard
(“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”), which defines
fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements and
does not require any new fair value measurements. The provisions of SFAS 157 are
effective for us beginning with our fiscal year 2009. We have not yet evaluated
the impact this standard will have on our financial statements.





In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans — An Amendment of
FASB Statements No. 87, 88, 106 and 132 (R)” (“SFAS 158”). SFAS 158
requires an employer to recognize the funded status of defined benefit
postretirement plan as an asset or liability in the balance sheet and to
recognize changes in that funded status in the year in which changes occur
through comprehensive income. Additionally, SFAS 158 requires an employer to
measure the funded status of each of its plans as of the date of its year-end
statement of financial position.  We adopted the recognition and disclosure
provisions of SFAS 158 in our fiscal year 2007. The measurement date provisions
of SFAS 158 will be effective for us beginning with our fiscal year 2009. We
have not yet evaluated the impact that the measurement date provisions of this
standard will have on our financial statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 permits
entities to measure many financial assets and financial liabilities at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are reported in earnings.  SFAS 159 is effective
for us beginning with our fiscal year 2009.  We have not yet evaluated the
impact of SFAS 159 on our financial statements.





ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Interest Rate
Risk.We have exposure to market risk relating to changes in interest
rates on our variable rate debt. Our policy is to manage interest rate exposure
through the use of a combination of fixed and floating rate debt instruments.
Our senior secured credit facility (revolver and term loan) and existing gold
consignment agreement are variable rate arrangements. Each quarter
point change in interest rates on our senior secured credit facility, which
bears interest at variable rates, would result in a $0.3 million change in
annual interest expense, assuming the entire revolving loan was
drawn.


31
 Index





Exchange Rate
Risk.We purchase the majority of our semi-precious and synthetic
stones from a single supplier in Germany. We believe that all of our major
competitors purchase their semi-precious stones from this same supplier. Each
ten percent change in the Euro exchange rate would result in a $0.5 million
annual change in cost of goods sold, assuming stone purchase levels approximate
the levels of fiscal 2007.





Gold.We
purchase a majority of our gold from a single supplier through our existing gold
consignment agreement described above. We pay for consigned gold as our related
products are shipped to customers. Each ten percent change in the price of gold
would result in a $2.9 million annual change in cost of goods sold,
assuming gold purchase levels approximate the levels in fiscal
2007.





ITEM 4. CONTROLS AND PROCEDURES





As of the
end of the period covered by this report, we carried out an evaluation, under
the supervision and with the participation of our management, including our
President and Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15 under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) as of the end of the quarter. The
evaluation was conducted based on the framework established by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated
Framework.Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and
procedures are effective in enabling us to record, process, summarize and report
information required to be included in the Company’s periodic SEC filings within
the required time period, and that such information is accumulated and
communicated to the Company’s management, including the Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
disclosure.





Additionally,
our Chief Executive Officer and Chief Financial Officer determined, as of the
end of the period covered by this report, that during our most recent fiscal
quarter, there was no change in our internal control over financial reporting
that has materially affected, or is likely to materially affect, our internal
control over financial reporting.





DISCLOSURE
REGARDING FORWARD LOOKING STATEMENTS





This
report contains “forward looking statements.” All statements other than
statements of historical facts included in this report that address activities,
events or developments that we expect, believe or anticipate will or may occur
in the future are forward looking statements. Forward looking statements give
our current expectations and projections relating to the financial condition,
results of operations, plans, objectives, future performance and business of our
company. You can identify these statements by the fact that they do not relate
strictly to historical or current facts. These statements may include words such
as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe”
and other words and terms of similar meaning in connection with any discussion
of the timing or nature of future operating or financial performance or other
events.





These
forward looking statements are based on our expectations and beliefs concerning
future events affecting us. They are subject to uncertainties and factors
relating to our operations and business environment, all of which are difficult
to predict and many of which are beyond our control. Although we believe that
the expectations reflected in our forward looking statements are reasonable, we
do not know whether our expectations will prove correct. They can be affected by
inaccurate assumptions we might make or by known or unknown risks and
uncertainties.





Although
management believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, the Company can give no
assurance that these expectations will be achieved. Any change in or adverse
development, including the following factors, may impact the achievement of
results in or accuracy of forward-looking statements: the price of gold and
precious, semiprecious and synthetic stones; the Company’s access to students
and consumers in schools; the seasonality of the Company’s business; regulatory
and accounting rules; the Company’s relationship with its independent sales
representatives; fashion and demographic trends; general economic, business, and
market trends and events, especially during peak buying seasons for the
Company’s products; the Company’s ability to respond to customer change orders
and delivery schedules; development and operating costs; competitive pricing
changes; successful completion of management initiatives designed to achieve
operating efficiencies; the Company’s cash flows; and the Company’s ability to
draw down funds under its current bank financings and to enter into new bank
financings. The foregoing factors are not exhaustive. New factors may emerge or
changes may occur that impact the Company’s operations and businesses.
Forward-looking statements herein are expressly qualified on the foregoing or
such other factors as may be applicable.





You
should consider the risks described in the Company’s Form 10-K filed with the
Securities and Exchange Commission on December 7, 2007 as you review this
quarterly report.





32
 Index


PART
II. OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS





In the
normal course of business, we may be a party to lawsuits and administrative
proceedings before various courts and government agencies. These lawsuits and
proceedings may involve personal injury, contractual issues and other matters.
We cannot predict the ultimate outcome of any pending or threatened litigation
or of actual claims or possible claims.





We
currently are not a party to any pending legal proceedings other than ordinary
routine litigation incidental to our business. In management’s opinion, adverse
decisions on these ordinary legal proceedings, individually or in the aggregate,
would not have a materially adverse impact on our results of operations,
financial condition or cash flows.





ITEM 1A. RISK FACTORS




You
should consider the risks described in the Company’s Form 10-K filed with the
Securities and Exchange Commission on December 7, 2007 as you review this
quarterly report. With the exception of the additional risks described below,
the
risk factors included in our Form 10-K for the fiscal year ended August 25, 2007
have not materially changed.


We
May Be Adversely Affected if the Transaction Is Not Completed





There is
no assurance that the conditions to the completion of the Transaction will be
satisfied or waived, that the necessary approvals will be obtained, or that we
will be able to successfully consummate the Transaction as provided for under
the Stock Purchase Agreement, if at all. In the event that the Transaction is
not completed, we may be subject to several risks including the following: we
may not realize any or all of the potential benefits of the Transaction,
including any synergies that could result from combining the resources of the
Company and the Buyer; we will remain liable for significant transaction costs,
including legal, accounting, financial advisory and other costs relating to the
Transaction even if it is not consummated; management’s attention from our day
to day business may be diverted; and uncertainties with regards to the
Transaction may adversely affect our relationships with our employees, vendors
and customers.





The
Announcement of the Transaction Could Have an Adverse Effect on Our Business in
the Near Term





Our
business partners and customers may delay, defer or cancel purchases pending the
consummation of the Transaction. The Transaction may also adversely affect our
ability to attract and retain key personnel. Activities relating to the
Transaction and related uncertainties could divert the attention of our
management and employees from our day-to-day business, which could cause
disruptions among our relationships with business partners and customers, and
cause our employees to seek alternative employment, all of which could detract
from our ability to generate revenue and control costs. In addition, the Stock
Purchase Agreement imposes affirmative and negative restrictions on the
operations of our business. Without the consent of the Buyer, we may be
restricted from making certain acquisitions and taking other specified actions
until the Transactioncloses or is terminated.
These restrictions may prevent us from pursuing otherwise attractive business
opportunities and making other changes to our business prior to completion of
the Transaction or its termination.





ITEM 6. EXHIBITS





(a) Exhibits





EXHIBITNUMBER
            
            DESIGNATION31.1
            
            CEO
      Certification Accompanying Period Report Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200231.2
            
            CFO
      Certification Accompanying Period Report Pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
            
            CEO
      Certification Accompanying Period Report Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 200232.2
            
            CFO
      Certification Accompanying Period Report Pursuant to Section 906 of
      the Sarbanes-Oxley Act of 2002








33
 Index








AMERICAN
ACHIEVEMENT GROUP HOLDING CORP.


AAC
GROUP HOLDING CORP.


AMERICAN
ACHIEVEMENT CORPORATION





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrants have
duly caused this report to be signed on their behalf by the undersigned
thereunto duly authorized.








Date:
July 15, 2008





AMERICAN
      ACHIEVEMENT GROUP HOLDING CORP.AAC
      GROUP HOLDING CORP.AMERICAN
      ACHIEVEMENT CORPORATIONBy:
            
            /s/
      DONALD J. PERCENTIDonald
      J. PercentiCHIEF
      EXECUTIVE OFFICER(principal
      executive officer)By:
            
            /s/
      KRIS G. RADHAKRISHNANKris
      G. RadhakrishnanCHIEF
      FINANCIAL OFFICER(principal
      financial officer)