**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**


**FORM
      10-Q**


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





**FOR
      THE QUARTERLY PERIOD ENDED May 26, 2007**





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





**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 May 26,
      2007: 505,460 shares of common stock.





Number
      of
      shares outstanding of AAC Group Holding Corp. as of May 26, 2007: 100 shares
      of
      common stock.





Number
      of
      shares of American Achievement Corporation outstanding as of May 26, 2007:
      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 26,
      2007**


**INDEX**


PAGEPART
                I. FINANCIAL INFORMATIONItem 1.
                Condensed Consolidated Financial Statements and NotesCondensed
                Consolidated Balance Sheets (unaudited) — As of May 26, 2007 and
                August 26, 2006
            
            
            3-5Condensed
                Consolidated Statements of Operations (unaudited) — For the Three Months
                Ended May 26, 2007 and For the Three Months ended May 27,
                2006
            
            
            6-8Condensed
                Consolidated Statement of Operations (unaudited) — For the Nine Months
                Ended May 26, 2007 and For the Nine Months Ended May 27,
                2006Condensed
                Consolidated Statements of Cash Flows (unaudited) — For the Nine Months
                Ended May 26, 2007 and For the Nine Months Ended May 27,
                2006
            
            
            9-11Notes
                to Condensed Consolidated Financial Statements (unaudited)
            
            
            12-26Item 2.
                Management’s Discussion and Analysis of Financial Condition and Results of
                Operations
            
            
            27-39Item 3.
                Quantitative and Qualitative Disclosures About Market Risk
            
            
            40Item 4.
                Controls and Procedures
            
            
            41PART
                II. OTHER INFORMATIONItem 1.
                Legal Proceedings
            
            
            42Item 6.
                Exhibits
            
            
            42SIGNATURES
            
            
            43CEO
                Certification Pursuant to Section 302CFO
                Certification Pursuant to Section 302CEO
                Certification Pursuant to Section 906CFO
                Certification 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


**AMERICAN
      ACHIEVEMENT GROUP HOLDING CORP.**


Condensed
      Consolidated Balance Sheets


(In
      thousands, except share data)


(unaudited)


**Parent
                Holdings****May
                26,**
            
            
            **August
                26,****2007**
            
            
            **2006****ASSETS***Current
                assets:*Cash
                and cash equivalents
            
            $
            7,215
            
            
            $
            3,404Accounts
                receivable, net
            
            
            73,318
            
            
            
            40,226Inventories,
                net
            
            
            22,035
            
            
            
            31,438Deferred
                tax asset
            
            
            5,582
            
            
            
            5,582Prepaid
                expenses and other current assets, net
            
            
            20,714
            
            
            
            13,944Total
                current assets
            
            
            128,864
            
            
            
            94,594Property,
                plant and equipment, net
            
            
            75,550
            
            
            
            76,054Goodwill
            
            
            187,610
            
            
            
            184,565Other
                intangible assets, net
            
            
            139,685
            
            
            
            148,595Other
                assets
            
            
            8,754
            
            
            
            7,468Total
                assets
            
            **$**
            **540,463**
            
            
            **$**
            **511,276****LIABILITIES
                AND STOCKHOLDERS’ DEFICIT***Current
                liabilities:*Bank
                overdraft
            
            $
            1,258
            
            
            $
            2,147Accounts
                payable
            
            
            14,948
            
            
            
            13,585Customer
                deposits
            
            
            34,086
            
            
            
            11,392Accrued
                expenses
            
            
            34,744
            
            
            
            23,382Deferred
                revenue
            
            
            680
            
            
            
            2,617Accrued
                interest
            
            
            2,840
            
            
            
            5,997Current
                portion of long-term debt
            
            
            972
            
            
            
            1,090Total
                current liabilities
            
            
            89,528
            
            
            
            60,210Long-term
                debt, net of current portion
            
            
            528,593
            
            
            
            525,734Mandatory
                redeemable preferred stock, $.01 par value, 15,000 shares authorized,
                7,500 shares issued and outstanding
            
            
            7,500
            
            
            
            7,500Deferred
                tax liabilities
            
            
            24,599
            
            
            
            25,760Other
                long-term liabilities
            
            
            8,140
            
            
            
            6,858Total
                liabilities
            
            
            658,360
            
            
            
            626,062Commitments
                and contingencies (Note 6)*Stockholders’
                deficit:*Common
                stock, $.01 par value, 1,250,000 shares authorized, 505,460 shares
                issued
                and outstanding
            
            
            5
            
            
            
            5Additional
                paid-in capital
            
            
            (124,045
            )
            
            
            (124,045
            )Retained
                earnings
            
            
            6,143
            
            
            
            9,254Total
                stockholders’ deficit
            
            
            (117,897
            )
            
            
            (114,786
            )Total
                liabilities and stockholders’ deficit
            
            **$**
            **540,463**
            
            
            **$**
            **511,276**





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


3


**AAC
      GROUP HOLDING CORP.**


Condensed
      Consolidated Balance Sheets


(In
      thousands, except share data)


(unaudited)


**Intermediate
                Holdings****May
                26, 2007**
            
            
            **August
                26, 2006****ASSETS***Current
                assets:*Cash
                and cash equivalents
            
            $
            6,932
            
            
            **$**
            2,904Accounts
                receivable, net
            
            
            73,318
            
            
            
            40,226Inventories,
                net
            
            
            22,035
            
            
            
            31,438Deferred
                tax asset
            
            
            5,582
            
            
            
            5,582Prepaid
                expenses and other current assets, net
            
            
            20,714
            
            
            
            13,944Total
                current assets
            
            
            128,581
            
            
            
            94,094Property,
                plant and equipment, net
            
            
            75,550
            
            
            
            76,054Goodwill
            
            
            187,610
            
            
            
            184,565Other
                intangible assets, net
            
            
            131,656
            
            
            
            139,592Other
                assets
            
            
            8,754
            
            
            
            7,468Total
                assets
            
            **$**
            **532,151**
            
            
            **$**
            **501,773****LIABILITIES
                AND STOCKHOLDERS’ EQUITY***Current
                liabilities:*Bank
                overdraft
            
            $
            1,258
            
            
            **$**
            2,147Accounts
                payable
            
            
            14,948
            
            
            
            13,585Customer
                deposits
            
            
            34,086
            
            
            
            11,392Accrued
                expenses
            
            
            34,720
            
            
            
            23,292Deferred
                revenue
            
            
            680
            
            
            
            2,617Accrued
                interest
            
            
            2,840
            
            
            
            5,997Current
                portion of long-term debt
            
            
            972
            
            
            
            1,090Total
                current liabilities
            
            
            89,504
            
            
            
            60,120Long-term
                debt, net of current portion
            
            
            358,469
            
            
            
            371,537Deferred
                tax liabilities
            
            
            33,613
            
            
            
            27,523Other
                long-term liabilities
            
            
            5,201
            
            
            
            5,879Total
                liabilities
            
            
            486,787
            
            
            
            465,059Commitments
                and contingencies (Note 6)*Stockholders’
                equity:*Common
                stock, $.01 par value, 1,000 shares authorized, 100 shares issued
                and
                outstanding
            
            
            —
            
            
            
            —Additional
                paid-in capital
            
            
            24,144
            
            
            
            24,144Retained
                earnings
            
            
            21,220
            
            
            
            12,570Total
                stockholders’ equity
            
            
            45,364
            
            
            
            36,714Total
                liabilities and stockholders’ equity
            
            **$**
            **532,151**
            
            
            **$**
            **501,773**





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


4


**AMERICAN
      ACHIEVEMENT CORPORATION**


Condensed
      Consolidated Balance Sheets


(In
      thousands, except share data)


(unaudited)


**AAC****May
                26, 2007**
            
            
            **August
                26, 2006****ASSETS***Current
                assets:*Cash
                and cash equivalents
            
            $
            6,391
            
            
            $
            2,381Accounts
                receivable, net
            
            
            73,318
            
            
            
            40,226Inventories,
                net
            
            
            22,035
            
            
            
            31,438Deferred
                tax asset
            
            
            5,582
            
            
            
            5,582Prepaid
                expenses and other current assets, net
            
            
            20,714
            
            
            
            13,944Total
                current assets
            
            
            128,040
            
            
            
            93,571Property,
                plant and equipment, net
            
            
            75,550
            
            
            
            76,054Goodwill
            
            
            187,610
            
            
            
            184,565Other
                intangible assets, net
            
            
            129,283
            
            
            
            136,884Other
                assets
            
            
            8,754
            
            
            
            7,468Total
                assets
            
            **$**
            **529,237**
            
            
            $
            **498,542****LIABILITIES
                AND STOCKHOLDERS’ EQUITY***Current
                liabilities:*Bank
                overdraft
            
            $
            1,258
            
            
            $
            2,147Accounts
                payable
            
            
            14,948
            
            
            
            13,585Customer
                deposits
            
            
            34,086
            
            
            
            11,392Accrued
                expenses
            
            
            34,718
            
            
            
            23,290Deferred
                revenue
            
            
            680
            
            
            
            2,617Accrued
                interest
            
            
            2,840
            
            
            
            5,997Current
                portion of long-term debt
            
            
            972
            
            
            
            1,090Total
                current liabilities
            
            
            89,502
            
            
            
            60,118Long-term
                debt, net of current portion
            
            
            243,348
            
            
            
            264,720Deferred
                tax liabilities
            
            
            43,419
            
            
            
            34,307Other
                long-term liabilities
            
            
            5,173
            
            
            
            5,851Total
                liabilities
            
            
            381,442
            
            
            
            364,996Commitments
                and contingencies (Note 6)*Stockholders’
                equity:*Common
                stock, $.01 par value, 1,000 shares authorized, 100 shares issued
                and
                outstanding
            
            
            —
            
            
            
            —Additional
                paid-in capital
            
            
            109,046
            
            
            
            109,046Retained
                earnings
            
            
            38,749
            
            
            
            24,500Total
                stockholders’ equity
            
            
            147,795
            
            
            
            133,546Total
                liabilities and stockholders’ equity
            
            **$**
            **529,237**
            
            
            **$**
            **498,542**





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


5


**AMERICAN
      ACHIEVEMENT GROUP HOLDING CORP.**


Condensed
      Consolidated Statements of Operations


(In
      thousands)


(unaudited)




**Parent
                  Holdings**
            
            **For
                the three months ended**
            
            
            **For
                the nine months ended****May
                26,**
            
            
            **May
                27,**
            
            
            **May
                26,**
            
            
            **May
                27,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                sales
            
            $
            144,163
            
            
            $
            140,164
            
            
            $
            254,598
            
            
            $
            257,733Cost
                of sales
            
            
            57,157
            
            
            
            56,566
            
            
            
            106,397
            
            
            
            103,336Gross
                profit
            
            
            87,006
            
            
            
            83,598
            
            
            
            148,201
            
            
            
            154,397Selling,
                general and administrative expenses
            
            
            47,095
            
            
            
            46,760
            
            
            
            107,707
            
            
            
            111,658Operating
                income
            
            
            39,911
            
            
            
            36,838
            
            
            
            40,494
            
            
            
            42,739Interest
                expense, net of interest income
            
            
            15,608
            
            
            
            8,910
            
            
            
            44,579
            
            
            
            25,942Income
                (loss) before provision (benefit) for income taxes
            
            
            24,303
            
            
            
            27,928
            
            
            
            (4,085
            )
            
            
            16,797Provision
                (benefit) for income taxes
            
            
            9,136
            
            
            
            12,169
            
            
            
            (974
            )
            
            
            7,358Net
                income (loss)
            
            $
            15,167
            
            
            $
            15,759
            
            
            $
            (3,111
            )
            
            $
            9,439





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


6


**AAC
      GROUP HOLDING CORP.**


Condensed
      Consolidated Statements of Operations


(In
      thousands)


(unaudited)




**Intermediate
                Holdings**
            
            **For
                the three months ended**
            
            
            **For
                the nine months ended****May
                26,**
            
            
            **May
                27,**
            
            
            **May
                26,**
            
            
            **May
                27,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                sales
            
            $
            144,163
            
            
            $
            140,164
            
            
            $
            254,598
            
            
            $
            257,733Cost
                of sales
            
            
            57,157
            
            
            
            56,566
            
            
            
            106,397
            
            
            
            103,336Gross
                profit
            
            
            87,006
            
            
            
            83,598
            
            
            
            148,201
            
            
            
            154,397Selling,
                general and administrative expenses
            
            
            47,095
            
            
            
            46,760
            
            
            
            107,707
            
            
            
            111,658Operating
                income
            
            
            39,911
            
            
            
            36,838
            
            
            
            40,494
            
            
            
            42,739Interest
                expense, net of interest income
            
            
            8,555
            
            
            
            8,910
            
            
            
            25,567
            
            
            
            25,942Income
                before provision for income taxes
            
            
            31,356
            
            
            
            27,928
            
            
            
            14,927
            
            
            
            16,797Provision
                for income taxes
            
            
            13,051
            
            
            
            12,169
            
            
            
            6,277
            
            
            
            7,358Net
                income
            
            $
            18,305
            
            
            $
            15,759
            
            
            $
            8,650
            
            
            $
            9,439





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


7


**AMERICAN
      ACHIEVEMENT CORPORATION**


Condensed
      Consolidated Statements of Operations


(In
      thousands)


(unaudited)




**AAC**
            
            **For
                the three months ended**
            
            
            **For
                the nine months ended****May
                26,**
            
            
            **May
                27,**
            
            
            **May
                26,**
            
            
            **May
                27,****2007**
            
            
            **2006**
            
            
            **2007**
            
            
            **2006**Net
                sales
            
            $
            144,163
            
            
            $
            140,164
            
            
            $
            254,598
            
            
            $
            257,733Cost
                of sales
            
            
            57,157
            
            
            
            56,566
            
            
            
            106,397
            
            
            
            103,336Gross
                profit
            
            
            87,006
            
            
            
            83,598
            
            
            
            148,201
            
            
            
            154,397Selling,
                general and administrative expenses
            
            
            47,095
            
            
            
            46,760
            
            
            
            107,707
            
            
            
            111,658Operating
                income
            
            
            39,911
            
            
            
            36,838
            
            
            
            40,494
            
            
            
            42,739Interest
                expense, net of interest income
            
            
            5,619
            
            
            
            5,980
            
            
            
            16,946
            
            
            
            17,738Income
                before provision for income taxes
            
            
            34,292
            
            
            
            30,858
            
            
            
            23,548
            
            
            
            25,001Provision
                for income taxes
            
            
            13,534
            
            
            
            12,248
            
            
            
            9,299
            
            
            
            9,925Net
                income
            
            $
            20,758
            
            
            $
            18,610
            
            
            $
            14,249
            
            
            $
            15,076





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


8


**AMERICAN
      ACHIEVEMENT GROUP HOLDING CORP.**


Condensed
      Consolidated Statements of Cash Flows


(In
      thousands)


(unaudited)


**Parent
                Holdings**For
                the nine months ended**May
                26, 2007**
            
            
            **May
                27, 2006****Cash
                flows from operating activities:**Net
                income (loss)
            
            $
            (3,111
            )
            
            $
            9,439Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            18,311
            
            
            
            19,132Deferred
                income taxes
            
            
            (2,406
            )
            
            
            6,949Amortization
                of debt discount and deferred financing fees
            
            
            2,620
            
            
            
            1,471Accretion
                of interest on 10.25% senior discount notes
            
            
            8,304
            
            
            
            7,514Accretion
                of 14.75% PIK notes
            
            
            15,927
            
            
            
            —Recovery
                for doubtful accounts
            
            
            851
            
            
            
            331Loss
                on sale of plant, property and equipment
            
            
            —
            
            
            
            90Changes
                in assets and liabilities net of acquired assets:Accounts
                receivable
            
            
            (33,446
            )
            
            
            (32,137)Inventories,
                net
            
            
            7,780
            
            
            
            (3,132
            )Prepaid
                expenses and other current assets, net
            
            
            (6,717
            )
            
            
            1,324Other
                assets
            
            
            852
            
            
            
            (817
            )Customer
                deposits
            
            
            22,694
            
            
            
            21,223Deferred
                revenue
            
            
            (1,937
            )
            
            
            (381)Accounts
                payable, accrued expenses, and other long-term liabilities
            
            
            10,529
            
            
            
            5,659Net
                cash provided by operating activities
            
            
            40,251
            
            
            
            36,665**Cash
                flows from investing activities:**Purchases
                of property, plant and equipment
            
            
            (7,928
            )
            
            
            (10,878
            )Powers
                acquisition, net of cash
            
            
            (5,954
            )
            
            
            —Net
                cash used in investing activities
            
            
            (13,882
            )
            
            
            (10,878
            )**Cash
                flows from financing activities:**Payments
                on revolving credit facility
            
            
            (25,150
            )
            
            
            (25,250
            )Proceeds
                from revolving credit facility
            
            
            15,850
            
            
            
            25,250Payments
                on term loan
            
            
            (12,190
            )
            
            
            (32,337
            )Proceeds
                from stock issuance
            
            
            —
            
            
            
            7,500Deferred
                financing fees
            
            
            (179
            )
            
            
            (269
            )Change
                in bank overdraft
            
            
            (889
            )
            
            
            1,295Net
                cash used in financing activities
            
            
            (22,558
            )
            
            
            (23,811
            )**Net
                increase in cash and cash equivalents**
            
            
            3,811
            
            
            
            1,976**Cash
                and cash equivalents, beginning of period**
            
            
            3,404
            
            
            
            4,324**Cash
                and cash equivalents, end of period**
            
            $
            7,215
            
            
            $
            6,300**Supplemental
                disclosure**Cash
                paid during the period for:Interest
            
            $
            18,992
            
            
            $
            20,347Income
                taxes
            
            $
            501
            
            
            $
            368





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


9


**AAC
      GROUP HOLDING CORP.**


Condensed
      Consolidated Statements of Cash Flows


(In
      thousands)


(unaudited)


**Intermediate
                Holdings**For
                the nine months endedMay
                26, 2007
            
            
            May
                27, 2006**Cash
                flows from operating activities:**Net
                income
            
            $
            8,650
            
            
            $
            9,439Adjustments
                to reconcile net loss to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            18,311
            
            
            
            19,132Deferred
                income taxes
            
            
            4,845
            
            
            
            6,949Amortization
                of debt discount and deferred financing fees
            
            
            1,483
            
            
            
            1,471Accretion
                of interest on 10.25% senior discount notes
            
            
            8,304
            
            
            
            7,514Recovery  for
                doubtful accounts
            
            
            851
            
            
            
            331Loss
                on sale of plan, property and equipment
            
            
            —
            
            
            
            90Changes
                in assets and liabilities net of acquired assets:Accounts
                receivable
            
            
            (33,446
            )
            
            
            (32,137)Inventories,
                net
            
            
            7,780
            
            
            
            (3,132
            )Prepaid
                expenses and other current assets, net
            
            
            (6,717
            )
            
            
            1,324Other
                assets
            
            
            852
            
            
            
            (817
            )Customer
                deposits
            
            
            22,694
            
            
            
            21,223Deferred
                revenue
            
            
            (1,937
            )
            
            
            (381)Accounts
                payable, accrued expenses, and other long-term liabilities
            
            
            8,635
            
            
            
            5,659Net
                cash provided by operating activities
            
            
            40,305
            
            
            
            36,665**Cash
                flows from investing activities:**Purchases
                of property, plant and equipment
            
            
            (7,928
            )
            
            
            (10,878
            )Powers
                acquisition, net of cash
            
            
            (5,954
            )
            
            
            —Net
                cash used in investing activities
            
            
            (13,882
            )
            
            
            (10,878
            )**Cash
                flows from financing activities:**Payments
                on revolving credit facility
            
            
            (25,150
            )
            
            
            (25,250
            )Proceeds
                from revolving credit facility
            
            
            15,850
            
            
            
            25,250Payments
                on term loan
            
            
            (12,190
            )
            
            
            (32,337
            )Proceeds
                from stock issuance
            
            
            —
            
            
            
            7,500Deferred
                financing fees
            
            
            (16
            )
            
            
            (269
            )Change
                in bank overdraft
            
            
            (889
            )
            
            
            1,295Net
                cash used in financing activities
            
            
            (22,395
            )
            
            
            (23,811
            )**Net
                increase in cash and cash equivalents**
            
            
            4,028
            
            
            
            1,976**Cash
                and cash equivalents, beginning of period**
            
            
            2,904
            
            
            
            4,324**Cash
                and cash equivalents, end of period**
            
            $
            6,932
            
            
            $
            6,300**Supplemental
                disclosure**Cash
                paid during the period for:Interest
            
            $
            18,992
            
            
            $
            20,347Income
                taxes
            
            $
            501
            
            
            $
            368





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


10


**AMERICAN
      ACHIEVEMENT CORPORATION**


Condensed
      Consolidated Statements of Cash Flows


(In
      thousands)


(unaudited)


**AAC**For
                the nine months endedMay
                26, 2007
            
            
            May
                27, 2006**Cash
                flows from operating activities:**Net
                income
            
            $
            14,249
            
            
            $
            15,076Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
                and amortization
            
            
            18,311
            
            
            
            19,132Deferred
                income taxes
            
            
            7,867
            
            
            
            9,516Amortization
                of debt discount and deferred financing fees
            
            
            1,148
            
            
            
            1,122Recovery
                for doubtful accounts
            
            
            851
            
            
            
            331Loss
                on sale of plant, property and equipment
            
            
            —
            
            
            
            90Changes
                in assets and liabilities net of acquired assets:Accounts
                receivable
            
            
            (33,446
            )
            
            
            (32,137)Inventories,
                net
            
            
            7,780
            
            
            
            (3,132
            )Prepaid
                expenses and other current assets, net
            
            
            (6,717
            )
            
            
            1,324Other
                assets
            
            
            852
            
            
            
            (817
            )Customer
                deposits
            
            
            22,694
            
            
            
            21,223Deferred
                revenue
            
            
            (1,937
            )
            
            
            (381)Accounts
                payable, accrued expenses, and other long-term liabilities
            
            
            8,635
            
            
            
            5,263Net
                cash provided by operating activities
            
            
            40,287
            
            
            
            36,610**Cash
                flows from investing activities:**Purchases
                of property, plant and equipment
            
            
            (7,928
            )
            
            
            (10,878
            )Powers
                acquisition, net of cash
            
            
            (5,954
            )
            
            
            —Net
                cash used in investing activities
            
            
            (13,882
            )
            
            
            (10,878
            )**Cash
                flows from financing activities:**Payments
                on revolving credit facility
            
            
            (25,150
            )
            
            
            (25,250
            )Proceeds
                from revolving credit facility
            
            
            15,850
            
            
            
            25,250Payments
                on term loan
            
            
            (12,190
            )
            
            
            (32,337
            )Capital
                contribution from Intermediate Holdings
            
            
            —
            
            
            
            7,000Deferred
                financing fees
            
            
            (16
            )
            
            
            —Change
                in bank overdraft
            
            
            (889
            )
            
            
            1,295Net
                cash used in financing activities
            
            
            (22,395
            )
            
            
            (24,042
            )**Net
                increase in cash and cash equivalents**
            
            
            4,010
            
            
            
            1,690**Cash
                and cash equivalents, beginning of period**
            
            
            2,381
            
            
            
            4,093**Cash
                and cash equivalents, end of period**
            
            $
            6,391
            
            
            $
            5,783**Supplemental
                disclosure**Cash
                paid during the period for:Interest
            
            $
            18,992
            
            
            $
            20,347Income
                taxes
            
            $
            501
            
            
            $
            368





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


11


**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. Together, Parent Holdings, Intermediate Holdings, and AAC
      are
      referred to as the “Company.”





***Description
      of Business***


The
      Company is a manufacturer and marketer of class rings, yearbooks, letter
      jackets, and other graduation-related scholastic products for the high school
      and college markets and manufactures and markets recognition and affinity
      jewelry designed to commemorate significant events, achievements and
      affiliations. The Company also operates a division which sells achievement
      publications in the specialty directory publishing industry nationwide. The
      Company markets its products and services primarily in the United States and
      operates in five reporting segments; class rings, yearbooks, graduation
      products, achievement publications and other. The Company’s corporate office is
      located in Austin, Texas and its primary manufacturing facilities are located
      in
      Austin, and Dallas, Texas and Louisville, Kentucky.





***Consolidation***


Intermediate
      Holdings was formed on November 8, 2004. On November 16, 2004, the
      stockholders of AAC Holding Corp. participated in an exchange, pursuant to
      which
      they exchanged their shares of common stock in AAC Holding Corp. for a like
      amount of shares in Intermediate Holdings. Following the exchange, AAC Holding
      Corp. became a wholly-owned subsidiary of Intermediate Holdings.





On
      November 16, 2004, Intermediate Holdings issued $131.5 million
      aggregate principal amount at maturity of 10.25% senior discount notes due
      2012
      (the “10.25% Notes”), generating net proceeds of $89.3 million.
      Intermediate Holdings is the sole obligor of these notes. The net proceeds
      of
      this offering were distributed to stockholders through the repurchase of shares
      of Intermediate Holdings’ common stock from its stockholders. Other than this
      debt obligation, related deferred debt issuance costs, associated accrued
      liabilities, and related interest expense, net of taxes, all other significant
      assets, liabilities, income, expenses and cash flows presented for the quarterly
      periods represent those of 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. All significant intercompany accounts and transactions have been
      eliminated in consolidation.





Parent
      Holdings was formed in May of 2006, and the stockholders of Intermediate
      Holdings participated in an exchange, pursuant to which they exchanged their
      shares of common stock and preferred stock in Intermediate Holdings for a like
      kind and amount of shares in Parent Holdings. Following the exchange,
      Intermediate Holdings became a wholly-owned subsidiary of Parent Holdings.
      On
      June 12, 2006, Parent Holdings issued $150.0 million of 12.75% Senior
      PIK notes due 2012, generating net proceeds of $140.9 million. On February
      24, 2007, the rate at which interest accrues on the 12.75% Senior PIK Notes
      increased by 2.00% per annum; the notes are referred to as “14.75% PIK Notes”
subsequent to such date. Parent Holdings is the sole obligor of these notes.
      The
      net proceeds of this offering were used to pay a dividend to its stockholders.
      Other than this debt obligation, related deferred debt issuance costs,
      associated accrued liabilities, and related interest expense, net of taxes,
      all
      other significant assets, liabilities, income, expenses and cash flows for
      the
      quarterly periods represent those of Parent Holdings’ wholly-owned direct
      subsidiary Intermediate Holdings. All significant intercompany accounts and
      transactions have been eliminated in consolidation. AAC, Intermediate Holdings,
      and Parent Holdings are treated as entities under common control and therefore,
      the consolidated statements of operations presented for Parent Holdings for
      the
      three months and nine months ended May 27, 2006 and statements of cash flows
      for
      nine months ended May 27, 2006 are presented to include the results of
      Intermediate Holdings and AAC for comparative purposes.


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


**Acquisition**


Effective
      April 1, 2007, Commemorative Brands, Inc., 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”). Powers is a producer of quality
      letter jackets, chenille patches and other school spirit embroidery merchandise,
      located in Waco, Texas. The addition of personalized letter jackets is a
      strategic fit and extension to the Company’s achievement and commemoration
      products. The purchase price in connection with this acquisition was
      approximately $6.2 million, including transaction costs, with up to $1.5 million
      additional to be paid upon achieving certain financial goals through August
      2010. The Powers acquisition was accounted for using the purchase method of
      accounting. Pro forma results of operations have not been presented since the
      effect of the Powers acquisition on AAC’s financial position and results of
      operations is not material.





AAC
      has preliminarily allocated the purchase price of Powers as
      follows:


Working
                capital
            
            $
            903Property,
                plant and equipment
            
            
            1,220Goodwill
            
            
            3,045Intangible
                assets
            
            
            2,273Deferred
                income taxes
            
            
            (1,245
            )Total
                purchase price
            
            $
            6,196





**Basis
      of Presentation**


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 26, 2007 are not necessarily
      indicative of the results that may be expected for the fiscal year ending
      August 25, 2007. Accordingly, 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 26,
      2006 included in the Company’s Report on Form 10-K (File No. 333-84294,
      333-121479 and 333-137067) filed on November 22, 2006.





Unless
      separately stated, the notes herein relate to Parent Holdings, Intermediate
      Holdings and AAC.





**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.





**2.
      Inventories, Net**


**May
                26, 2007**
            
            
            **August
                26, 2006**Raw materials
            
            $
            6,775
            
            
            $
            17,759Work in process
            
            
            9,512
            
            
            
            6,473Finished goods
            
            
            6,822
            
            
            
            7,400Less — reserves
            
            
            (1,074
            )
            
            
            (194
            )$
            22,035
            
            
            $
            31,438


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





The
      Company’s cost of sales includes depreciation of $2,031 and $2,354 for the three
      months ended May 26, 2007 and May 27, 2006, respectively. Cost of sales includes
      depreciation of $7,456 and $7,075 for the nine months ended May 26, 2007 and
      May
      27, 2006, respectively.





**3.
      Prepaid Expenses and Other Current Assets, Net**


Prepaid
      expenses and other current assets, net include reserves on sales representative
      advances of $2,459 and $2,055 at May 26, 2007 and August 26, 2006,
      respectively.





**4.
      Goodwill by Segment and Other Intangible Assets**


**May
                26, 2007**
            
            
            **August
                26, 2006*****Goodwill***Class Rings
            
            $
            71,792
            
            
            $
            71,792Yearbooks
            
            
            65,241
            
            
            
            65,241Graduation Products
            
            
            23,781
            
            
            
            23,781Achievement Publications
            
            
            11,693
            
            
            
            11,693Other
            
            
            15,103
            
            
            
            12,058Total
            
            $
            187,610
            
            
            $
            184,565





***Other
      Intangible Assets***


**Estimated**
            
            
            **Gross**
            
            
            **Accumulated**
            
            
            **Net****Parent
                Holdings**
            
            **Useful
                Life**
            
            
            **Asset**
            
            
            **Amortization**
            
            
            **Asset****At  
                 May 26, 2007**Trademarks
            
            Indefinite
            
            $
            49,978
            
            
            $
            —
            
            
            $
            49,978Deferred
                financing costs
            
            
            7
                to 8 years
            
            
            
            24,263
            
            
            
            (7,364
            )
            
            
            16,899Patents
            
            
            14
                to 17 years
            
            
            
            7,317
            
            
            
            (1,405
            )
            
            
            5,912Customer
                lists and distribution contracts
            
            
            3
                to 12 years
            
            
            
            102,789
            
            
            
            (35,893
            )
            
            
            66,896**Total**
            
            
            
            
            
            $
            184,347
            
            
            $
            (44,662
            )
            
            $
            139,685





**Estimated**
            
            
            **Gross**
            
            
            **Accumulated**
            
            
            **Net****Parent
                Holdings**
            
            **Useful
                Life**
            
            
            **Asset**
            
            
            **Amortization**
            
            
            **Asset****At    August 26,
                2006**Trademarks
            
            Indefinite
            
            $
            50,095
            
            
            $
            —
            
            
            $
            50,095Deferred
                financing costs
            
            
            7
                to 8 years
            
            
            
            24,084
            
            
            
            (4,745
            )
            
            
            19,339Patents
            
            
            14
                to 17 years
            
            
            
            7,317
            
            
            
            (1,072
            )
            
            
            6,245Customer
                lists and distribution contracts
            
            
            3
                to 12 years
            
            
            
            100,516
            
            
            
            (27,600
            )
            
            
            72,916**Total**
            
            
            
            
            
            $
            182,012
            
            
            $
            (33,417
            )
            
            $
            148,595





**Estimated**
            
            
            **Gross**
            
            
            **Accumulated**
            
            
            **Net****Intermediate
                Holdings**
            
            **Useful
                Life**
            
            
            **Asset**
            
            
            **Amortization**
            
            
            **Asset****At   
                May 26, 2007**Trademarks
            
            Indefinite
            
            $
            49,978
            
            
            $
            —
            
            
            $
            49,978Deferred
                financing costs
            
            
            7
                to 8 years
            
            
            
            14,771
            
            
            
            (5,901
            )
            
            
            8,870Patents
            
            
            14
                to 17 years
            
            
            
            7,317
            
            
            
            (1,405
            )
            
            
            5,912Customer
                lists and distribution contracts
            
            
            3
                to 12 years
            
            
            
            102,789
            
            
            
            (35,893
            )
            
            
            66,896**Total**
            
            
            
            
            
            **$**
            174,855
            
            
            **$**
            (43,199
            )
            
            $
            131,656







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





**Estimated**
            
            
            **Gross**
            
            
            **Accumulated**
            
            
            **Net****Intermediate
                Holdings**
            
            **Useful
                Life**
            
            
            **Asset**
            
            
            **Amortization**
            
            
            **Asset****At   
                August 26, 2006**Trademarks
            
            Indefinite
            
            $
            50,095
            
            
            $
            —
            
            
            $
            50,095Deferred
                financing costs
            
            
            7
                to 8 years
            
            
            
            14,755
            
            
            
            (4,419
            )
            
            
            10,336Patents
            
            
            14
                to 17 years
            
            
            
            7,317
            
            
            
            (1,072
            )
            
            
            6,245Customer
                lists and distribution contracts
            
            
            3
                to 12 years
            
            
            
            100,516
            
            
            
            (27,600
            )
            
            
            72,916**Total**
            
            
            
            
            
            **$**
            172,683
            
            
            **$**
            (33,091
            )
            
            $
            139,592








**Estimated**
            
            
            **Gross**
            
            
            **Accumulated**
            
            
            **Net****AAC**
            
            **Useful
                Life**
            
            
            **Asset**
            
            
            **Amortization**
            
            
            **Asset****At   
                May 26, 2007**Trademarks
            
            Indefinite
            
            $
            49,978
            
            
            $
            —
            
            
            $
            49,978Deferred
                financing costs
            
            
            7
                to 8 years
            
            
            
            11,263
            
            
            
            (4,766
            )
            
            
            6,497Patents
            
            
            14
                to 17 years
            
            
            
            7,317
            
            
            
            (1,405
            )
            
            
            5,912Customer
                lists and distribution contracts
            
            
            3
                to 12 years
            
            
            
            102,789
            
            
            
            (35,893
            )
            
            
            66,896**Total**
            
            
            
            
            
            **$**
            171,
                347
            
            
            $
            (42,064
            )
            
            $
            129,283





**Estimated**
            
            
            **Gross**
            
            
            **Accumulated**
            
            
            **Net****AAC**
            
            **Useful
                Life**
            
            
            **Asset**
            
            
            **Amortization**
            
            
            **Asset****At   
                August 26, 2006**Trademarks
            
            Indefinite
            
            $
            50,095
            
            
            $
            —
            
            
            $
            50,095Deferred
                financing costs
            
            
            7
                to 8 years
            
            
            
            11,247
            
            
            
            (3,619
            )
            
            
            7,628Patents
            
            
            14
                to 17 years
            
            
            
            7,317
            
            
            
            (1,072
            )
            
            
            6,245Customer
                lists and distribution contracts
            
            
            3
                to 12 years
            
            
            
            100,516
            
            
            
            (27,600
            )
            
            
            72,916**Total**
            
            
            
            
            
            **$**
            169,175
            
            
            $
            (32,291
            )
            
            $
            136,884





For
      Parent Holdings, total amortization on other intangible assets was $3,567 and
      $11,245 for the three and nine months ended May 26, 2007, respectively, and
      was
      $3,461 and $10,369 for the three and nine months ended May 27, 2006,
      respectively, of which amortization on deferred financing costs is recorded
      as
      interest expense and amortization on patents and customer lists and distribution
      contracts is recorded as selling, general and administrative expenses. Estimated
      annual amortization expense is $14,558, $13,638, $13,638, $13,638 and $13,121,
      respectively, for fiscal years 2007 through 2011.





For
      Intermediate Holdings, total amortization on other intangible assets was $3,188
      and $10,108 for the three and nine months ended May 26, 2007, respectively,
      and
      was $3,461 and $10,369 for the three and nine months ended May 27, 2006,
      respectively, of which amortization on deferred financing costs is recorded
      as
      interest expense and amortization on patents and customer lists and distribution
      contracts is recorded as selling, general and administrative expenses. Estimated
      annual amortization expense is $13,118, $12,198, $12,198, $12,198 and $11,681,
      respectively, for fiscal years 2007 through 2011.








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


For
      AAC, total amortization on other intangible assets was $3,076 and $9,773 for
      the
      three and nine months ended May 26, 2007, respectively, and was $3,340 and
      $10,020 for the three and nine months ended May 27, 2006, respectively of which
      amortization on deferred financing costs is recorded as interest expense and
      amortization on patents and customer lists and distribution contracts is
      recorded as selling, general and administrative expenses. Estimated annual
      amortization expense is $12,672, $11,752, $11,752, $11,752 and $11,235,
      respectively, for fiscal years 2007 through 2011.





**5.
      Long-term Debt**


**May
                26, 2007**
            
            
            **August
                26, 2006****Parent
                Holdings**14.75%
                Senior PIK Notes (including PIK interest of $20,124 and $4,197,
                respectively)
            
            $
            170,124
            
            
            $
            154,19710.25%
                Senior discount notes due 2012 (net of unamortized discount of $16,379
                and
                $24,683, respectively)
            
            
            115,121
            
            
            
            106,8178.25%
                Senior subordinated notes due 2012
            
            
            150,000
            
            
            
            150,000Revolving
                credit facility due 2010
            
            
            —
            
            
            
            9,300Term
                loan due 2011
            
            
            94,320
            
            
            
            106,510Total
            
            
            529,565
            
            
            
            526,824Less
                current portion of long-term debt
            
            
            (972
            )
            
            
            (1,090
            )Total
                long-term debt
            
            $
            528,593
            
            
            $
            525,734





**May
                26, 2007**
            
            
            **August
                26, 2006****Intermediate
                Holdings**10.25%
                Senior discount notes due 2012 (net of unamortized discount of $16,379
                and
                $24,683, respectively)
            
            $
            115,121
            
            
            $
            106,8178.25%
                Senior subordinated notes due 2012
            
            
            150,000
            
            
            
            150,000Senior
                secured credit facilityRevolving
                credit facility due 2010
            
            
            —
            
            
            
            9,300Term
                loan due 2011
            
            
            94,320
            
            
            
            106,510Total
            
            
            359,441
            
            
            
            372,627Less
                current portion of long-term debt
            
            
            (972
            )
            
            
            (1,090
            )Total
                long-term debt
            
            $
            358,469
            
            
            $
            371,537





**May
                26, 2007**
            
            
            **August
                26, 2006****AAC**8.25%
                Senior subordinated notes due 2012
            
            $
            150,000
            
            
            $
            150,000Senior
                secured credit facilityRevolving
                credit facility due 2010
            
            
            —
            
            
            
            9,300Term
                loan due 2011
            
            
            94,320
            
            
            
            106,510Total
            
            
            244,320
            
            
            
            265,810Less
                current portion of long-term debt
            
            
            (972
            )
            
            
            (1,090
            )Total
                long-term debt
            
            $
            243,348
            
            
            $
            264,720





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


***14.75%
      Senior PIK Notes***


On
      June12, 2006, Parent Holdings issued $150 million of 12.75% PIK Notes. The
      net proceeds of this offering were used to pay a $140.5 million dividend to
      stockholders. Parent Holdings was formed in May 2006, as the parent of
      Intermediate Holdings and has no separate operations from its ownership in
      Intermediate Holdings. Interest accrued on these notes at 12.75% per annum
      through February 23, 2007. As of February 24, 2007, the rate at which
      interest accrues increased to 14.75% per annum (as described below). The first
      interest payment on the 12.75% PIK Notes occurred on October 1, 2006.
      Through April 1, 2011, interest on the 14.75% PIK Notes will be payable in
      the form of additional notes semi-annually in arrears on April 1 and October
      1.
      On October 1, 2011, and thereafter, interest will be payable in cash
      semi-annually in arrears on April 1 and October 1.





The
      14.75% PIK Notes mature on October 1, 2012. At maturity, Parent Holdings is
      required to repay the 14.75% PIK Notes at a repayment price of 103.188% of
      the
      aggregate principal amount thereof, plus accrued and unpaid interest and special
      interest, if any, to the maturity date.





At
      any time on or after October 1, 2008, Parent Holdings may redeem the 14.75%
      PIK Notes, in whole or in part, at a redemption price equal to 100% of the
      principal amount plus a premium of 9.563%, declining ratably to 3.188%, plus
      accrued, unpaid, and special interest. At any time prior to October 1,
      2008, Parent Holdings may also redeem 100% (but not less than 100%) of the
      then
      outstanding notes. The 14.75% PIK Notes are required to be redeemed with the
      net
      cash proceeds of certain equity offerings at redemption price equal to the
      lesser of 109.563% or the then applicable redemption price of the aggregate
      principal amount, plus accrued, unpaid, and special interest.





For
      the four quarters ending February 24, 2007, consolidated adjusted EBITDA fell
      below a certain target level , as specified in the indenture governing the
      12.75% PIK Notes, for the period then ended, and therefore, the rate at which
      interest accrues on the 12.75% PIK Notes increased by 2.00% per annum commencing
      on and including February 24, 2007 accordingly, the notes are referred to as
      14.75% PIK Notes subsequent to such date. Additionally, if the consolidated
      group leverage ratio on August 30, 2008 is greater than 5.0 to 1.0, the
      rate at which interest accrues on the 14.75% PIK Notes will increase an
      additional 2.00% per annum commencing on and including August 30,
      2008.





If
      a change in control as defined in the indenture relating to the 14.75% PIK
      Notes
      occurs, Parent Holdings must give the holders of the 14.75% Notes the
      opportunity to sell their 14.75% PIK Notes to Parent Holdings at 101% of the
      aggregate principal amount outstanding of the 14.75% PIK Notes, plus accrued
      interest.





Additionally,
      the terms of the 14.75% PIK Notes limit Parent Holdings’ ability to, among other
      things, incur additional indebtedness, dispose of assets, make acquisitions,
      make other investments, pay dividends and make various other payments. As of
      May
      26, 2007, Parent Holdings was in compliance with all such
      provisions.




***Mandatory
        Redeemable Preferred Stock***
 On
        January 18, 2006, Intermediate Holdings entered into a Preferred Stock
        Purchase Agreement (the “Purchase Agreement”) with an investor pursuant to which
        Intermediate Holdings sold shares of its Series A Mandatory Redeemable
        Preferred Stock (the “Series A Preferred Stock”). In connection with the
        Purchase Agreement, the investor was granted (i) registration rights on the
        capital stock of Intermediate Holdings held by the investor in the event
        of an
        initial public offering by Intermediate Holdings, (ii) preemptive rights to
        purchase additional capital stock of Intermediate Holdings in order to maintain
        its percentage ownership in Intermediate Holdings upon the sales of additional
        capital stock and (iii) the right to have an observer seat on the Board of
        Directors of Intermediate Holdings. Intermediate Holdings issued the investor
        7,500 shares of the Series A Preferred Stock for an aggregate purchase
        price of $7.5 million, which the investor paid to Intermediate Holdings in
        cash. The holders of the Series A Preferred Stock are entitled to receive
        cumulative dividends at a rate of 14% per year, when, as and if declared
        by the
        Board of Directors of Intermediate Holdings. All undeclared dividends and
        declared but unpaid dividends shall accrue from the date the stock was issued.
        Undeclared dividends at May 26, 2007 totaled $1,557 and have been recorded
        as
        accrued interest in other long-term liabilities in the financial statements.
        The
        Series A Preferred Stock may be redeemed by Intermediate Holdings on or
        after January 18, 2007 at a price equal to 104% of the Liquidation
        Preference (as defined in the Amended and Restated Certificate of Incorporation
        of Intermediate Holdings (the “Certificate of Incorporation”). Such percentage
        is reduced annually until the purchase price upon redemption to Intermediate
        Holdings is equal to 100% of the Liquidation Preference.
 
 In
        addition, the Series A Preferred Stock is subject to mandatory redemption
        on January 18, 2013 or, at the election of the investor, in the event of a
        Change in Control or a Public Equity Offering (each as defined in the
        Certificate of Incorporation). As a result of the mandatory redemption
        requirements, the Series A Preferred Stock was classified as long-term
        debt.
 
 The
        holders of Series A Preferred Stock agreed in May 2006 to exchange
        their shares of Series A Preferred Stock for new shares of Series A
        Mandatory Redeemable Preferred Stock of Parent Holdings, the new parent company
        of Intermediate Holdings. These new shares have the same rights, preferences
        and
        privileges as the Series A Preferred Stock of Intermediate
        Holdings.


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





***10.25%
      Senior Discount Notes***


On
      November 16, 2004 Intermediate Holdings issued the 10.25% Notes. The net
      proceeds of this offering were distributed to stockholders through the
      repurchase of shares of Intermediate Holdings’ common stock from its
      stockholders. Intermediate Holdings was formed on November 8, 2004 and has
      no operations separate from its ownership in AAC Holding Corp. and its
      subsidiary, AAC. Interest accrues on the 10.25% Notes in the form of an increase
      in the accreted value of the notes prior to October 1, 2008. Thereafter,
      cash interest on the 10.25% Notes will accrue and be payable semiannually in
      arrears on April 1 and October 1 of each year, commencing April 1, 2009 at
      a rate of 10.25% per annum.





At
      any time on or after October 1, 2008, Intermediate Holdings may redeem the
      10.25% Notes, in whole or in part, at a redemption price equal to 100% of the
      principal amount plus a premium of 5.125%,


declining
      ratably to par, plus accrued and unpaid interest. At any time on or prior to
      October 1, 2007, Intermediate Holdings may redeem up to 35% of the
      aggregate accreted value of the 10.25% Notes with the proceeds of qualified
      equity offerings at a redemption price equal to 110.25% of the accreted
      value.





If
      a change in control as defined in the indenture relating to the 10.25% Notes
      occurs prior to October 1, 2008, Intermediate Holdings must give the
      holders of the 10.25% Notes the opportunity to sell their 10.25% Notes to
      Intermediate Holdings at 101% of the accreted value of the 10.25% Notes, plus
      accrued interest. If a change in control as defined in the indenture relating
      to
      the 10.25% Notes occurs following October 1, 2008, Intermediate Holdings
      must give the holders of the 10.25% Notes the opportunity to sell their 10.25%
      Notes to Intermediate Holdings at 101% of the aggregate principal amount at
      maturity of the 10.25% Notes, plus accrued interest.





Additionally,
      the terms of the 10.25% Notes limit Intermediate Holdings’ ability to, among
      other things, incur additional indebtedness, dispose of assets, make
      acquisitions, make other investments, pay dividends and make various other
      payments. The terms also include cross-default provisions to the indenture
      governing the 8.25% Notes and the Senior Credit Facility (as defined below).
      As
      of May 26, 2007 Intermediate Holdings was in compliance with all such
      provisions.





***8.25%
      Senior Subordinated Notes***


On
      March 25, 2004, AAC issued $150 million of the 8.25% Notes. The 8.25%
      Notes bear interest at a stated rate of 8.25%. The 8.25% Notes are unsecured
      senior subordinated obligations and are subordinated in right of payment to
      all
      of AAC’s existing and future senior indebtedness, including obligations under
      the Company’s Senior Credit Facility (as defined below), *pari passu*in
      right of payment with any of the Company’s future senior subordinated
      indebtedness and senior in right of payment to any of the Company’s future
      subordinated indebtedness. The 8.25% Notes are guaranteed by certain of the
      Company’s existing domestic subsidiaries (non guarantor subsidiaries are minor),
      and will be guaranteed by certain of the Company’s future domestic subsidiaries.
      The guarantees are subordinated in right of payment to all existing and future
      senior indebtedness of the applicable guarantor, *pari passu*in right of
      payment with any future senior subordinated debt of such guarantor and senior
      in
      right of payment to any future subordinated indebtedness of such
      guarantor.





The
      Company may not redeem the 8.25% Notes until on or after April 1, 2008,
      except that the Company, in connection with certain equity offerings, may redeem
      up to 35% of the 8.25% Notes before the third anniversary of the issue date
      of
      the 8.25% Notes as long as (a) the Company pays a specified percentage of
      the principal amount of the 8.25% Notes, plus interest, (b) the Company
      redeems the 8.25% Notes within 90 days of completing a public equity
      offering and (c) at least 65% of the aggregate principal amount of the
      8.25% Notes originally issued remains outstanding afterward.





If
      a change in control as defined in the indenture relating to the 8.25% Notes
      occurs, the Company must give the holders of the 8.25% Notes the opportunity
      to
      sell their 8.25% Notes to the Company at 101% of the principal amount of the
      8.25% Notes, plus accrued interest.





The
      8.25% Notes contain customary negative covenants and restrictions on actions
      by
      the Company and its subsidiaries including, without limitation, restrictions
      on
      additional indebtedness, investments, asset dispositions outside the ordinary
      course of business, liens, and transactions with affiliates, among other
      restrictions (as defined in the indenture governing the 8.25% Notes). In
      addition, the 8.25% Notes contain covenants, which restrict the declaration
      or
      payment of dividends by the Company and/or its subsidiaries (as defined in
      the
      indenture governing the 8.25% Notes). The Company was in compliance with the
      8.25% Notes covenants as of May 26, 2007.





***Senior
      Secured Credit Facility***





On
      March 25, 2004, AAC entered into a $195.0 million senior credit
      facility (the “Senior Credit Facility”) which includes a $155.0 million
      term loan and up to $40.0 million available under a revolving credit
      facility. The Senior Credit Facility is secured by a first priority security
      interest in all existing and after-acquired assets of AAC, and certain of AAC’s
      direct and indirect domestic subsidiaries’ existing and after-acquired assets,
      including, without limitation, real property and all of the capital stock owned
      by AAC


Holding
      Corp. and certain of AAC’s direct and indirect domestic subsidiaries (including
      certain capital stock of their direct foreign subsidiaries only to the extent
      permitted by applicable law). As of May 26, 2007, assets of AAC subject to
      lien
      under the Senior Credit Facility were approximately $341.1 million. All of
      AAC’s
      obligations under the Senior Credit Facility are fully and unconditionally
      guaranteed by AAC Holding Corp. and certain of AAC’s direct and indirect
      domestic subsidiaries.





On
      August 17, 2006, some of the terms of the Senior Credit Facility were
      amended, “Amended Senior Credit Facility,” which added Parent Holdings to the
      agreement and gave the Company more latitude in some of the restrictions on
      restricted junior payments, reimbursement of income taxes and corporate
      operating expenses.





The
      term loan of the Amended Senior Credit Facility is due in March 2011.
      Quarterly payments of $243 are made through 2011. The term loan of the Amended
      Senior Credit Facility has an interest rate based on the prime rate, plus points
      based on a calculated leverage ratio. The weighted average interest rate on
      the
      term loan of the Amended Senior Credit Facility was approximately 7.7% at May
      26, 2007.





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
      $0.8 million was mandatory quarterly payments.





The
      revolving credit facility matures in March 2010. 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
      26,
      2007 was approximately $37.7 million including $2.3 million in letters
      of credit outstanding.





Advances
      under the revolving credit facility may be made as base rate loans or LIBOR
      loans at AAC’s election (except for the initial loans that were base rate
      loans). Interest rates payable on advances are based upon the base rate or
      LIBOR
      depending on the type of loan AAC chooses, plus an applicable margin based
      upon
      a consolidated leverage ratio of certain outstanding indebtedness to EBITDA
      (net
      income (loss) before interest expense, income taxes, depreciation and
      amortization) to be calculated in accordance with the terms specified in the
      credit agreement governing the Amended Senior Credit Facility.





The Amended Senior Credit Facility and the indenture governing the 8.25% Notes
      each contain restrictions on the ability of AAC to pay dividends and make
      certain other payments to Parent Holdings and subsidiaries. Pursuant to each
      arrangement, AAC may, subject to certain limitations, pay dividends or make
      such
      payments in connection with (i) repurchases of certain capital stock of
      Parent Holdings and (ii) the payment by Parent Holdings of taxes, costs and
      other expenses required to maintain its legal existence and legal, accounting
      and other overhead costs in the ordinary course of business.





AAC
      was in compliance with the Amended Senior Credit Facility’s covenants as of May
      26, 2007.





Parent
      Holdings’ weighted average interest rate on debt outstanding as of May 26, 2007
      and August 26, 2006 was 10.7% and 10.0%, respectively.





Intermediate
      Holdings’ weighted average interest rate on debt outstanding as of May 26, 2007
      and August 26, 2006 was 8.8% and 8.7%, respectively.





AAC’s
      weighted average interest rate on debt outstanding as of May 26, 2007 and August
      26, 2006 was 8.0% and 8.1%, respectively.





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


**6.
      Commitments and Contingencies**





***Pending
      Litigation***


On
      July 17, 2006, in the 128th Judicial
      District
      Court of Orange County, Texas a Seventh Amended Petition (naming over 100
      defendants) was filed by the estate of John Estrada and Nancy Estrada adding
      Taylor Publishing Company (“Taylor”), a subsidiary of AAC, back into a long
      outstanding multi-party toxic tort suit. Taylor was originally brought into
      this
      lawsuit in September of 2004 when Mr. Estrada, a former Taylor-San Angelo
      employee and his wife, filed their Fifth Amended Petition seeking damages for
      personal injuries allegedly caused by Mr. Estrada’s exposure to benzene in
      the workplace. On June 21, 2005, the Estrada’s dismissed their case against
      Taylor, without prejudice, without any payment or other compensation by Taylor.
      Mr. Estrada is now deceased. This Seventh Amended Petition now seeks
      damages for his alleged wrongful death and seeks to avoid the Workers’
Compensation bar to employer liability by pleading gross negligence on the
      part
      of Taylor. Taylor filed a timely answer to the lawsuit. A settlement with
      prejudice has been reached and the settlement documents have been executed.
      The
      settlement amount is less than $50,000 and contains a confidentiality and non
      disclosure provision.





The
      Company is not a party to any other 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 flow.





***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. The Company had expensed $30
      consignment fees for the three months ended May 26, 2007 and $82 for the three
      months ended May 27, 2006. The Company had expensed $36 consignment fees for
      the
      nine months ended May 26, 2007 and $242 for the nine months ended May 27, 2006.
      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 26, 2007, the Company held 8,865 ounces of consigned gold valued at
      $5.8 million, while at August 26, 2006, 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.





**7.
      Income Taxes**


AAC has recorded a tax provision at an effective rate of 39% for the three
      and
      nine months ended May 26, 2007, which represents the estimated federal and
      state
      income tax rate that will apply to estimated pre-tax earnings for fiscal 2007.
      Intermediate Holdings has recorded a tax provision at an effective rate of
      42%
      for the three and nine months ended May 26, 2007, which represents the estimated
      federal and state income tax rate, after taking into consideration the
      non-deductibility of a portion of its interest on high-yield debt, that will
      apply to pre-tax earnings for fiscal 2007. Parent Holdings has recorded a tax
      provision at an effective rate of 38% and a tax benefit at an effective rate
      of
      24% for the three and nine months ended May 26, 2007, respectively. The
      effective rate of 24% for the nine month period represents the estimated annual
      federal and state income tax rate that would apply to estimated pre-tax
      earnings. Since the estimated non-deductible interest on its high yield debt
      is
      significant in relation to the projected book pre-tax loss for fiscal 2007,
      there is a high degree of variability on the potential annual effective tax
      rate.


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





**8.
      Postretirement Pension and Medical Benefits**


Commemorative
      Brands, Inc. (“CBI”), a wholly-owned subsidiary of AAC, provides certain
      healthcare and life insurance benefits for former employees of the L.G. Balfour
      Company, Inc. (“CBI Plan”). Certain hourly employees of Taylor are covered by a
      defined benefit pension plan (“TPC Plan”) established by Taylor. 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.





The
      net periodic postretirement benefit cost (income), include the following
      components:


For
                the three months ended
            
            
            For
                the three months endedMay
                26, 2007
            
            
            May
                27, 2006CBI
                post-
            
            
            
            
            
            
            CBI
                post-Taylor
                pension
            
            
            retirement
            
            
            Taylor
                pension
            
            
            retirementService
                costs, benefits attributed to Service during the period
            
            $
            20
            
            
            $
            —
            
            
            $
            25
            
            
            $
            —Interest
                cost
            
            
            225
            
            
            
            27
            
            
            
            211
            
            
            
            32Expected
                return on assets
            
            
            (247
            )
            
            
            —
            
            
            
            (223
            )
            
            
            —Amortization
                of unrecognized net loss (gain)
            
            
            —
            
            
            
            (88
            )
            
            
            —
            
            
            
            (80
            )Amortization
                of unrecognized net prior service costs
            
            
            —
            
            
            
            (37
            )
            
            
            —
            
            
            
            (25
            )Net
                periodic postretirement benefit cost (income)
            
            $
            (2
            )
            
            $
            (98
            )
            
            $
            13
            
            
            $
            (73
            )





For
                the nine months ended
            
            
            For
                the nine months endedMay
                26, 2007
            
            
            May
                27, 2006CBI
                post-
            
            
            
            
            
            
            CBI
                post-Taylor
                pension
            
            
            retirement
            
            
            Taylor
                pension
            
            
            retirementService
                costs, benefits attributed to Service during the period
            
            $
            60
            
            
            $
            —
            
            
            $
            74
            
            
            $
            —Interest
                cost
            
            
            675
            
            
            
            81
            
            
            
            633
            
            
            
            110Expected
                return on assets
            
            
            (741
            )
            
            
            —
            
            
            
            (669
            )
            
            
            —Amortization
                of unrecognized net loss (gain)
            
            
            —
            
            
            
            (264
            )
            
            
            —
            
            
            
            (235
            )Amortization
                of unrecognized net prior service costs
            
            
            —
            
            
            
            (111
            )
            
            
            —
            
            
            
            (25
            )Net
                periodic postretirement benefit cost (income)
            
            $
            (6
            )
            
            $
            (294
            )
            
            $
            38
            
            
            $
            (150
            )





**9.
      Related-Party Transactions**


On
      March 25, 2004, AAC entered into a new 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 $3,000 or 5% of
      the
      previous fiscal year’s EBITDA (as defined in the agreement). Amounts paid under
      the new management agreement totaled $916 and $2,748 by the Company for the
      three and nine months ended May 26, 2007, respectively, and $750 and $2,250
      for
      the three and nine months ended May 27, 2006.





As
      of May 26, 2007, the Company had prepaid management fees of approximately $305
      and accrued expenses of approximately $55, while as of August 26, 2006, the
      Company had prepaid management fees of approximately $250, and accrued expenses
      of approximately $90.





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


**10.
      Business Segments**


The Company manufactures, markets and sells class rings, yearbooks, letter
      jackets, and graduation products, which includes fine paper products and
      graduation accessories, to high school, college and, to a lesser extent,
      elementary and junior high school markets in the United States. The Company’s
      class ring segment consists of its on campus class rings and retail class rings
      operating segments, which have been aggregated into one reporting segment in
      accordance with paragraph 26.a of FAS 131. The achievement publications segment
      produces, markets, and sells publications that recognize the achievements of
      top
      students at the high school and college levels, as well as the nation’s most
      inspiring teachers. The other segment consists of jewelry commemorating family
      events such as the birth of a child, fan affinity jewelry and related products,
      professional sports championship rings such as World Series rings, commercial
      and fine books, and letter jackets.


**Parent
                Holdings****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Three
                Months Ended May 26, 2007**Net
                sales
            
            $
            40,409
            
            
            $
            68,202
            
            
            $
            25,029
            
            
            $
            341
            
            
            $
            10,182
            
            
            $
            144,163Segment
                operating income (loss)
            
            
            7,369
            
            
            
            25,206
            
            
            
            6,852
            
            
            
            (949
            )
            
            
            1,433
            
            
            $
            39,911Segment
                assets
            
            
            206,373
            
            
            
            190,496
            
            
            
            67,388
            
            
            
            36,127
            
            
            
            40,079
            
            
            $
            540,463





**Parent
                Holdings****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Three
                Months Ended May 27, 2006**Net
                sales
            
            $
            37,656
            
            
            $
            70,858
            
            
            $
            23,800
            
            
            $
            1,145
            
            
            $
            6,705
            
            
            $
            140,164Segment
                operating income (loss)
            
            
            6,644
            
            
            
            25,155
            
            
            
            5,860
            
            
            
            (635
            )
            
            
            (186)
            
            
            $
            36,838Segment
                assets
            
            
            206,331
            
            
            
            192,674
            
            
            
            67,336
            
            
            
            38,657
            
            
            
            34,799
            
            
            $
            539,797





**Parent
                Holdings****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Nine
                Months Ended May 26, 2007**Net
                sales
            
            $
            104,778
            
            
            $
            81,407
            
            
            $
            43,066
            
            
            $
            1,631
            
            
            $
            23,716
            
            
            $
            254,598Segment
                operating income (loss)
            
            
            16,092
            
            
            
            17,336
            
            
            
            7,891
            
            
            
            (2,976
            )
            
            
            2,151
            
            
            $
            40,494Segment
                assets
            
            
            206,373
            
            
            
            190,496
            
            
            
            67,388
            
            
            
            36,127
            
            
            
            40,079
            
            
            $
            540,463





**Parent
                Holdings****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Nine
                Months Ended May 27, 2006**Net
                sales
            
            $
            103,715
            
            
            $
            86,390
            
            
            $
            42,641
            
            
            $
            8,661
            
            
            $
            16,326
            
            
            $
            257,733Segment
                operating income (loss)
            
            
            17,350
            
            
            
            19,025
            
            
            
            6,852
            
            
            
            (479)
            
            
            
            (9)
            
            
            $
            42,739Segment
                assets
            
            
            206,331
            
            
            
            192,674
            
            
            
            67,336
            
            
            
            38,657
            
            
            
            34,799
            
            
            $
            539,797


21
 **AMERICAN
                ACHIEVEMENT GROUP HOLDING CORP.**
 **AAC
                GROUP HOLDING CORP.**
 **AMERICAN
                ACHIEVEMENT CORPORATION**
 Notes
                to Condensed Consolidated Financial Statements -
                (Continued)
 (Dollars
                in thousands, unless otherwise stated)
 (unaudited)





**Intermediate
                Holdings****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Three
                Months Ended May 26, 2007**Net
                sales
            
            $
            40,409
            
            
            $
            68,202
            
            
            $
            25,029
            
            
            $
            341
            
            
            $
            10,182
            
            
            $
            144,163Segment
                operating income (loss)
            
            
            7,369
            
            
            
            25,206
            
            
            
            6,852
            
            
            
            (949
            )
            
            
            1,433
            
            
            $
            39,911Segment
                assets
            
            
            203,131
            
            
            
            187,549
            
            
            
            66,338
            
            
            
            35,599
            
            
            
            39,534
            
            
            $
            532,151





**Intermediate
                Holdings****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Three
                Months Ended May 27, 2006**Net
                sales
            
            $
            37,656
            
            
            $
            70,858
            
            
            $
            23,800
            
            
            $
            1,145
            
            
            $
            6,705
            
            
            $
            140,164Segment
                operating income (loss)
            
            
            6,644
            
            
            
            25,155
            
            
            
            5,860
            
            
            
            (635
            )
            
            
            (186)
            
            
            $
            36,838Segment
                assets
            
            
            206,331
            
            
            
            192,674
            
            
            
            67,336
            
            
            
            38,657
            
            
            
            34,799
            
            
            $
            539,797





**Intermediate
                Holdings****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Nine
                Months Ended May 26, 2007**Net
                sales
            
            $
            104,778
            
            
            $
            81,407
            
            
            $
            43,066
            
            
            $
            1,631
            
            
            $
            23,716
            
            
            $
            254,598Segment
                operating income (loss)
            
            
            16,092
            
            
            
            17,336
            
            
            
            7,891
            
            
            
            (2,976
            )
            
            
            2,151
            
            
            $
            40,494Segment
                assets
            
            
            203,131
            
            
            
            187,549
            
            
            
            66,338
            
            
            
            35,599
            
            
            
            39,534
            
            
            $
            532,151





**Intermediate
                Holdings****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Nine
                Months Ended May 27, 2006**Net
                sales
            
            $
            103,715
            
            
            $
            86,390
            
            
            $
            42,641
            
            
            $
            8,661
            
            
            $
            16,326
            
            
            $
            257,733Segment
                operating income (loss)
            
            
            17,350
            
            
            
            19,025
            
            
            
            6,852
            
            
            
            (479)
            
            
            
            (9)
            
            
            $
            42,739Segment
                assets
            
            
            206,331
            
            
            
            192,674
            
            
            
            67,336
            
            
            
            38,657
            
            
            
            34,799
            
            
            $
            539,797


22
 **AMERICAN
                ACHIEVEMENT GROUP HOLDING CORP.**
 **AAC
                GROUP HOLDING CORP.**
 **AMERICAN
                ACHIEVEMENT CORPORATION**
 Notes
                to Condensed Consolidated Financial Statements -
                (Continued)
 (Dollars
                in thousands, unless otherwise stated)
 (unaudited)





**AAC****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Three
                Months Ended May 26, 2007**Net
                sales
            
            $
            40,409
            
            
            $
            68,202
            
            
            $
            25,029
            
            
            $
            341
            
            
            $
            10,182
            
            
            $
            144,163Segment
                operating income (loss)
            
            
            7,369
            
            
            
            25,206
            
            
            
            6,852
            
            
            
            (949
            )
            
            
            1,433
            
            
            $
            39,911Segment
                assets
            
            
            201,994
            
            
            
            186,516
            
            
            
            65,970
            
            
            
            35,413
            
            
            
            39,344
            
            
            $
            529,237





**AAC****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Three
                Months Ended May 27, 2006**Net
                sales
            
            $
            37,656
            
            
            $
            70,858
            
            
            $
            23,800
            
            
            $
            1,145
            
            
            $
            6,705
            
            
            $
            140,164Segment
                operating income (loss)
            
            
            6,644
            
            
            
            25,155
            
            
            
            5,860
            
            
            
            (635
            )
            
            
            (186)
            
            
            $
            36,838Segment
                assets
            
            
            204,930
            
            
            
            191,401
            
            
            
            66,883
            
            
            
            38,429
            
            
            
            34,564
            
            
            $
            536,207





**AAC****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Nine
                Months Ended May 26, 2007**Net
                sales
            
            $
            104,778
            
            
            $
            81,407
            
            
            $
            43,066
            
            
            $
            1,631
            
            
            $
            23,716
            
            
            $
            254,598Segment
                operating income (loss)
            
            
            16,092
            
            
            
            17,336
            
            
            
            7,891
            
            
            
            (2,976
            )
            
            
            2,151
            
            
            $
            40,494Segment
                assets
            
            
            201,994
            
            
            
            186,516
            
            
            
            65,970
            
            
            
            35,413
            
            
            
            39,344
            
            
            $
            529,237





**AAC****Class**
            
            
            
            
            
            **Graduation**
            
            **Achievement****Rings**
            
            **Yearbooks**
            
            **Products**
            
            **Publications**
            
            **Other**
            
            **Total****Nine
                Months Ended May 27, 2006**Net
                sales
            
            $
            103,715
            
            
            $
            86,390
            
            
            $
            42,641
            
            
            $
            8,661
            
            
            $
            16,326
            
            
            $
            257,733Segment
                operating income (loss)
            
            
            17,350
            
            
            
            19,025
            
            
            
            6,852
            
            
            
            (479)
            
            
            
            (9)
            
            
            $
            42,739Segment
                assets
            
            
            204,930
            
            
            
            191,401
            
            
            
            66,883
            
            
            
            38,429
            
            
            
            34,564
            
            
            $
            536,207


23
 **AMERICAN
                ACHIEVEMENT GROUP HOLDING CORP.**
 **AAC
                GROUP HOLDING CORP.**
 **AMERICAN
                ACHIEVEMENT CORPORATION**
 Notes
                to Condensed Consolidated Financial Statements -
                (Continued)
 (Dollars
                in thousands, unless otherwise stated)
 (unaudited)





**11.
      Recent Accounting Pronouncements**


In
      July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“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
      will be effective for the Company beginning with its fiscal year 2008. The
      Company is currently evaluating the impact this standard will have on its
      financial position and results of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements” (“FAS 157”), which defines fair value, establishes a framework for
      measuring fair value and expands disclosures about fair value measurements.
      FAS
      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 FAS 157 are effective for the Company with its fiscal year 2009.
      The Company is currently evaluating the impact this standard will have on its
      financial position and results of operations.





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)” (“FAS 158”). FAS 158 requires
      the recognition of an asset for a plan’s overfunded status or a liability for a
      plan’s underfunded status in the statement of financial position, measurement of
      the funded status of a plan as of the date of its year-end statement of
      financial position and recognition for changes in the funded status of a defined
      benefit postretirement plan in the year in which the changes occur as a
      component of other comprehensive income. The provisions of FAS 158 will be
      effective for the Company at the end of its fiscal year 2007. The Company is
      currently evaluating the impact this standard will have on its financial
      position and results of operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities—Including an amendment of FASB
      Statement No. 115” (“FAS 159”), which permits entities to choose to measure
      many financial instruments and certain other items at fair value. The accounting
      provisions of FAS 159 are effective for the Company beginning with its fiscal
      year 2009. The Company is currently evaluating the impact this standard will
      have on its financial position and results of operations.








24


**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 the notes
      thereto. The consolidated financial statements, and the notes thereto, have
      been
      prepared in accordance with U.S. GAAP. The following discussion includes
      forward-looking statements that involve certain risks and uncertainties. See
      “Disclosure Regarding Forward-Looking Statements.”





**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.





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 additional interest
      expense related to the 10.25% senior discount notes, amortization of deferred
      financing costs and the effective income tax rate.





Intermediate
      Holdings was formed on November 8, 2004. On November 16, 2004, the
      stockholders of AAC Holding Corp. participated in an exchange, pursuant to
      which
      they exchanged their shares of common stock in AAC Holding Corp. for a like
      amount of shares in Intermediate Holdings. Following the exchange, AAC Holding
      Corp. became a wholly-owned subsidiary of Intermediate Holdings.





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 additional
      interest expense related to its 14.75% senior PIK notes, amortization of
      deferred financing costs and the effective income tax rate.





Parent
      Holdings was formed in May 2006, and the stockholders of Intermediate
      Holdings participated in an exchange on May 30, 2006, pursuant to which
      they exchanged their shares of common stock and preferred stock in Intermediate
      Holdings for a like kind and amount of shares in Parent Holdings. Following
      the
      exchange, Intermediate Holdings became a wholly-owned subsidiary of Parent
      Holdings.





**Fiscal
      Year End**


We use a 52/53-week fiscal year ending on the last Saturday of
      August.





**General**


We are one of the leading manufacturers and marketers of class rings, yearbooks,
      graduation products, achievement publications and recognition and affinity
      jewelry in the United States. We serve the high school, college and, to a lesser
      extent, elementary and junior high school markets. We market and sell yearbooks
      in all of the markets we serve. We primarily sell our class rings, graduation
      products, and letter jackets, which include fine paper products and graduation
      accessories, in the high school, college and junior high school markets. Our
      achievement publications segment produces, markets, and sells publications
      that
      recognize the achievements of top students at the high school and college
      levels, as well as the nation’s most inspiring teachers. It consists of various
      titles including the *Who’s Who*brand and *The National Dean’s
      List*. Our other segment consists primarily of jewelry commemorating family
      events such as the birth of a child, fan affinity jewelry and related products,
      professional sports championship rings such as World Series rings, commercial
      printing, and letter jackets.










25







Our
      ability to meet our debt service and other obligations depends in significant
      part on how successful we are in maintaining our business and further
      implementing our business strategy. Our business plan envisions several
      long-term growth initiatives, including the development and acquisition 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, precious and
      non-precious 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 all of our gold from a single supplier,
      The
      Bank of Nova Scotia, 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 stones from a
      single supplier in Germany. The prices for these products 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. Gold prices were unstable and the U.S. dollar declined compared
      to
      the Euro during the first three quarters of our fiscal year 2007.





We
      face competition for most of our principal products. The class ring and yearbook
      markets are highly concentrated and consist primarily of a few national
      manufacturers (of which we are one) and, to a significantly lesser extent,
      small
      regional competitors. Our achievement publication products compete with one
      national manufacturer and, to a lesser extent, with various other companies.
      We
      believe that it would be costly and time-consuming for new competitors to
      replicate the production and distribution capabilities necessary to compete
      effectively in this market, and as a result, there have been no major new
      competitors in the last 60 years.





We
      experience seasonal fluctuations in our net sales tied primarily to the school
      year. We recorded 44% of our fiscal year 2006 net sales in our third quarter.
      Class ring sales are highest during October through December, with most 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. We have experienced operating losses during our first and
      fourth fiscal quarters, which include 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. The
      interest rates are based on a floating benchmark rate (such as LIBOR or the
      Federal Funds rate) plus a fixed spread.





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 grow by an average of
      2.2%
      and 2.5% per year, respectively, from 2002 to 2008. Additionally, the U.S.
      Census Bureau projects that the total U.S. population will increase by 9.5%
      between 2000 and 2010. Both the increased population, and the increased number
      of high school and college graduates should expand the market for our
      products.





**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 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, whose primary business was
      designing and printing student yearbooks. In March 2001, AAC acquired all of
      the
      capital stock of Educational Communications, Inc. (“ECI”), which publishes
      achievement publications. 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.







26





On
      March 25, 2004, AAC Acquisition Corp., a wholly owned subsidiary of AAC
      Holding Corp., merged with and into AAC (the “Merger”), with AAC continuing as
      the surviving corporation and a wholly-owned subsidiary of AAC Holding Corp.
      The
      Merger was financed by a cash equity investment by an investor group led by
      Fenway Partners Capital Fund II, L.P., borrowings under AAC’s senior secured
      credit facility and the issuance of AAC’s 8.25% senior subordinated notes due
      2012. In November 2004, AAC Holding Corp. underwent a recapitalization
      transaction pursuant to which its stockholders exchanged their shares of AAC
      Holding Corp. common stock for shares of Intermediate Holdings common stock
      and,
      as a result, AAC Holding Corp became a wholly owned subsidiary of Intermediate
      Holdings.





On
      November 16, 2004, Intermediate Holdings issued $131.5 million
      aggregate principal amount at maturity of 10.25% senior discount notes due
      2012
      (the “10.25% Notes”), generating net proceeds of $89.3 million. Intermediate
      Holdings is the sole obligor of these notes. The net proceeds of this offering
      were distributed to stockholders through the repurchase of shares of
      Intermediate Holdings’ common stock from its stockholders.





On
      January 18, 2006, Intermediate Holdings entered into a Preferred Stock
      Purchase Agreement with an investor pursuant to which Intermediate Holdings
      sold
      shares of its Series A Mandatory Redeemable Preferred Stock (“Series A
      Preferred Stock”). In connection with this transaction, Intermediate Holdings
      issued the investor 7,500 shares of the Series A Preferred Stock for an
      aggregate purchase price of $7.5 million, which the investor paid to
      Intermediate Holdings in cash. The holders of the Series A Preferred Stock
      are entitled to receive cumulative dividends at a rate of 14% per year, when,
      as
      and if declared by the Board of Directors of Intermediate Holdings.





On
      May 8, 2006, the holders of outstanding stock of Intermediate Holdings,
      agreed to form a new holding company for Intermediate Holdings, and on
      May 30, 2006, reached agreement for their new company, American Achievement
      Group Holding Corp., to affect a stock exchange with Intermediate Holdings.
      Pursuant to that agreement, each holder of common stock of Intermediate Holdings
      contributed each share of such stock then held to Parent Holdings in exchange
      for a new share of common stock of Parent Holdings and each holder of
      Series A Preferred Stock of Intermediate Holdings contributed each share of
      such stock then held to Parent Holdings in exchange for a new share of series
      A
      mandatory redeemable preferred stock of Parent Holdings. Each new share of
      capital stock received in such contribution and exchange had the same rights,
      preferences and privileges as the corresponding share of stock of Intermediate
      Holdings that was contributed to Parent Holdings. As a result of the foregoing
      recapitalization, Intermediate Holdings became a wholly owned subsidiary of
      Parent Holdings.





On
      June 12, 2006, Parent Holdings issued $150.0 million principal amount
      of 12.75% senior PIK notes due October 1, 2012. The net proceeds of the
      12.75% senior PIK notes were approximately $140.5 million and were
      distributed to the stockholders of Parent Holdings as a dividend. The 12.75%
      senior PIK notes are the unsecured senior obligation of Parent Holdings and
      are
      not guaranteed by Intermediate Holdings or any of its subsidiaries. Interest
      accrued on these notes at 12.75% per annum through February 23, 2007. As of
      February 24, 2007, the rate at which interest accrues increased to 14.75% per
      annum.





Effective
      April 1, 2007, Commemorative Brands, Inc., 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”). Powers is a producer of quality
      letter jackets, chenille patches and other school spirit embroidery merchandise,
      located in Waco, Texas. The purchase price in connection with this acquisition
      was approximately $6.2 million, including transaction costs, with up to $1.5
      million additional to be paid upon achieving certain financial goals through
      August 2010. The Powers acquisition was accounted for using the purchase method
      of accounting.





27


**Results
      of Operations**


**Three
      Months Ended May 26, 2007 Compared to Three Months Ended May 27,
      2006**


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
      (dollars in thousands):


**Parent
                Holdings****For
                the Three**
            
            
            **%
                of**
            
            
            **For
                the Three**
            
            
            **%
                of****Months
                Ended**
            
            
            **Net**
            
            
            **Months
                Ended**
            
            
            **Net****May
                26, 2007**
            
            
            **Sales**
            
            
            **May
                27, 2006**
            
            
            **Sales**Net
                sales
            
            $
            144,163
            
            
            
            100.0
            %
            
            $
            140,164
            
            
            
            100.0
            %Cost
                of sales
            
            
            57,157
            
            
            
            39.7
            %
            
            
            56,566
            
            
            
            40.4
            %Gross
                profit
            
            
            87,006
            
            
            
            60.3
            %
            
            
            83,598
            
            
            
            59.6
            %Selling,
                general and administrative expenses
            
            
            47,095
            
            
            
            32.7
            %
            
            
            46,760
            
            
            
            33.3
            %Operating
                income
            
            
            39,911
            
            
            
            27.6
            %
            
            
            36,838
            
            
            
            26.3
            %Interest
                expense
            
            
            15,608
            
            
            
            10.8
            %
            
            
            8,910
            
            
            
            6.4
            %Income
                before income taxes
            
            
            24,303
            
            
            
            16.8
            %
            
            
            27,928
            
            
            
            19.9
            %Provision
                for income taxes
            
            
            9,136
            
            
            
            6.3
            %
            
            
            12,169
            
            
            
            8.7
            %Net
                income
            
            $
            15,167
            
            
            
            10.5
            %
            
            $
            15,759
            
            
            
            11.2
            %





**Intermediate
                Holdings****For
                the Three**
            
            
            **%
                of**
            
            
            **For
                the Three**
            
            
            **%
                of****Months
                Ended**
            
            
            **Net**
            
            
            **Months
                Ended**
            
            
            **Net****May
                26, 2007**
            
            
            **Sales**
            
            
            **May
                27, 2006**
            
            
            **Sales**Net
                sales
            
            $
            144,163
            
            
            
            100.0
            %
            
            $
            140,164
            
            
            
            100.0
            %Cost
                of sales
            
            
            57,157
            
            
            
            39.7
            %
            
            
            56,566
            
            
            
            40.4
            %Gross
                profit
            
            
            87,006
            
            
            
            60.3
            %
            
            
            83,598
            
            
            
            59.6
            %Selling,
                general and administrative expenses
            
            
            47,095
            
            
            
            32.7
            %
            
            
            46,760
            
            
            
            33.3
            %Operating
                income
            
            
            39,911
            
            
            
            27.6
            %
            
            
            36,838
            
            
            
            26.3
            %Interest
                expense
            
            
            8,555
            
            
            
            5.9
            %
            
            
            8,910
            
            
            
            6.4
            %Income
                before income taxes
            
            
            31,356
            
            
            
            21.7
            %
            
            
            27,928
            
            
            
            19.9
            %Provision
                for income taxes
            
            
            13,051
            
            
            
            9.0
            %
            
            
            12,169
            
            
            
            8.7
            %Net
                income
            
            $
            18,305
            
            
            
            12.7
            %
            
            $
            15,759
            
            
            
            11.2
            %





**AAC****For
                the Three**
            
            
            **%
                of**
            
            
            **For
                the Three**
            
            
            **%
                of****Months
                Ended**
            
            
            **Net**
            
            
            **Months
                Ended**
            
            
            **Net****May
                26, 2007**
            
            
            **Sales**
            
            
            **May
                27, 2006**
            
            
            **Sales**Net
                sales
            
            $
            144,163
            
            
            
            100.0
            %
            
            $
            140,164
            
            
            
            100.0
            %Cost
                of sales
            
            
            57,157
            
            
            
            39.7
            %
            
            
            56,566
            
            
            
            40.4
            %Gross
                profit
            
            
            87,006
            
            
            
            60.3
            %
            
            
            83,598
            
            
            
            59.6
            %Selling,
                general and administrative expenses
            
            
            47,095
            
            
            
            32.7
            %
            
            
            46,760
            
            
            
            33.3
            %Operating
                income
            
            
            39,911
            
            
            
            27.6
            %
            
            
            36,838
            
            
            
            26.3
            %Interest
                expense
            
            
            5,619
            
            
            
            3.8
            %
            
            
            5,980
            
            
            
            4.3
            %Income
                before income taxes
            
            
            34,292
            
            
            
            23.8
            %
            
            
            30,858
            
            
            
            22.0
            %Provision
                for income taxes
            
            
            13,534
            
            
            
            9.4
            %
            
            
            12,248
            
            
            
            8.7
            %Net
                income
            
            $
            20,758
            
            
            
            14.4
            %
            
            $
            18,610
            
            
            
            13.3
            %





*Net
      Sales.*Net sales consist of product sales and are net of product returns
      and promotional discounts. Net sales increased $4.0 million, or 2.9%, to
      $144.2 million for the three months ended May 26, 2007 from
      $140.2 million for the three months ended May 27, 2006.








28








The
      following details the changes in net sales during such periods by business
      segment.





*Class Rings.*Net sales increased $2.7 million to $40.4 million for the three
      months ended May 26, 2007 from $37.7 million for the three months ended May
      27, 2006. The increase in net sales was the result of increases of
      $1.4 million in high school ring sales and $1.3 million in college
      ring sales. The increase in high school ring sales of $1.2 million is due to
      the
      timing of delivery of on-campus ring shipments and an increase in average price
      per unit. The remaining increase in high school class rings is due to an
      increase in class rings sold at retail stores.  The increase in
      college rings is a result of an increase in units and the average price of
      the
      rings shipped.





*Yearbooks.*Net sales decreased $2.7 million to $68.2 million for the three
      months ended May 26, 2007 from $70.9 million for the three months ended May
      27, 2006. The decline in yearbooks is the result of fewer contracts due to
      timing of shipments shifting from the three months ended May 26, 2007 to the
      three months ended August 25, 2007.





*Graduation
      Products.*Net sales increased $1.2 million to $25.0 million for
      the three months ended May 26, 2007 from $23.8 million for the three months
      ended May 27, 2006. The increase in net sales was mainly due to timing of
      shipments. The sales in the three months ended May 26, 2007 were higher than
      normal because some shipments that were expected to ship in the second quarter
      2007 were actually shipped in the third quarter 2007.





*Achievement
      Publications.*Net sales decreased $0.8 million to $0.3 million for the
      three months ended May 26, 2007 from $1.1 million for the three months
      ended May 27, 2006. The decrease in net sales was the result of a decline in
      collateral product sales.





*Other.*Net sales increased $3.5 million to $10.2 million for the three
      months ended May 26, 2007 from $6.7 million for the three months ended May
      27, 2006. Approximately $1.1 million of the sales increase was due the sales
      of
      letter jackets, chenille patches and other spirit embroidery merchandise as
      a
      result of the Powers acquisition, which occurred April 1, 2007. The remainder
      of
      the increase in net sales was attributable to an increase in affinity jewelry
      sales at retail stores and through e-commerce channels.





*Gross
      Profit.*Overall, gross profit increased $3.4 million. The increase is
      due to higher sales and a one-time write-off of obsolete inventory in the
      graduation products segment that was taken in the prior fiscal
      year.





*Selling,
      General and Administrative Expenses.*Selling, general and administrative
      expenses increased $0.3 million, or 0.7%, to $47.1 million for the three
      months ended May 26, 2007 from $46.8 million for the three months ended May
      27, 2006. 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 $0.3 million to
      $36.3 million or 25.2% of net sales, for the three months ended May 26,
      2007 from $36.0 million or 25.7% of net sales, for the three months ended
      May 27, 2006.  General and administrative expenses remained flat at
      $10.8 million or 7.5% of net sales, for the three months ended May 26, 2007
      from $10.8 million or 7.7% of net sales, for the three months ended May 27,
      2006.





*Operating
      Income.*As a result of the foregoing, operating income was
      $39.9 million, or 27.6% of net sales, for the three months ended May 26,
      2007 as compared with operating income of $36.8 million, or 26.3% of net
      sales, for the three months ended May 27, 2006. The class rings segment reported
      operating income of $7.4 million for the three months ended May 26, 2007 as
      compared with operating income of $6.6 million for the three months ended
      May 27, 2006. The yearbooks segment reported operating income of
      $25.2 million for the three months ended May 26, 2007 as compared with
      operating income of $25.2 million for the three months ended May 27, 2006.
      The graduation products segment reported operating income of $6.9 million for
      the three months ended May 26, 2007 as compared with operating income of
      $5.9 million for the three months ended May 27, 2006. The achievement
      publications segment reported an operating loss of $0.9 million for the three
      months ended May 26, 2007 as compared with an operating loss of $0.6 million
      for
      the three months ended May 27, 2006. The other segment reported operating income
      of $1.4 million for the three months ended May 26, 2007 as compared with an
      operating loss of $0.2 million for the three months ended May 27,
      2006.





29


*Interest
      Expense, Net.*For Parent Holdings, net interest expense was $15.6 million
      for the three months ended May 26, 2007 and $8.9 million for the three
      months ended May 27, 2006. The average debt outstanding of Parent Holdings
      for
      the three months ended May 26, 2007 and the three months ended May 27, 2006
      was
      $533 million and $373 million, respectively. The weighted average
      interest rate on debt outstanding of Parent Holdings for the three months ended
      May 26, 2007 and the three months ended May 27, 2006 was 10.9% and 9.1%,
      respectively.





For
      Intermediate Holdings, net interest expense was $8.6 million for the three
      months ended May 26, 2007 and $8.9 million for the three months ended May
      27, 2006. The average debt outstanding of Intermediate Holdings for the three
      months ended May 26, 2007 and the three months ended May 27, 2006 was
      $359 million and $373 million, respectively. The weighted average
      interest rate on debt outstanding of Intermediate Holdings for the three months
      ended May 26, 2007 and the three months ended May 27, 2006 was 9.0% and 9.1%,
      respectively.





For
      AAC, net interest expense was $5.6 million for the three months ended May
      26, 2007 and $6.0 million for the three months ended May 27, 2006. The
      average debt outstanding of AAC for the three months ended May 26, 2007 and
      the
      three months ended May 27, 2006 was $245 million and $262 million,
      respectively. The weighted average interest rate on debt outstanding of AAC
      for
      the three months ended May 26, 2007 and the three months ended May 27, 2006
      was
      8.5% and 8.5%, respectively.





*Income
      Taxes.*For the three months ended May 26, 2007 and May 27, 2006, Parent
      Holdings recorded an income tax provision of $9.1 million and $12.2
      million, respectively, which represents an effective tax rate of 38% and 44%
      for
      each period. The effective rate differs from normal statutory rates due to
      the
      non-deductibility of a portion of its interest on high-yield debt. Additional
      high-yield debt was added in June 2006 at Parent Holdings, which has caused
      the effective tax rate in fiscal 2007 to be different than fiscal
      2006.





For
      the three months ended May 26, 2007 and May 27, 2006, Intermediate Holdings
      recorded an income tax provision of $13.1 million and $12.2 million,
      respectively, which represents an effective tax rate of 42% and 44% for each
      period. Intermediate Holdings’ effective rates for the three months ended May
      26, 2007 and May 27, 2006 represent an estimate of the annual federal and state
      income tax rate after considering the non-deductibility of a portion of its
      interest on high-yield debt.





For
      the three months ended May 26, 2007 and May 27, 2006, AAC recorded an income
      tax
      provision of $13.5 million and $12.2 million, respectively, which
      represents an effective tax rate of 39% and 40% for each period. AAC’s effective
      rates for the three months ended May 26, 2007 and May 27, 2006 represent an
      estimate of the annual federal and state income tax rate.





*Net
      Income.*As a result of the foregoing, Parent Holdings reported net income
      of $15.2 million for the three months ended May 26, 2007 as compared to net
      income of $15.8 million for the three months ended May 27,
      2006.





As
      a result of the foregoing, Intermediate Holdings reported net income of
      $18.3 million for the three months ended May 26, 2007 as compared to net
      income of $15.8 million for the three months ended May 27,
      2006.





As
      a result of the foregoing, AAC reported net income of $20.8 million for the
      three months ended May 26, 2007 as compared to a net income of
      $18.6 million for the three months ended May 27, 2006.




30


**Nine
      Months Ended May 26, 2007 Compared to Nine Months Ended May 27,
      2006**


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
      (dollars in thousands):


**Parent
                Holdings****For
                the Nine**
            
            
            **%
                of**
            
            
            **For
                the Nine**
            
            
            **%
                of****Months
                Ended**
            
            
            **Net**
            
            
            **Months
                Ended**
            
            
            **Net****May
                26, 2007**
            
            
            **Sales**
            
            
            **May
                27, 2006**
            
            
            **Sales**Net
                sales
            
            $
            254,598
            
            
            
            100.0
            %
            
            $
            257,733
            
            
            
            100.0
            %Cost
                of sales
            
            
            106,397
            
            
            
            41.8
            %
            
            
            103,336
            
            
            
            40.1
            %Gross
                profit
            
            
            148,201
            
            
            
            58.2
            %
            
            
            154,397
            
            
            
            59.9
            %Selling,
                general and administrative expenses
            
            
            107,707
            
            
            
            42.3
            %
            
            
            111,658
            
            
            
            43.3
            %Operating
                income
            
            
            40,494
            
            
            
            15.9
            %
            
            
            42,739
            
            
            
            16.6
            %Interest
                expense
            
            
            44,579
            
            
            
            17.5
            %
            
            
            25,942
            
            
            
            10.1
            %Income
                (loss) before income taxes
            
            
            (4,085
            )
            
            
            (1.6
            )%
            
            
            16,797
            
            
            
            6.5
            %Provision
                (benefit) for income taxes
            
            
            (974
            )
            
            
            (0.4
            )%
            
            
            7,358
            
            
            
            2.8
            %Net
                income (loss)
            
            $
            (3,111
            )
            
            
            (1.2
            )%
            
            $
            9,439
            
            
            
            3.7
            %





**Intermediate
                Holdings****For
                the Nine**
            
            
            **%
                of**
            
            
            **For
                the Nine**
            
            
            **%
                of****Months
                Ended**
            
            
            **Net**
            
            
            **Months
                Ended**
            
            
            **Net****May
                26, 2007**
            
            
            **Sales**
            
            
            **May
                27, 2006**
            
            
            **Sales**Net
                sales
            
            $
            254,598
            
            
            
            100.0
            %
            
            $
            257,733
            
            
            
            100.0
            %Cost
                of sales
            
            
            106,397
            
            
            
            41.8
            %
            
            
            103,336
            
            
            
            40.1
            %Gross
                profit
            
            
            148,201
            
            
            
            58.2
            %
            
            
            154,397
            
            
            
            59.9
            %Selling,
                general and administrative expenses
            
            
            107,707
            
            
            
            42.3
            %
            
            
            111,658
            
            
            
            43.3
            %Operating
                income
            
            
            40,494
            
            
            
            15.9
            %
            
            
            42,739
            
            
            
            16.6
            %Interest
                expense
            
            
            25,567
            
            
            
            10.0
            %
            
            
            25,942
            
            
            
            10.1
            %Income
                before income taxes
            
            
            14,927
            
            
            
            5.9
            %
            
            
            16,797
            
            
            
            6.5
            %Provision
                for income taxes
            
            
            6,277
            
            
            
            2.5
            %
            
            
            7,358
            
            
            
            2.8
            %Net
                income
            
            $
            8,650
            
            
            
            3.4
            %
            
            $
            9,439
            
            
            
            3.7
            %





**AAC****For
                the Nine**
            
            
            **%
                of**
            
            
            **For
                the Nine**
            
            
            **%
                of****Months
                Ended**
            
            
            **Net**
            
            
            **Months
                Ended**
            
            
            **Net****May
                26, 2007**
            
            
            **Sales**
            
            
            **May
                27, 2006**
            
            
            **Sales**Net
                sales
            
            $
            254,598
            
            
            
            100.0
            %
            
            $
            257,733
            
            
            
            100.0
            %Cost
                of sales
            
            
            106,397
            
            
            
            41.8
            %
            
            
            103,336
            
            
            
            40.1
            %Gross
                profit
            
            
            148,201
            
            
            
            58.2
            %
            
            
            154,397
            
            
            
            59.9
            %Selling,
                general and administrative expenses
            
            
            107,707
            
            
            
            42.3
            %
            
            
            111,658
            
            
            
            43.3
            %Operating
                income
            
            
            40,494
            
            
            
            15.9
            %
            
            
            42,739
            
            
            
            16.6
            %Interest
                expense
            
            
            16,946
            
            
            
            6.7
            %
            
            
            17,738
            
            
            
            6.9
            %Income
                before income taxes
            
            
            23,548
            
            
            
            9.2
            %
            
            
            25,001
            
            
            
            9.7
            %Provision
                for income taxes
            
            
            9,299
            
            
            
            3.6
            %
            
            
            9,925
            
            
            
            3.8
            %Net
                income
            
            $
            14,249
            
            
            
            5.6
            %
            
            $
            15,076
            
            
            
            5.9
            %





*Net
      Sales.*Net sales consist of product sales and are net of product returns
      and promotional discounts. Net sales decreased $3.1 million, or 1.2%, to
      $254.6 million for the nine months ended May 26, 2007 from
      $257.7 million for the nine months ended May 27, 2006.


31


The
      following details the changes in net sales during such periods by business
      segment.





*Class Rings.*Net sales increased $1.1 million to $104.8 million for the nine
      months ended May 26, 2007 from $103.7 million for the nine months ended May
      27, 2006. The increase in net sales was the result of an increase of
      $2.0 million in college rings, partially offset by a decrease of
      $0.9 million in high school rings. The increase in college ring sales is
      attributable to the increase in average price of the rings. The decrease in
      high
      school ring sales is due to a $1.6 million decline in rings sold in retail
      stores offset by an increase in average selling prices of on campus high school
      rings.





*Yearbooks.*Net sales decreased $5.0 million to $81.4 million for the nine months
      ended May 26, 2007 from $86.4 million for the nine months ended May 27,
      2006. The decline in yearbooks is the result of fewer contracts due to timing
      of
      shipments shifting from the three months ended May 26, 2007 to the three months
      ended August 25, 2007 and a slight decrease in the average price per contract
      due to product mix.





*Graduation
      Products.*Net sales increased $0.4 million to $43.0 million for
      the nine months ended May 26, 2007 from $42.6 million for the nine months
      ended May 27, 2006.





*Achievement
      Publications.*Net sales decreased $7.1 million to $1.6 million for the
      nine months ended May 26, 2007 from $8.7 million for the nine months ended
      May 27, 2006. The decrease in sales was due to lower collateral product sales
      and  not shipping a *Who’s Who Among American High School
      Students* publication in the nine months ended May 26, 2007. In the nine
      months ended May 27, 2006, the publication was shipped and accounted for
      $5.5 million of net sales. In fiscal year 2006, two editions of *Who’s
      Who Among American High School Students*were shipped, one in
      October 2005 and one in August 2006, while in fiscal year 2007, this
      publication will only ship in August 2007. Thus, total fiscal year 2007 net
      sales for achievement publications will be lower than total fiscal year 2006
      net
      sales.





*Other.*Net sales increased $7.4 million to $23.7 million for the nine
      months ended May 26, 2007 from $16.3 million for the nine months ended May
      27, 2006. Approximately $1.1 million of the sales increase was due the sales
      of
      letter jackets, chenille patches and other spirit embroidery merchandise as
      a
      result of the Powers acquisition, which occurred April 1, 2007. The remainder
      of
      the increase was mainly related to an increase in affinity jewelry sales at
      retail stores and through e-commerce channels.





*Gross
      Profit.*Overall, gross profit decreased $6.2 million, of which $5.9
      million related to the decline in achievement publications segment. The
      remaining difference was made up of a decline of $2.6 million related to
      the timing of shipments and the product mix of yearbook sales and a $0.8 million
      decline in class rings due to lower retail sales and product mix, offset by
      an
      increase in graduation products and affinity jewelry sales. The increase in
      graduation products is also the result of the one-time write-off of obsolete
      inventory taken in the prior fiscal year.





*Selling,
      General and Administrative Expenses.*Selling, general and administrative
      expenses decreased $4.0 million, or 3.5%, to $107.7 million for the
      nine months ended May 26, 2007 from $111.7 million for the nine months
      ended May 27, 2006. Included in selling, general and administrative expenses
      are
      two sub-categories: selling and marketing expenses and general and
      administrative expenses. Selling and marketing expenses decreased
      $2.2 million to $76.2 million or 29.9% of net sales, for the nine
      months ended May 26, 2007 from $78.4 million or 30.4% of net sales, for the
      nine months ended May 27, 2006. The decrease in selling and marketing expenses
      was primarily the result of not publishing the *Who’s Who Among American High
      School Students* publication in the nine months ended May 26, 2007. General
      and administrative expenses for the nine months ended May 26, 2007 were
      $31.5 million, or 12.4% of net sales, as compared to $33.3 million, or
      12.9% of net sales, for the nine months ended May 27, 2006. The decrease in
      general and administrative expenses was primarily the result of non-recurring
      professional services incurred in the nine months ended May 27,
      2006.





32


*Operating
      Income (Loss).*As a result of the foregoing, operating income was
      $40.5 million, or 15.9% of net sales, for the nine months ended May 26,
      2007 as compared with operating income of $42.7 million, or 16.6% of net sales,
      for the nine months ended May 27, 2006. The class rings segment reported
      operating income of $16.1 million for the nine months ended May 26, 2007 as
      compared with operating income of $17.4 million for the nine months ended
      May 27, 2006. The yearbooks segment reported operating income of
      $17.3 million for the nine months ended May 26, 2007 as compared with an
      operating income of $19.0 million for the nine months ended May 27, 2006.
      The graduation products segment reported operating income of $7.9 million
      for the nine months ended May 26, 2007 as compared with operating income of
      $6.9 million for the nine months ended May 27, 2006. The achievement
      publications segment reported an operating loss of $3.0 million for the
      nine months ended May 26, 2007 as compared with operating loss of
      $0.5 million for the nine months ended May 27, 2006. The other segment
      reported operating income of $2.2 million for the nine months ended May 26,
      2007
      as compared with operating loss of $9 thousand for the nine months ended May
      27,
      2006.





*Interest
      Expense, Net.*For Parent Holdings, net interest expense was
      $44.6 million for the nine months ended May 26, 2007 and $25.9 million
      for the nine months ended May 27, 2006. The average debt outstanding of Parent
      Holdings for the nine months ended May 26, 2007 and the nine months ended May
      27, 2006 was $539 million and $390 million, respectively. The weighted
      average interest rate on debt outstanding of Parent Holdings for the nine months
      ended May 26, 2007 and the nine months ended May 27, 2006 was 10.6% and 8.4%,
      respectively.





For
      Intermediate Holdings, net interest expense was $25.6 million for the nine
      months ended May 26, 2007 and $25.9 million for the nine months ended May
      27, 2006. The average debt outstanding of Intermediate Holdings for the nine
      months ended May 26, 2007 and the nine months ended May 27, 2006 was
      $369 million and $390 million, respectively. The weighted average
      interest rate on debt outstanding of Intermediate Holdings for the nine months
      ended May 26, 2007 and the nine months ended May 27, 2006 was 8.7% and 8.4%,
      respectively.





For
      AAC, net interest expense was $16.9 million for the nine months ended May
      26, 2007 and $17.7 million for the nine months ended May 27, 2006. The
      average debt outstanding of AAC for the nine months ended May 26, 2007 and
      the
      nine months ended May 27, 2006 was $258 million and $286 million,
      respectively. The weighted average interest rate on debt outstanding of AAC
      for
      the nine months ended May 26, 2007 and the nine months ended May 27, 2006 was
      8.1% and 7.7%, respectively.





*Income
      Taxes.*For the nine months ended May 26, 2007 and May 27, 2006, Parent
      Holdings recorded an income tax benefit of $1.0 million and an income tax
      provision of $7.4 million, respectively, which represents an effective tax
      rate of 24% and 44% for each period. The effective rate differs from normal
      statutory rates due to the non-deductibility of a portion of its interest on
      high-yield debt. Additional high-yield debt was added in June 2006 at
      Parent Holdings, which has caused the effective tax rate in fiscal 2007 to
      be
      different than fiscal 2006.





For
      the nine months ended May 26, 2007 and May 27, 2006, Intermediate Holdings
      recorded an income tax provision of $6.3 million and $7.4 million,
      respectively, which represents an effective tax rate of 42% and 44% for each
      period. Intermediate Holdings’ effective rates for the nine months ended May 26,
      2007 and May 27, 2006 represent an estimate of the annual federal and state
      income tax rate after considering the non-deductibility of a portion of its
      interest on high-yield debt.





For
      the nine months ended May 26, 2007 and May 27, 2006, AAC recorded an income
      tax
      provision of $9.3 million and $9.9 million, respectively, which
      represents an effective tax rate of 39% and 40% for each period. AAC’s effective
      rates for the nine months ended May 26, 2007 and May 27, 2006 represent an
      estimate of the annual federal and state income tax rate.





*Net
      Income (Loss).*As a result of the foregoing, Parent Holdings reported a net
      loss of $3.1 million for the nine months ended May 26, 2007 as compared to
      net
      income of $9.4 million for the nine months ended May 27, 2006.





33





As
      a result of the foregoing, Intermediate Holdings reported net income of
      $8.7 million for the nine months ended May 26, 2007 as compared to net
      income of $9.4 million for the nine months ended May 27, 2006.





As
      a result of the foregoing, AAC reported net income of $14.2 million for the
      nine months ended May 26, 2007 as compared to net income of $15.1 million
      for the nine months ended May 27, 2006.





**Liquidity
      and Capital Resources**


***Operating
      Activities***


Operating
      activities provided $40.3 million of cash for the nine months ended May 26,
      2007 compared to cash provided of $36.7 million for the nine months ended
      May 27, 2006. The $3.6 million increase in cash provided by operating activities
      was mainly attributable to lower working capital requirements, partially offset
      by lower operating results.





***Investing
      Activities***


Capital
      expenditures for the nine months ended May 26, 2007 were $7.9 million
      compared to capital expenditures of $10.9 million for the nine months ended
      May 27, 2006. Our projected capital expenditures for the entire fiscal year
      2007
      are expected to be approximately $14.0 million.  In addition, the
      Powers acquisition accounted for $6.0 million, net of cash, investing
      outflow.





***Financing
      Activities***


For
      Parent Holdings, net cash used in financing activities was $22.6 million
      for the nine months ended May 26, 2007 compared to cash used of
      $23.8 million for the nine months ended May 27, 2006. During the nine
      months ended May 26, 2007, the Company paid down $9.3 million, net, of the
      revolver and $12.2 million of its term loan.





For
      Intermediate Holdings, financing activities used cash of $22.4 million for
      the nine months ended May 26, 2007 compared to cash used of $23.8 million
      for the nine months ended May 27, 2006. During the nine months ended May 26,
      2007, the Company paid down $9.3 million, net, of the revolver and
      $12.2 million of its term loan.





For
      AAC, financing activities used cash of $22.4 million for the nine months
      ended May 26, 2007 compared to cash used of $24.0 million for the nine
      months ended May 27, 2006. During the nine months ended May 26, 2007, the
      Company paid down $9.3 million, net, of the revolver and $12.2 million
      of its term loan.




***Capital
      Resources***


******In
      connection with the Merger, AAC entered into its existing $195.0 million
      senior secured credit facility and issued $150.0 million of the 8.25%
      senior subordinated notes. Certain provisions of these financing arrangements
      are described below.





The
      senior secured credit facility, as amended, provides a $155.0 million term
      loan, maturing in 2011, and up to $40.0 million in available revolving loan
      borrowings, maturing in 2010. As of May 26, 2007, $0 was outstanding on the
      revolving loan and we had commitments for $2.3 million on letters of credit
      outstanding. The senior secured credit facility, as amended, imposes certain
      restrictions on AAC, including restrictions on its ability to incur
      indebtedness, pay dividends, make investments, grant liens, sell assets and
      engage in certain other activities. In addition, the senior secured credit
      facility, as amended, contains financial covenants and maintenance tests,
      including a minimum interest coverage test and a maximum total leverage test,
      and restrictive covenants, including restrictions on its ability to make capital
      expenditures. The senior secured credit facility, as amended, is secured by
      substantially all of the assets of AAC, is guaranteed by and secured by the
      assets of some of its existing and future domestic subsidiaries, if any, and
      by
      a pledge of all of the capital stock of some of its existing and future domestic
      subsidiaries, if any. The senior secured credit facility, as amended, is also
      guaranteed by AAC Holding Corp.





AAC
      is required to pay cash interest on the 8.25% notes semi-annually in arrears
      on
      April 1 and October 1 of each year. The 8.25% notes have no scheduled
      amortization and mature on April 1, 2012. The indenture governing the 8.25%
      notes contains certain restrictions on AAC, including restrictions on its
      ability to incur indebtedness, pay dividends, make investments, grant liens,
      sell its assets and engage in certain other activities. The 8.25% notes are
      guaranteed by certain of AAC’s existing and future domestic
      subsidiaries.





34


In
      November 2004, Intermediate Holdings issued $89.3 million (net
      proceeds) of 10.25% senior discount notes due 2012. The notes accrete to
      $131.5 million aggregate principal amount at maturity. Interest accrues on
      the notes in the form of an increase in the accreted value of such notes prior
      to October 1, 2008. Thereafter, cash interest on the notes will accrue and
      be payable semiannually in arrears on April 1 and October 1 of each year,
      commencing April 1, 2009, at a rate of 10.25% per annum. The notes are
      Intermediate Holdings’ unsecured obligation and rank equally with all of its
      future senior obligations and senior to its future subordinated indebtedness.
      The 10.25% notes are effectively subordinated to Intermediate Holdings’ future
      secured indebtedness to the extent of the assets securing that


indebtedness
      and are structurally subordinated to all indebtedness and other obligations
      of
      Intermediate Holdings’ subsidiaries, including AAC.





In
      June 2006, Parent Holdings issued $150.0 million 12.75% senior PIK
      notes. Interest accrued on these notes at 12.75% per annum through
      February 23, 2007. As of February 24, 2007, the rate at which interest
      accrues increased to 14.75% per annum. The first interest payment on the notes
      occurred on October 1, 2006. Through April 1, 2011, interest on the
      notes will be payable in the form of additional notes semi-annually in arrears
      on April 1 and October 1. On October 1, 2011, and thereafter, interest will
      be payable in cash semi-annually in arrears on April 1 and October 1. The notes
      mature on October 1, 2012. At maturity, we are required to repay the notes
      at a repayment price of 103.188% of the aggregate principal amount thereof,
      plus
      accrued and unpaid interest and special interest, if any, to the maturity date.
      The notes are Parent Holdings’ unsecured obligation and rank equally with all of
      its future senior obligations and senior to its future subordinated
      indebtedness. The notes are effectively subordinated to Parent Holdings’ future
      secured indebtedness to the extent of the assets securing that indebtedness
      and
      are structurally subordinated to all indebtedness and other obligations of
      Parent Holdings’ subsidiaries, including Intermediate Holdings and
      AAC.





We
      are currently in compliance with financial covenants in all of the agreements
      governing our outstanding indebtedness.





We
      have a significant amount of indebtedness. On May 26, 2007, Parent Holdings
      had
      total indebtedness of $538.8 million (of which $170.1 million was
      14.75% senior PIK notes, $115.1 million was 10.25% senior discount notes,
      $150.0 million was 8.25% senior subordinated notes, $94.3 million was
      indebtedness under the existing senior secured credit facility,
      $7.5 million was of our mandatory redeemable series A preferred stock and
      the balance of which consisted of AAC’s capital lease obligations and bank
      overdraft).





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.





35


**Off
      Balance-Sheet Obligations**


***Gold
      Consignment Agreement.***On March 25, 2004, we signed the First
      Amended and Restated Letter Agreement for Fee Consignment and Purchase of Gold
      with The Bank of Nova Scotia. Under this agreement, 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
      and (iii) a borrowing base, calculated based on a percentage of the value of
      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 The Bank of Nova Scotia 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 26, 2007,
      we
      held 8,865 ounces of consigned gold with a value of
      $5.8 million.





The
      agreement can be terminated by either us or The Bank of Nova Scotia with
      60 days prior written notice to the other party.





**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,
      with
      most 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 majority of our achievement publications are
      shipped in August of each year. The remaining 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 experienced operating losses during our
      first
      and fourth fiscal quarters, which include 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.


36


**Recent
      Accounting Pronouncements**


In
      July 2006, the Financial Accounting Standards Board (“FASB”) FASB issued
      FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“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
      will be effective for us beginning with our fiscal year 2008. We are currently
      evaluating the impact this standard will have on our financial position and
      results of operations.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value
      Measurements” (“FAS 157”), which defines fair value, establishes a framework for
      measuring fair value and expands disclosures about fair value measurements.
      FAS
      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 FAS 157 are effective for us with our fiscal year 2009. We are
      currently evaluating the impact this standard will have on our financial
      position and results of operations.





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)” (“FAS 158”). FAS 158 requires
      the recognition of an asset for a plan’s overfunded status or a liability for a
      plan’s underfunded status in the statement of financial position, measurement of
      the funded status of a plan as of the date of its year-end statement of
      financial position and recognition for changes in the funded status of a defined
      benefit postretirement plan in the year in which the changes occur as a
      component of other comprehensive income. The provisions of FAS 158 will be
      effective for us at the end of our fiscal year 2007. We are currently evaluating
      the impact this standard will have on our financial position and results of
      operations.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
      for Financial Assets and Financial Liabilities—Including an amendment of FASB
      Statement No. 115” (“FAS 159”), which permits entities to choose to measure
      many financial instruments and certain other items at fair value. The accounting
      provisions of FAS 159 are effective for us beginning with our fiscal year 2009.
      We are currently evaluating the impact this standard will have on our financial
      position and results of operations.


37


**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. The interest
      rates are based on a floating benchmark rate (such as LIBOR or the Federal
      Funds
      rate) plus a fixed spread. Our other financial instruments subject to interest
      rate risk consist of long-term debt and notional amount under the gold
      consignment agreement. With respect to the senior secured credit facility,
      which
      bears interest at variable rates, each quarter point change in interest rates
      would result in a $0.4 million change in annual interest expense, assuming
      the entire revolving loan was drawn.





***Semi-Precious
      Stones.***We purchase the majority of our semi-precious 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 change in
      cost of goods sold, assuming stone purchase levels approximate the levels of
      fiscal 2006. In order to hedge market risk, we have from time-to-time purchased
      forward foreign currency exchange contracts. During the three and nine months
      ended May 26, 2007 and fiscal 2006, we did not purchase any forward foreign
      currency contracts and did not have any such contracts outstanding.





***Gold.***We purchase a majority of our gold from The Bank of Nova Scotia
      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 $2.3 million change
      in cost of goods sold, assuming gold purchase levels approximate the levels
      in
      fiscal 2006.


38


**ITEM
      4. CONTROLS AND PROCEDURES**


As
      of the date of 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 year. 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 upon that evaluation, our President and Chief Executive Officer
      and
      our Chief Financial Officer concluded that these disclosure controls and
      procedures are effective.





Additionally,
      our President and Chief Executive Officer and Chief Financial Officer
      determined, as of the date of this report that during the third quarter of
      fiscal 2007 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 includes forward-looking statements within the meaning of
      Section 21E of the Securities Exchange Act of 1934, as amended. 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 November 22, 2006 as you review this
      quarterly report.


39


**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. However, we believe resulting
      liabilities, if any, will not have a material adverse impact upon our results
      of
      operations, financial condition or cash flows.





On
      July 17, 2006, in the 128thJudicial
      District
      Court of Orange County, Texas a Seventh Amended Petition (naming over 100
      defendants) was filed by the estate of John Estrada and Nancy Estrada adding
      Taylor Publishing Company, a subsidiary of AAC, back into a long outstanding
      multi-party toxic tort suit. Taylor was originally brought into this lawsuit
      in
      September of 2004 when Mr. Estrada, a former Taylor-San Angelo employee and
      his
      wife, filed their Fifth Amended Petition seeking damages for personal injuries
      allegedly caused by Mr. Estrada’s exposure to benzene in the workplace. On
      June 21, 2005, the Estrada’s dismissed their case against Taylor, without
      prejudice, without any payment or other compensation by Taylor. Mr. Estrada
      is now deceased. This Seventh Amended Petition now seeks damages for his alleged
      wrongful death and seeks to avoid the Workers’ Compensation bar to employer
      liability by pleading gross negligence on the part of Taylor. Taylor filed
      a
      timely answer to the lawsuit. A settlement with prejudice has been reached
      and
      the settlement documents have been executed. The settlement amount is less
      than
      $50,000 and contains a confidentiality and non disclosure
      provision.








**ITEM
      6. EXHIBITS**


(a) Exhibits


**EXHIBIT****NUMBER**
            
            **DESIGNATION**31.1
            
            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


40


**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 10, 2007


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/
                SHERICE P. BENCHSherice
                P. BenchCHIEF
                ACCOUNTING OFFICER
              (principal
                accounting officer)