10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended May 26, 2006

OR

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

For the transition period from              to             

Commission file number 1-13859

AMERICAN GREETINGS CORPORATION

(Exact name of registrant as specified in its charter)

Ohio	34-0065325
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
One American Road, Cleveland, Ohio	44144
(Address of principal executive offices)	(Zip Code)

(216) 252-7300

(Registrant’s telephone number, including area code)

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

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  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of June 29, 2006, the number of shares outstanding of each of the issuer’s classes of common stock was:

Class A Common	52,962,609
Class B Common	4,227,153

AMERICAN GREETINGS CORPORATION

INDEX

		Page Number
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	32
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 6.	Exhibits	33
SIGNATURES		34
EXHIBITS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN GREETINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF INCOME

(Thousands of dollars except share and per share amounts)

	(Unaudited) Three Months Ended
	May 26, 2006			May 27, 2005
Net sales	$	406,571		$	439,469
Costs and expenses:
Material, labor and other production costs		176,321			178,430
Selling, distribution and marketing		143,769			153,798
Administrative and general		62,006			62,475
Interest expense		12,464			9,677
Other income – net		(6,880	)		(8,495	)
Total costs and expenses		387,680			395,885
Income from continuing operations before income tax expense		18,891			43,584
Income tax expense		2,854			16,676
Income from continuing operations		16,037			26,908
Loss from discontinued operations, net of tax		(645	)		(494	)
Net income	$	15,392		$	26,414
Earnings per share – basic:
Income from continuing operations	$	0.27		$	0.40
Loss from discontinued operations		(0.01	)		(0.01	)
Net income	$	0.26		$	0.39
Earnings per share – assuming dilution:
Income from continuing operations	$	0.25		$	0.36
Loss from discontinued operations		(0.01	)		(0.01	)
Net income	$	0.24		$	0.35
Average number of shares outstanding		58,137,230			68,595,786
Average number of shares outstanding – assuming dilution		71,077,312			81,952,895
Dividends declared per share	$	0.08		$	0.08

See notes to condensed consolidated financial statements (unaudited).

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AMERICAN GREETINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(Thousands of dollars)

	(Unaudited) May 26, 2006			(Note 1) February 28, 2006			(Unaudited) May 27, 2005
ASSETS
Current assets
Cash and cash equivalents	$	205,468		$	213,613		$	210,956
Short-term investments		83,100			208,740			208,750
Trade accounts receivable, net		122,808			142,087			191,523
Inventories		237,658			217,318			230,059
Deferred and refundable income taxes		164,079			154,327			165,123
Assets of businesses held for sale		10,978			12,990			22,154
Prepaid expenses and other		211,611			213,067			209,983
Total current assets		1,035,702			1,162,142			1,238,548
Goodwill		208,973			203,599			261,450
Other assets		528,352			549,162			621,954
Property, plant and equipment – at cost		965,947			953,981			980,031
Less accumulated depreciation		661,524			649,922			652,747
Property, plant and equipment – net		304,423			304,059			327,284
	$	2,077,450		$	2,218,962		$	2,449,236
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Debt due within one year	$	159,122		$	174,792		$	10,184
Accounts payable		123,457			126,061			115,569
Accrued liabilities		75,937			73,046			109,732
Accrued compensation and benefits		45,217			69,016			40,374
Income taxes		24,857			16,887			31,177
Liabilities of businesses held for sale		3,102			3,016			4,219
Other current liabilities		93,202			96,165			121,817
Total current liabilities		524,894			558,983			433,072
Long-term debt		239,838			300,516			476,152
Other liabilities		98,729			116,554			147,883
Deferred income taxes		25,144			22,884			34,612
Shareholders’ equity
Common shares – Class A		53,386			56,130			63,365
Common shares – Class B		4,225			4,218			4,213
Capital in excess of par value		401,644			398,505			376,586
Treasury stock		(732,890	)		(676,436	)		(487,563	)
Accumulated other comprehensive income		23,952			9,823			14,894
Retained earnings		1,438,528			1,427,785			1,386,022
Total shareholders’ equity		1,188,845			1,220,025			1,357,517
	$	2,077,450		$	2,218,962		$	2,449,236

See notes to condensed consolidated financial statements (unaudited).

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AMERICAN GREETINGS CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(Thousands of dollars)

	(Unaudited) Three Months Ended
	May 26, 2006			May 27, 2005
OPERATING ACTIVITIES:
Net income	$	15,392		$	26,414
Loss from discontinued operations		645			494
Income from continuing operations		16,037			26,908
Adjustments to reconcile to net cash provided by operating activities:
(Gain) loss on disposal of fixed assets		(79	)		944
Loss on extinguishment of debt		4,963			862
Depreciation and amortization		11,777			14,467
Deferred income taxes		(1,913	)		7,740
Other non-cash charges		3,926			516
Changes in operating assets and liabilities, net of acquisitions:
Decrease (increase) in trade accounts receivable		22,203			(12,433	)
Increase in inventories		(17,607	)		(13,759	)
(Increase) decrease in other current assets		(8,711	)		14,415
Decrease in deferred costs – net		13,017			25,051
Decrease in accounts payable and other liabilities		(24,266	)		(47,924	)
Other – net		1,983			920
Cash Provided by Operating Activities		21,330			17,707
INVESTING ACTIVITIES:
Proceeds from sale of short-term investments		448,320			575,785
Purchases of short-term investments		(322,680	)		(575,795	)
Property, plant & equipment additions		(9,604	)		(8,538	)
Proceeds from sale of fixed assets		182			36
Other – net		3,223			(650	)
Cash Provided (Used) by Investing Activities		119,441			(9,162	)
FINANCING ACTIVITIES:
Increase in long-term debt		200,000			—
Reduction of long-term debt		(281,363	)		—
Sale of stock under benefit plans		1,052			8,511
Purchase of treasury shares		(59,529	)		(45,533	)
Dividends to shareholders		(4,605	)		(5,500	)
Debt issuance costs		(7,276	)		—
Cash Used by Financing Activities		(151,721	)		(42,522	)
DISCONTINUED OPERATIONS:
Cash used by operating activities from discontinued operations		(1,293	)		(392	)
Cash provided by investing activities from discontinued operations		1,657			208
Cash Provided (Used) by Discontinued Operations		364			(184	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		2,441			(2,682	)
DECREASE IN CASH AND CASH EQUIVALENTS		(8,145	)		(36,843	)
Cash and Cash Equivalents at Beginning of Year		213,613			247,799
Cash and Cash Equivalents at End of Period	$	205,468		$	210,956

See notes to condensed consolidated financial statements (unaudited).

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AMERICAN GREETINGS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Three Months Ended May 26, 2006 and May 27, 2005

Note 1 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of American Greetings Corporation and its subsidiaries (the “Corporation”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to fairly present financial position, results of operations and cash flows for the periods have been included.

The Corporation’s fiscal year ends on February 28 or 29. References to a particular year refer to the fiscal year ending in February of that year. For example, 2006 refers to the year ended February 28, 2006. For 2006, AG Interactive changed its fiscal year-end to coincide with the Corporation’s fiscal year-end. As a result, the three months ended May 27, 2005 included five months of AG Interactive’s operations. The additional two months of activity generated revenues of approximately $11 million for the three months ended May 27, 2005, but had no significant impact on earnings.

These interim financial statements should be read in conjunction with the Corporation’s financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended February 28, 2006, from which the Condensed Consolidated Statement of Financial Position at February 28, 2006, presented herein, has been derived. Certain amounts in the prior year financial statements have been reclassified to conform to the 2007 presentation.

Note 2 – Seasonal Nature of Business

A significant portion of the Corporation’s business is seasonal in nature. Therefore, the results of operations for interim periods are not necessarily indicative of the results for the fiscal year taken as a whole.

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Note 3 – Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151 (“SFAS 151”), “Inventory Costs – an amendment of ARB No. 43, Chapter 4.” SFAS 151 seeks to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) in the determination of inventory carrying costs. The statement requires such costs to be treated as a current period expense. SFAS 151 also establishes the concept of “normal capacity” and requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. Any unallocated overhead would be treated as a current period expense in the period incurred. This statement is effective for fiscal years beginning after July 15, 2005. The adoption of SFAS 151, effective March 1, 2006, did not significantly impact the Corporation’s consolidated financial statements.

In October 2005, the FASB issued FASB Staff Position No. FAS 13-1 (“FSP 13-1”), “Accounting for Rental Costs Incurred During a Construction Period,” to clarify the proper accounting for rental costs incurred on building or ground operating leases during a construction period. FSP 13-1 requires that rental costs incurred during a construction period be expensed, not capitalized. The statement is effective for the first reporting period beginning after December 15, 2005. The adoption of FSP 13-1, effective March 1, 2006, did not materially affect the Corporation’s consolidated financial statements.

Note 4 – Other Income – Net

	Three Months Ended
(In thousands)	May 26, 2006			May 27, 2005
Royalty revenue	$	(1,447	)	$	(5,679	)
Foreign exchange (gain) loss		(1,436	)		1,009
Interest income		(2,835	)		(2,573	)
Other		(1,162	)		(1,252	)
	$	(6,880	)	$	(8,495	)

Other includes, among other things, gains and losses on asset disposals and rental income.

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Note 5 – Earnings Per Share

The following table sets forth the computation of earnings per share and earnings per share—assuming dilution:

	Three Months Ended
	May 26, 2006		May 27, 2005
Numerator (in thousands):
Income from continuing operations	$	16,037	$	26,908
Add-back – interest on convertible subordinated notes, net of tax		1,874		1,875
Income from continuing operations – assuming dilution	$	17,911	$	28,783
Denominator (in thousands):
Weighted average shares outstanding		58,137		68,596
Effect of dilutive securities:
Convertible debt		12,576		12,591
Stock options and other		364		766
Weighted average shares outstanding – assuming dilution		71,077		81,953
Income from continuing operations per share	$	0.27	$	0.40
Income from continuing operations per share – assuming dilution	$	0.25	$	0.36

Approximately 4.7 million and 2.7 million stock options outstanding in the three month periods ended May 26, 2006 and May 27, 2005, respectively, were excluded from the weighted average shares outstanding – assuming dilution calculation because the effect would have been antidilutive. Refer to Note 10 for additional information on changes that occurred near the end of the quarter ended May 26, 2006 that impacted the Corporation’s outstanding 7.00% convertible subordinated notes.

Note 6 – Comprehensive Income

The Corporation’s total comprehensive income is as follows:

	Three Months Ended
(In thousands)	May 26, 2006		May 27, 2005
Net income	$	15,392	$	26,414
Other comprehensive income (loss):
Foreign currency translation adjustment and other		14,057		(14,144	)
Unrealized gain (loss) on securities		72		(1	)
Total comprehensive income	$	29,521	$	12,269

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Note 7 – Trade Accounts Receivable, Net

Trade accounts receivable are reported net of certain allowances and discounts. The most significant of these are as follows:

(In thousands)	May 26, 2006		February 28, 2006		May 27, 2005
Allowance for seasonal sales returns	$	84,000	$	73,275	$	84,284
Allowance for doubtful accounts		9,361		8,138		16,701
Allowance for cooperative advertising and marketing funds		24,379		21,658		27,613
Allowance for rebates		62,360		51,957		59,308
	$	180,100	$	155,028	$	187,906

Note 8 – Inventories

(In thousands)	May 26, 2006		February 28, 2006		May 27, 2005
Raw materials	$	24,175	$	19,806	$	26,601
Work in process		18,898		15,399		23,788
Finished products		248,743		239,866		231,847
		291,816		275,071		282,236
Less LIFO reserve		79,802		79,403		76,673
		212,014		195,668		205,563
Display materials and factory supplies		25,644		21,650		24,496
	$	237,658	$	217,318	$	230,059

The valuation of inventory under the Last-In, First-Out (LIFO) method is made at the end of each fiscal year based on inventory levels and costs at that time. Accordingly, interim LIFO calculations, by necessity, are based on estimates of expected fiscal year-end inventory levels and costs and are subject to final fiscal year-end LIFO inventory calculations.

Note 9 – Deferred Costs

As of May 26, 2006, February 28, 2006 and May 27, 2005, deferred costs and future payment commitments are included in the following financial statement captions:

(In thousands)	May 26, 2006			February 28, 2006			May 27, 2005
Prepaid expenses and other	$	149,812		$	156,442		$	158,055
Other assets		466,926			489,286			564,298
Deferred cost assets		616,738			645,728			722,353
Other current liabilities		(63,555	)		(61,391	)		(92,568	)
Other liabilities		(48,771	)		(68,695	)		(81,921	)
Deferred cost liabilities		(112,326	)		(130,086	)		(174,489	)
Net deferred costs	$	504,412		$	515,642		$	547,864

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Note 10 – Debt

On April 4, 2006, the Corporation entered into a new $650 million secured credit agreement. The new credit agreement includes a $350 million revolving credit facility and a $300 million delay draw term loan. The Corporation may request one or more term loans until April 4, 2007. In connection with the execution of this new agreement, the Corporation’s amended and restated credit agreement dated May 11, 2004 was terminated. The obligations under the new credit agreement are guaranteed by the Corporation’s material domestic subsidiaries and are secured by substantially all of the personal property of American Greetings Corporation and each of its material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of the Corporation’s domestic subsidiaries and 65% of the capital stock of the Corporation’s first tier foreign subsidiaries. The revolving loans will mature on April 4, 2011 and the term loans will mature on April 4, 2013. Each term loan will amortize in equal quarterly installments equal to 0.25% of the amount of such term loan, beginning on April 4, 2007, with the balance payable on April 4, 2013. There were no outstanding balances under this agreement at May 26, 2006.

Revolving loans denominated in U.S. dollars under the new credit agreement will bear interest at a rate per annum based on the then applicable London Inter-Bank Offer Rate (“LIBOR”) or the alternate base rate (“ABR”), as defined in the credit agreement, in each case, plus margins adjusted according to the Corporation’s leverage ratio. Term loans will bear interest at a rate per annum based on either LIBOR plus 150 basis points or based on the ABR, as defined in the credit agreement, plus 25 basis points. The Corporation pays an annual commitment fee of 25 basis points on the undrawn portion of the revolving credit facility and 62.5 basis points on the undrawn portion of the term loan. In accordance with the terms of the new credit agreement, the commitment fee on the revolving facility will fluctuate based on the Corporation’s leverage ratio beginning November 30, 2006. The commitment fee on the term loan terminates on April 4, 2007 if no amounts have been drawn as of that date.

The credit agreement contains certain restrictive covenants that are customary for similar credit arrangements, including covenants relating to limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions and transactions with affiliates. There are also financial performance covenants that require the Corporation to maintain a maximum leverage ratio and a minimum interest coverage ratio. The credit agreement also requires the Corporation to make certain mandatory prepayments of outstanding indebtedness using the net cash proceeds received from certain dispositions, events of loss and additional indebtedness that the Corporation may incur from time to time.

Also, on April 4, 2006, the Corporation reduced the available financing under its accounts receivable securitization financing agreement from $200 million to $150 million. Under the terms of the agreement, the Corporation transfers receivables to a wholly-owned consolidated subsidiary that in turn utilizes the receivables to secure borrowings through a credit facility with a financial institution. The maturity date for this agreement is August 1, 2007. The related interest rate is commercial paper-based. The Corporation pays an annual commitment fee of 25 basis points on the undrawn portion of the accounts receivable facility. There were no outstanding balances under this agreement at May 26, 2006.

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On May 24, 2006, the Corporation issued $200.0 million of 7.375% senior unsecured notes, due on June 1, 2016. The proceeds from this issuance were used for the repurchase of the Corporation’s 6.10% senior notes due on August 1, 2028 that were tendered in the Corporation’s tender offer and consent solicitation for these notes that was completed on May 25, 2006.

On May 25, 2006, the Corporation repurchased $277.3 million of its 6.10% senior notes due on August 1, 2028 and recorded a charge of $5.0 million for the consent payment and other fees associated with the notes repurchased, as well as for the write-off of related deferred financing costs. In conjunction with the tender, the indenture governing the 6.10% senior notes was amended to eliminate certain restrictive covenants and events of default. The remaining 6.10% senior notes may be put back to the Corporation on August 1, 2008, at the option of the holders, at 100% of the principal amount provided the holders exercise this option between July 1, 2008 and August 1, 2008.

On May 26, 2006, $159.1 million of the Corporation’s 7.00% convertible subordinated notes due on July 15, 2006 were exchanged (modified) for a new series of 7.00% convertible subordinated notes due on July 15, 2006. The Corporation paid an exchange fee of $0.8 million that has been deferred and will be amortized over the remaining term of the new convertible subordinated notes. The terms of the new notes are substantially the same as the old notes except that upon conversion, the new notes will be settled in cash and, depending on the trading price of the Corporation’s Class A common shares, in Class A common shares. Upon conversion, the old notes can only be settled in Class A common shares. The old notes are convertible at the option of the holders into Class A common shares of the Corporation at any time before the close of business on July 15, 2006, at a conversion rate of 71.9466 common shares per $1 thousand principal amount of notes. If the remaining old notes outstanding at May 26, 2006 were converted, this would result in the issuance of approximately 1,127,000 Class A common shares of the Corporation. If the new notes outstanding at May 26, 2006 were converted, this would result in a cash payment of $159.1 million and the issuance of approximately 4,466,000 Class A common shares of the Corporation based on the closing market price of the Corporation’s Class A common shares on May 26, 2006 and a conversion rate of 71.9466 common shares per $1 thousand principal amount of notes.

At May 26, 2006, the Corporation was in compliance with all of its financial covenants.

At May 26, 2006, February 28, 2006 and May 27, 2005, debt due within one year, representing current maturities of long-term debt, totaled $159.1 million, $174.8 million and $10.2 million, respectively.

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At May 26, 2006, February 28, 2006 and May 27, 2005, long-term debt and their related calendar year due dates were as follows:

(In thousands)	May 26, 2006		February 28, 2006		May 27, 2005
6.10% Senior Notes, due 2028	$	22,615	$	298,910	$	298,603
7.375% Senior Notes, due 2016		200,000		—		—
7.00% Convertible Subordinated Notes, due 2006		15,662		—		175,000
Other		1,561		1,606		2,549
	$	239,838	$	300,516	$	476,152

During 2006, the Corporation repurchased the remaining 11.75% senior subordinated notes that were included in debt due within one year at May 27, 2005. As a result, a charge of $0.9 million was recorded for the premium associated with the notes as well as for the write-off of the remaining related deferred financing costs.

Note 11 – Retirement Benefits

The components of periodic benefit cost for the Corporation’s defined benefit pension and postretirement benefit plans are as follows:

	Defined Benefit Pension						Postretirement Benefit
	Three Months Ended						Three Months Ended
(In thousands)	May 26, 2006			May 27, 2005			May 26, 2006			May 27, 2005
Service cost	$	135		$	128		$	999		$	711
Interest cost		1,785			1,811			1,925			1,872
Expected return on plan assets		(1,775	)		(1,721	)		(1,275	)		(1,201	)
Amortization of prior service cost (credit)		65			23			(1,849	)		(1,849	)
Amortization of actuarial loss		665			358			1,700			1,771
	$	875		$	599		$	1,500		$	1,304

The Corporation has a non-contributory profit-sharing plan with a contributory 401(k) provision covering most of its United States employees. The profit-sharing plan expense for the three months ended May 26, 2006 and May 27, 2005 was $0.9 million and $3.2 million, respectively. The profit-sharing plan expense for the three month periods are estimates as actual contributions to the profit-sharing plan are made after fiscal year-end and are contingent upon final year-end results. The Corporation matches a portion of 401(k) employee contributions contingent upon meeting specified annual operating results goals. The expense recognized for the 401(k) match for the three months ended May 26, 2006 and May 27, 2005 was $1.1 million and $0.7 million, respectively.

Note 12 – Stock-Based Compensation

Effective March 1, 2006, the Corporation adopted SFAS No. 123R (“SFAS 123R”), “Share-Based Payment,” utilizing the “modified prospective” method as described in SFAS 123R. In the “modified prospective” method, compensation cost is recognized for all share-based payments granted after the effective date and for all unvested

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awards granted prior to the effective date. In accordance with SFAS 123R, prior period amounts were not restated. SFAS 123R also requires the tax benefits associated with these share-based payments to be classified as financing activities in the Condensed Consolidated Statement of Cash Flows, rather than as operating cash flows as required under previous accounting guidance. Total stock-based compensation expense, recognized in “Administrative and general” expenses on the Condensed Consolidated Statement of Income, was $2.4 million ($1.5 million net of tax), which reduced earnings per share and earnings per share – assuming dilution by $0.02 during the three months ended May 26, 2006.

Prior to the effective date, the Corporation followed Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations for its stock options granted to employees and directors. Because the exercise price of the Corporation’s stock options equals the fair market value of the underlying stock on the date of grant, no compensation expense was recognized. The Corporation had adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” Pro-forma information regarding the impact of total stock-based compensation on net income and earnings per share for prior periods is required by SFAS 123R.

The following illustrates the pro-forma information, determined as if the Corporation had applied the fair value method of accounting for stock options, during the three months ended May 27, 2005:

(In thousands, except per share amounts)
Net income as reported	$	26,414
Deduct: Stock-based compensation expense determined under fair value based method, net of tax		1,029
Pro forma net income	$	25,385
Earnings per share:
As reported	$	0.39
Pro forma		0.37
Earnings per share – assuming dilution:
As reported	$	0.35
Pro forma		0.33

Under the Corporation’s stock option plans, options to purchase Class A and/or Class B common shares are granted to directors, officers and other key employees at fair market value on the date of grant. In general, subject to continuing service, options become exercisable commencing twelve months after date of grant in annual installments and expire over a period of not more than ten years from the date of grant. The majority of options granted vest in annual installments over a two-year period. The Corporation, from time to time, makes certain grants whereby the vesting or exercise periods have the potential to be accelerated if the market value of the Corporation’s Class A common shares reaches certain specified prices. These grants are subject to

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the terms of the applicable option plans and agreements. These types of grants are not material to the total number of options outstanding at May 26, 2006. The Corporation generally issues new shares when options to purchase Class A common shares are exercised and treasury shares when options to purchase Class B shares are exercised.

Stock option transactions and prices are summarized as follows:

	Number of Class A Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at February 28, 2006	5,395,480		$	22.12		$	9,072
Granted	942,625			22.65
Exercised	(54,305	)		17.05
Cancelled	(38,805	)		23.30
Outstanding at May 26, 2006	6,244,995		$	22.24	6.3		12,960
Exercisable at May 26, 2006	4,546,622		$	21.85	5.5		12,236
	Number of Class B Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at February 28, 2006	893,882		$	26.28		$	122
Granted	193,000			22.65
Outstanding at May 26, 2006	1,086,882		$	25.63	5.3		456
Exercisable at May 26, 2006	674,093		$	27.03	4.1		296

The fair value of the Corporation’s stock options was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for all options granted during the three months ended May 26, 2006 and May 27, 2005:

	Three Months Ended
	May 26, 2006	May 27, 2005
Risk-free interest rate	5.00%	3.68%
Dividend yield	1.41%	0.32%
Expected stock volatility	0.24	0.28
Expected life in years	2.40	3.80

The weighted-average grant date fair value of options granted during the three months ended May 26, 2006 and May 27, 2005 was $5.92 and $7.54, respectively. The total intrinsic value of options exercised during the three months ended May 26, 2006 was $0.3 million.

14

During 2006, approximately 180,000 performance shares were awarded to certain executive officers under the American Greetings 1997 Equity and Performance Incentive Plan. The performance shares represent the right to receive Class B common shares, at no cost to the officer, upon achievement of management objectives over a performance period of up to five years. The performance shares are in lieu of a portion of the officer’s annual cash bonus. The number of performance shares actually earned will be based on the percentage of the officer’s target incentive award, if any, that the officer achieves during the performance period under the Corporation’s Key Management Annual Incentive Plan. The Corporation recognizes compensation expense related to performance shares ratably over the estimated vesting period. The fair value per share of the performance shares in 2007 was $20.94, using the following assumptions: risk-free interest rate of 4.74%; dividend yield of 1.52%; volatility of 0.24; and an expected life of one year. The fair value per share of the performance shares in 2006 was $24.88, using the following assumptions: risk-free rate of 3.20%; dividend yield of 0.24%; volatility of 0.24; and an expected life of one year.

As of May 26, 2006, the Corporation had unrecognized compensation expense of approximately $13 million, before taxes, related to stock options and performance shares. The unrecognized compensation expense is expected to be recognized over an average period of approximately 1.5 years.

Note 13 – Business Segment Information

The Corporation is organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. During the fourth quarter of 2006, the Corporation modified its segment reporting to reflect changes in how the Corporation’s operations are managed, viewed and evaluated. Prior periods have been reclassified to conform to the new segment disclosures.

The North American Social Expression Products and International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of distribution with mass retailers as the primary channel.

At May 26, 2006, the Corporation owned and operated 499 card and gift retail stores in the United States and Canada through its Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The stores sell products purchased from the North American Social Expression Products segment as well as products purchased from other vendors.

AG Interactive is an electronic provider of social expression content through the Internet and wireless platforms.

The Corporation’s non-reportable operating segments primarily include licensing activities, distribution of supplemental educational products and the design, manufacture and sale of display fixtures.

15

Segment results are internally reported and evaluated at consistent exchange rates between years to eliminate the impact of foreign currency fluctuations. An exchange rate adjustment is included in the reconciliation of the segment results to the consolidated results; this adjustment represents the impact on the segment results of the difference between the exchange rates used for segment reporting and evaluation and the actual exchange rates for the periods presented.

Centrally incurred and managed costs are not allocated back to the operating segments. The unallocated items include interest expense on centrally-incurred debt, domestic profit-sharing expense and stock-based compensation expense. In addition, the costs associated with corporate operations including the senior management, corporate finance, legal and human resource functions, among other costs, are included in the unallocated items.

Operating Segment Information

	Net Sales						Segment Earnings (Loss)
	Three Months Ended						Three Months Ended
(In thousands)	May 26, 2006			May 27, 2005			May 26, 2006			May 27, 2005
North American Social Expression Products	$	288,573		$	304,976		$	65,828		$	79,475
Intersegment items		(16,377	)		(11,675	)		(12,028	)		(8,535	)
Exchange rate adjustment		3,143			1,566			1,418			682
Net		275,339			294,867			55,218			71,622
International Social Expression Products		57,323			55,339			481			2,070
Exchange rate adjustment		4,291			7,506			62			292
Net		61,614			62,845			543			2,362
Retail Operations		40,678			42,860			(7,178	)		(6,238	)
Exchange rate adjustment		2,761			1,382			(121	)		(42	)
Net		43,439			44,242			(7,299	)		(6,280	)
AG Interactive		19,960			28,047			2,041			330
Exchange rate adjustment		5			214			(1	)		(95	)
Net		19,965			28,261			2,040			235
Non-reportable segments		6,214			8,206			(2,619	)		4,132
Unallocated items - net		—			1,048			(29,044	)		(28,553	)
Exchange rate adjustment		—			—			52			66
Net		—			1,048			(28,992	)		(28,487	)
Consolidated total	$	406,571		$	439,469		$	18,891		$	43,584

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Termination Benefits and Plant Closings

Termination benefits are primarily considered part of an ongoing benefit arrangement, accounted for in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits,” and are recorded when payment of the benefits is probable and can be reasonably estimated.

During 2006, the Corporation recorded a severance charge of $4.4 million related to the planned Lafayette, Tennessee plant closure and other headcount reductions. The plant closure is targeted for early summer in calendar year 2006.

During the three months ended May 27, 2005, the North American Social Expression Products segment recorded a charge of $3.2 million for shutdown and relocation costs incurred during the period in connection with the Franklin, Tennessee plant closure.

The balance of the severance accrual was $6.7 million, $9.1 million and $11.1 million at May 26, 2006, February 28, 2006 and May 27, 2005, respectively.

Deferred Revenue

Deferred revenue, included in “Other current liabilities” on the Condensed Consolidated Statement of Financial Position, totaled $29.6 million, $28.4 million and $26.9 million at May 26, 2006, February 28, 2006 and May 27, 2005, respectively. The amounts relate primarily to the Corporation’s AG Interactive segment and the licensing activities included in non-reportable segments.

Note 14 – Discontinued Operations

In February 2006, the Corporation committed to a plan to sell its South African business unit. It had been determined that the business unit was no longer a strategic fit for the Corporation. The Corporation has identified the assets and liabilities of the business as held for sale.

The South African business unit meets the definition of a “component of an entity” and has been accounted for as a discontinued operation under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the Corporation’s condensed consolidated financial statements and related notes have been presented to reflect it as a discontinued operation for all periods presented. The South African business unit was previously included within the former “Social Expression Products” segment.

The following summarizes the results of discontinued operations:

(In thousands)	Three Months Ended
	May 26, 2006			May 27, 2005
Net sales	$	3,767		$	3,807
Pretax loss from operations	$	(645	)	$	(494	)
Income tax expense		—			—
Loss from discontinued operations	$	(645	)	$	(494	)

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“Assets of businesses held for sale” and “Liabilities of businesses held for sale” in the Condensed Consolidated Statement of Financial Position include the following:

(In thousands)	May 26, 2006		February 28, 2006		May 27, 2005
Assets of businesses held for sale:
Current assets	$	10,978	$	11,277	$	11,938
Other assets		—		1,713		6,266
Fixed assets		—		—		3,950
	$	10,978	$	12,990	$	22,154
Liabilities of businesses held for sale:
Current liabilities	$	3,102	$	3,016	$	4,211
Noncurrent liabilities		—		—		8
	$	3,102	$	3,016	$	4,219

Note 15 - Subsequent Events

In June 2006, the Corporation closed on the sale of its South African business unit. Proceeds of approximately $10 million were received and any gain or loss on sale will be recorded during the second quarter.

Also, in June 2006, the Corporation’s AG Interactive subsidiary completed the acquisition of an online greeting card business for approximately $21 million, of which approximately 70% will be paid in the second quarter with the remainder to be paid in 2008. The financial results of this acquisition will be included in the Corporation’s results from the date of acquisition.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited consolidated financial statements. This discussion and analysis, and other statements made in this Report, contain forward-looking statements, see “Factors That May Affect Future Results” at the end of this discussion and analysis for a discussion of the uncertainties, risks and assumptions associated with these statements. Unless otherwise indicated or the context otherwise requires, the “Corporation,” “we,” “our,” “us” and “American Greetings” are used in this Report to refer to the businesses of American Greetings Corporation and its consolidated subsidiaries.

Overview

We experienced lower net sales and earnings during the first quarter of 2007, compared to the prior year quarter, primarily driven by our North American Social Expression Products segment where the implementation of our strategy to invest in our core greeting card business (“investment in cards strategy”) and scan-based trading (“SBT”) implementations directly impacted both net sales and earnings during the period. As we noted in our Annual Report on Form 10-K, we have committed approximately $75 million to the investment in cards strategy. These expenditures, which we expect to be weighted toward the second half of the year, will significantly reduce our operating earnings during fiscal 2007.

During the first quarter, actions related to the investment in cards strategy decreased net sales by approximately $6 million and SBT implementations reduced net sales by approximately $7 million. In total, actions related to the investment in cards strategy and SBT implementations reduced consolidated pretax income by approximately $9 million and $7 million, respectively. In addition, both of our social expression products segments experienced generally soft demand for their products.

AG Interactive net sales decreased approximately $8 million from the prior year first quarter. However, the prior year quarter included five months of operating results as AG Interactive changed its fiscal year-end from December 31 to February 28/29. The additional two months of activity in the prior year added approximately $11 million to net sales with no impact on net income. Factoring in this impact, net sales improved approximately $3 million as the core revenue drivers of advertising and subscriptions continued to demonstrate positive trends this quarter.

On March 1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payments,” using the modified prospective transition method. As a result, stock-based compensation expense recognized during the period was $2.4 million and is included in “Administrative and general” expenses on the Condensed Consolidated Statement of Income.

The effective tax rate for the first quarter of 2007 was 15.1% compared to 38.3% in the first quarter of 2006 due entirely to several discrete events that reduced income tax expense in the current period.

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During the first quarter of 2007, we continued to optimize our capital structure. We completed a successful exchange offering for our convertible notes, repurchased substantially all of our $300 million 6.10% senior notes, replaced our credit facility with a new $650 million credit facility and issued $200 million of 7.375% senior unsecured notes. In total, we increased our financial flexibility, which is needed to continue to implement our operational strategy of investing in our core greeting card business, our financial strategy of investing in our own stock and the ongoing SBT conversions.

Related to these financing activities, our first quarter results included approximately $6 million for the purchase premiums, transaction costs and the write-off of deferred financing costs associated with the extinguished debt instruments. These costs were partially offset by a net gain of $2.4 million associated with an interest rate derivative designed to offset the initial interest rate risk related to the $200 million of 7.375% senior unsecured notes issued during the period.

The prior year quarter included $3.2 million for shutdown and relocation costs incurred during the period in connection with a plant closure and $0.9 million for the costs associated with the repurchase of our remaining outstanding 11.75% senior subordinated notes.

Subsequent to the quarter end, we completed the sale of our South African business unit and our AG Interactive business acquired an online greeting card business.

As we discussed on the June 29, 2006 web cast of our first quarter earnings, we are not changing the full year guidance that we provided in our April 6, 2006 earnings release and conference call where we announced that, subject to certain assumptions identified at that time, we anticipate for 2007 (1) earnings per share (assuming dilution) to be between $0.80 and $1.00, (2) a capital spending level of $70 million to $80 million and (3) cash provided by operating activities less capital expenditures to be between $100 million and $130 million.

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Results of Operations

Three months ended May 26, 2006 and May 27, 2005

Net income was $15.4 million, or $0.24 per share, in the quarter compared to $26.4 million, or $0.35 per share, in the prior year first quarter (all per-share amounts assume dilution).

Our results for the three months ended May 26, 2006 and May 27, 2005 are summarized below:

(Dollars in thousands)	2006			% Net Sales		2005			% Net Sales
Net sales	$	406,571		100.0	%	$	439,469		100.0	%
Material, labor and other production costs		176,321		43.4	%		178,430		40.6	%
Selling, distribution and marketing		143,769		35.4	%		153,798		35.0	%
Administrative and general		62,006		15.3	%		62,475		14.2	%
Interest expense		12,464		3.0	%		9,677		2.2	%
Other income – net		(6,880	)	(1.7	)%		(8,495	)	(1.9	)%
Total costs and expenses		387,680		95.4	%		395,885		90.1	%
Income from continuing operations before income tax expense		18,891		4.6	%		43,584		9.9	%
Income tax expense		2,854		0.7	%		16,676		3.8	%
Income from continuing operations		16,037		3.9	%		26,908		6.1	%
Loss from discontinued operations, net of tax		(645	)	(0.1	)%		(494	)	(0.1	)%
Net income	$	15,392		3.8	%	$	26,414		6.0	%

For the three months ended May 26, 2006, consolidated net sales were $406.6 million, down from $439.5 million in the prior year first quarter. This 7.5% or approximately $33 million decrease was primarily the result of lower sales in our North American Social Expression Products segment of approximately $21 million, AG Interactive of approximately $8 million and our Retail Operations segment of approximately $2 million.

Net sales of our North American Social Expression Products segment decreased approximately $21 million. Approximately $6 million of the decrease was due to the implementation of our investment in cards strategy, approximately $7 million resulted from SBT implementations and the remaining decrease was from lower sales of everyday cards, party goods, candles and gift packaging. These decreases were offset slightly by improvements in seasonal card sales.

The reduction in AG Interactive’s net sales was due to the prior period including five months of activity due to the change in fiscal year-ends partially offset by growth in the online product group. The additional two months in the prior year added approximately $11 million to net sales. Growth in both advertising and subscription revenue added approximately $3 million to net sales in the current period.

Our Retail Operations segment was down approximately $2 million, or 5.1%, as favorable same-store sales of 2.2% were more than offset by the decrease in store doors of approximately 7%.

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Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the three months ended May 26, 2006 and May 27, 2005 are summarized below:

	Increase (Decrease) From the Prior Year
	Everyday Cards				Seasonal Cards				Total Greeting Cards
	2006		2005		2006		2005		2006		2005
Unit volume	(13.2	)%	(0.2	)%	4.6	%	(12.7	)%	(7.2	)%	(4.8	)%
Selling prices	7.0	%	1.0	%	(1.5	)%	4.2	%	4.3	%	1.7	%
Overall increase / (decrease)	(7.1	)%	0.8	%	3.0	%	(9.0	)%	(3.2	)%	(3.2	)%

During the first quarter, combined everyday and seasonal greeting card sales less returns fell 3.2% compared to the prior year quarter. Approximately 55% of this decrease was the result of the SBT buyback during the quarter.

Everyday card unit volume, down 13.2%, and selling prices, up 7.0%, were significantly impacted during the first quarter by the SBT buyback. Approximately 50% of the decrease in everyday card unit volume and approximately 65% of the increase in selling prices was the direct result of the SBT buyback. The remaining everyday card sales less returns decreased 4.3%, including a decline of unit volume of 6.5% and an increase in selling prices of 2.4%. The percentage decrease in card unit volume was consistent across all business units. The increase in selling prices was due to improved mix within most card lines.

Seasonal card unit volume increased 4.6% compared to the prior year quarter due to improvements in Mother’s Day, Easter and Father’s Day unit sales. The decrease in selling prices of seasonal cards is due to a slight change in the mix of Mother’s Day and Father’s Day cards to lower priced product.

Expense Overview

Material, labor and other production costs (“MLOPC”) for the three months ended May 26, 2006 were $176.3 million, a decrease from $178.4 million for the comparable period in the prior year. As a percentage of net sales, these costs were 43.4% in the current period compared to 40.6% for the three months ended May 27, 2005. The $2.1 million decrease from the prior year is due to favorable volume variances of approximately $13 million due to the lower sales volume in the current period substantially offset by unfavorable product and business mix of approximately $6 million and higher inventory adjustments and SBT scrap costs of approximately $5 million.

Selling, distribution and marketing costs for the three months ended May 26, 2006 were $143.8 million, decreasing from $153.8 million for the comparable period in the prior year. The decrease of $10.0 million is due primarily to a reduction of approximately $5 million in AG Interactive’s expenses as the prior year period included an additional two months of activity as well as acquisition costs for the fiscal 2005 acquisitions. A reduction in lease costs and store expenses of approximately $3 million in our Retail Operations segment further reduced expenses in the current period due to fewer stores. The remainder of the decrease is attributable to lower licensing related expenses due to lower royalty income and reduced merchandiser expenses.

22

Administrative and general expenses were $62.0 million for the three months ended May 26, 2006, a decrease from $62.5 million for the three months ended May 27, 2005. More than half of the decrease of $0.5 million from the prior year quarter is due to favorable foreign currency exchange rates. Domestic profit-sharing expense was $2.3 million lower in the current period. AG Interactive’s administrative and general expenses were lower in the current quarter as the additional two months of activity last year contributed to higher administrative and general expenses in that period. These reductions were partially offset by stock-based compensation expense of $2.4 million recorded in the current period.

Interest expense for the three months ended May 26, 2006 was $12.5 million, an increase from $9.7 million for the prior year quarter. The increase of $2.8 million is attributable to $5.0 million of expense related to the early retirement of substantially all of our 6.10% senior notes including the consent payment, fees paid and the write-off of deferred financing costs. Deferred financing costs of $1.0 million associated with the credit facility that was terminated in April 2006 were written off in the current quarter. Additionally, due to the increase in the available financing under the new credit facility, commitment fees increased $0.3 million in the current year period. These amounts were partially offset by $2.4 million for the net gain recognized on the interest rate derivative entered into and settled during the three months ended May 26, 2006 and $0.9 million for expenses in the prior year quarter for the retirement of the remaining $10.2 million of our 11.75% senior subordinated notes.

Other income – net was $6.9 million for the three months ended May 26, 2006, a decrease from $8.5 million for the comparable period in the prior year. The decrease of $1.6 million is principally related to lower royalty income of $4.2 million partially offset by a swing of $2.5 million from a foreign exchange loss in the prior year quarter to a gain in the current quarter.

The effective tax rate on income from continuing operations was 15.1% and 38.3% for the three months ended May 26, 2006 and May 27, 2005, respectively. The decrease in the effective tax rate relates to several discrete events during the current year period, primarily additional tax benefits related to the extraterritorial income (“ETI”) exclusion.

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Segment Information

Our operations are organized and managed according to a number of factors, including product categories, geographic locations and channels of distribution. Our North American Social Expression Products and our International Social Expression Products segments primarily design, manufacture and sell greeting cards and other related products through various channels of distribution, with mass retailers as the primary channel. As permitted under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” certain operating divisions have been aggregated into both the North American Social Expression Products and International Social Expression Products segments. The aggregated operating divisions have similar economic characteristics, products, production processes, types of customers and distribution methods. At May 26, 2006, we owned and operated 499 card and gift retail stores in the United States and Canada through our Retail Operations segment. The stores are primarily located in malls and strip shopping centers. The stores sell products purchased from the North American Social Expression Products segment as well as products purchased from other vendors. AG Interactive is an electronic provider of social expression content through the Internet and wireless platforms.

We review segment results using consistent exchange rates between periods to eliminate the impact of foreign currency fluctuations.

North American Social Expression Products Segment

(Dollars in thousands)	Three Months Ended				% Change
	May 26, 2006		May 27, 2005
Net sales	$	272,196	$	293,301	(7.2	)%
Segment earnings		53,800		70,940	(24.2	)%

Net sales of our North American Social Expression Products segment for the three months ended May 26, 2006, excluding the impact of foreign exchange and intersegment items, decreased $21.1 million or 7.2% from the prior year period. The implementation of our investment in cards strategy and SBT conversions reduced net sales by approximately $6 million and $7 million, respectively, during the period. The remaining decrease was due to lower net sales of everyday cards, party goods, candles and gift packaging, offset slightly by improvements in seasonal card sales.

Segment earnings, excluding the impact of foreign exchange and intersegment items, decreased $17.1 million or 24.2% compared to the prior year period. The combined impact of the investment in cards strategy and SBT implementations decreased segment earnings by approximately $13 million compared to the prior year quarter. The remaining decline was due primarily to lower unit volume across most product lines and higher SBT scrap costs.

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International Social Expression Products Segment

(Dollars in thousands)	Three Months Ended				% Change
	May 26, 2006		May 27, 2005
Net sales	$	57,323	$	55,339	3.6	%
Segment earnings		481		2,070	(76.8	)%

Net sales of our International Social Expression Products segment, excluding the impact of foreign exchange, increased $2.0 million, or 3.6%, compared to the prior year quarter. This increase was due to improvements in seasonal card sales, primarily Easter and Mother’s Day, partially offset by lower everyday card sales.

Segment earnings for the three months ended May 26, 2006, excluding the impact of foreign exchange, decreased $1.6 million compared to the three months ended May 27, 2005. This decrease is due to increased operating costs in the United Kingdom (“U.K.”), primarily merchandiser and other selling costs, inventory adjustments and other plant operating costs.

Retail Operations Segment

(Dollars in thousands)	Three Months Ended						% Change
	May 26, 2006			May 27, 2005
Net sales	$	40,678		$	42,860		(5.1	)%
Segment loss		(7,178	)		(6,238	)	(15.1	)%

Net sales, excluding the impact of foreign exchange, in our Retail Operations segment decreased $2.2 million or 5.1% for the three months ended May 26, 2006, compared to the prior year period as favorable same-store sales of 2.2% were more than offset by the reduction in store doors. Net sales for the quarter decreased approximately $3 million due to fewer stores. The average number of stores was approximately 7% less than in the prior year quarter.

Segment earnings, excluding the impact of foreign exchange, was a loss of $7.2 million in the three months ended May 26, 2006, compared to a loss of $6.2 million in the three months ended May 27, 2005. Earnings were unfavorably impacted by promotional pricing and inventory write-offs of approximately $3 million compared to the prior year quarter, of which approximately $2 million related to our investment in cards strategy. Gross margins decreased by approximately 7.6 percentage points. Segment earnings benefited from lower store rent, operating expenses and associate costs of approximately $3 million due to fewer stores.

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AG Interactive Segment

	Three Months Ended
(Dollars in thousands)	May 26, 2006		May 27, 2005		% Change
Net sales	$	19,960	$	28,047	(28.8	)%
Segment earnings		2,041		330	518.5	%

For 2006, AG Interactive changed its fiscal year-end from December 31 to February 28/29. As a result, the three months ended May 27, 2005 included five months of AG Interactive’s operations.

Net sales of AG Interactive for the three months ended May 26, 2006, excluding the impact of foreign exchange, decreased $8.1 million compared to the prior year first quarter. The $8.1 million decrease is primarily due to approximately $11 million of net sales associated with the additional two months of activity in the prior year period. The decrease due to the change in fiscal year-ends was partially offset by advertising and subscription revenue growth in the online product group, which contributed approximately $3 million to net sales in the current year quarter. At the end of the first quarter of 2007, AG Interactive had approximately 2.7 million online paid subscribers versus 2.3 million at the prior year quarter end.

Segment earnings, excluding the impact of foreign exchange, increased by $1.7 million for the quarter ended May 26, 2006, compared to the prior year period. The online product group contributed approximately two-thirds of the improvement while the mobile product group added one-third. The additional two months of activity in the quarter ended May 27, 2005 had no significant impact on segment earnings.

Liquidity and Capital Resources

The seasonal nature of our business precludes a useful comparison of the current period and the fiscal year-end financial statements; therefore, a Condensed Consolidated Statement of Financial Position as of May 27, 2005, has been included.

Operating Activities

Operating activities provided $21.3 million of cash during the three months ended May 26, 2006, compared to $17.7 million of cash in the prior year quarter.

Other non-cash charges were $3.9 million for the three months ended May 26, 2006, compared to $0.5 million in the prior year period. This increase is primarily related to the stock-based compensation expense of $2.4 million recorded during the period and the write-off of deferred financing fees associated with our old credit facility.

Accounts receivable provided $22.2 million of cash from February 28, 2006, compared to using cash of $12.4 million during the three months ended May 27, 2005. As a percentage of the prior twelve months’ net sales, net accounts receivable were 6.6% at May 26, 2006, compared to 10.1% at May 27, 2005. This improvement is driven by additional customers moving to the SBT business model. In general, customers on the SBT business model tend to have shorter payment terms than non-SBT customers.

26

Inventory was a use of $17.6 million from February 28, 2006, compared to a use of $13.8 million in the prior year period. As a percentage of the prior twelve months’ MLOPC, inventories were 28.0% at May 26, 2006, compared to 25.7% at May 27, 2005. The higher usage is related to inventory build to support our investment in cards strategy.

Other current assets used $8.7 million of cash from February 28, 2006, compared to providing $14.4 million in the prior year quarter. The difference is due to refundable tax amounts in the prior year.

Deferred costs - net represents payments under agreements with retailers net of the related amortization of those payments. During the three months ended May 26, 2006, amortization exceeded payments by $13.0 million; in the three months ended May 27, 2005, amortization exceeded payments by $25.1 million. See Note 9 to the condensed consolidated financial statements for further detail of deferred costs related to customer agreements.

Accounts payable and other liabilities were a use of $24.3 million during the three months ended May 26, 2006, compared to $47.9 million in the prior year period. The change from the prior year is due primarily to tax payments made in the prior period.

Investing Activities

Investing activities provided $119.4 million of cash during the three months ended May 26, 2006, compared to using $9.2 million in the prior year period. The source of cash in the current year is primarily related to sales of short-term investments exceeding purchases. Short-term investments decreased from $208.7 million at February 28, 2006 to $83.1 million at May 26, 2006.

Financing Activities

Financing activities used $151.7 million of cash during the three months ended May 26, 2006, compared to $42.5 million during the three months ended May 27, 2005. The current year amount relates primarily to our financing activities in the period. We issued $200.0 million of 7.375% senior unsecured notes and retired $277.3 million of our 6.10% senior notes, approximately 92% of the total outstanding. We paid $7.3 million of debt issuance costs during the current period for our new credit facility, the 7.375% senior unsecured notes and the exchange offer on our 7.00% convertible subordinated notes. These amounts were deferred and will be amortized over the respective periods of the instruments. Our Class A common share repurchase programs also contributed to the cash used for financing activities in both periods. These repurchases were made through 10b5-1 programs. During the three months ended May 26, 2006, $59.4 million was paid to repurchase approximately 2.8 million shares under the repurchase program, compared to $45.5 million used in the prior year quarter to repurchase approximately 1.9 million shares.

Our receipt of the exercise price on stock options provided $1.1 million and $8.5 million during the three months ended May 26, 2006 and May 27, 2005, respectively. In accordance with SFAS No. 123 (revised 2004), tax benefits associated with share-based payments are classified as financing activities in the Condensed Consolidated Statement of Cash Flows, rather than as operating cash flows as required under previous accounting guidance. Prior period amounts were not reclassified.

During the three months ended May 26, 2006 and May 27, 2005, we paid quarterly dividends of $0.08 per common share, which totaled $4.6 million and $5.5 million, respectively.

27

Credit Sources

Substantial credit sources are available to us. In total, we had available sources of approximately $800 million at May 26, 2006. This included our $650 million senior secured credit facility and our $150 million accounts receivable securitization financing. There were no outstanding balances under either of these arrangements at May 26, 2006.

On April 4, 2006, we entered into a new $650 million credit agreement. The new credit agreement includes a $350 million revolving credit facility and a $300 million delay draw term loan. We may request one or more term loans until April 4, 2007. In connection with the execution of this new agreement, our amended and restated credit agreement dated May 11, 2004 was terminated. The obligations under the new credit agreement are guaranteed by our material domestic subsidiaries and are secured by substantially all of the personal property of American Greetings Corporation and each of our material domestic subsidiaries, including a pledge of all of the capital stock in substantially all of our domestic subsidiaries and 65% of the capital stock of our first tier foreign subsidiaries. The revolving loans will mature on April 4, 2011, and the term loans will mature on April 4, 2013. Each term loan will amortize in equal quarterly installments equal to 0.25% of the amount of such term loan, beginning on April 4, 2007, with the balance payable on April 4, 2013.

Revolving loans denominated in U.S. dollars under the new credit agreement will bear interest at a rate per annum based on the then applicable London Inter-Bank Offer Rate (“LIBOR”) or the alternate base rate (“ABR”), as defined in the credit agreement, in each case, plus margins adjusted according to our leverage ratio. Term loans will bear interest at a rate per annum based on either LIBOR plus 150 basis points or based on the ABR, as defined in the credit agreement, plus 25 basis points. We pay an annual commitment fee of 25 basis points on the undrawn portion of the revolving credit facility and 62.5 basis points on the undrawn portion of the term loan. Effective November 30, 2006, the commitment fee on the revolving facility will fluctuate based on our leverage ratio. The commitment fee on the term loan terminates on April 4, 2007 if no amounts have been drawn as of that date.

The credit agreement contains certain restrictive covenants that are customary for similar credit arrangements, including covenants relating to limitations on liens, dispositions, issuance of debt, investments, payment of dividends, repurchases of capital stock, acquisitions and transactions with affiliates. There are also financial performance covenants that require us to maintain a maximum leverage ratio and a minimum interest coverage ratio. The credit agreement also requires us to make certain mandatory prepayments of outstanding indebtedness using the net cash proceeds received from certain dispositions, events of loss and additional indebtedness that we may incur from time to time.

Also, on April 4, 2006, we reduced the available financing under our accounts receivable securitization financing agreement from $200 million to $150 million. Under the terms of the agreement, we transfer receivables to a wholly-owned consolidated subsidiary that in turn utilizes the receivables to secure borrowings through a credit facility with a financial institution. The maturity date for this agreement is August 1, 2007. The related interest rate is commercial paper-based. We pay an annual commitment fee of 25 basis points on the undrawn portion of the facility.

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On May 24, 2006, we issued $200 million of 7.375% senior unsecured notes, due on June 1, 2016. The proceeds from this issuance were used for the repurchase of our 6.10% senior notes that were tendered in our tender offer and consent solicitation for these notes that was completed on May 25, 2006.

On May 25, 2006, we repurchased $277.3 million of our 6.10% senior notes and recorded a charge of $5.0 million for the consent payment and other fees associated with the notes repurchased as well as for the write-off of related deferred financing costs. In conjunction with the tender, the indenture governing the 6.10% senior notes was amended to eliminate certain restrictive covenants and events of default. The remaining 6.10% senior notes may be put back to the Corporation on August 1, 2008, at the option of the holders, at 100% of the principal amount provided the holders exercise this option between July 1, 2008 and August 1, 2008.

On May 26, 2006, $159.1 million of our 7.00% convertible subordinated notes due on July 15, 2006 were exchanged for a new series of 7.00% convertible subordinated notes due on July 15, 2006. We paid an exchange fee of $0.8 million that has been deferred and will be amortized over the remaining term of the new convertible subordinated notes. The terms of the new notes are substantially the same as the old notes except that upon conversion, the new notes will be settled in cash and, depending on the trading price of our Class A common shares, in Class A common shares. Upon conversion, the old notes can only be settled in our Class A common shares. The old notes are convertible at the option of the holders into our Class A common shares at any time before the close of business on July 15, 2006, at a conversion rate of 71.9466 common shares per $1 thousand principal amount of notes. If the remaining old notes outstanding at May 26, 2006 were converted, this would result in the issuance of approximately 1,127,000 Class A common shares of American Greetings. If the new notes outstanding at May 26, 2006 were converted, this would result in a cash payment of $159.1 million and the issuance of approximately 4,466,000 Class A common shares of American Greetings based on the closing market price of our Class A common shares on May 26, 2006 and a conversion rate of 71.9466 common shares per $1 thousand principal amount of notes.

Our future operating cash flow and borrowing availability under our credit agreement and our accounts receivable securitization financing program are expected to meet currently anticipated funding requirements. The seasonal nature of the business results in peak working capital requirements that may be financed through short-term borrowings.

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Contractual Obligations

The following table presents our long-term debt and capital lease obligations and our interest payment obligations as reported in our Annual Report on Form 10-K for the year ended February 28, 2006 and as adjusted to reflect the debt transactions completed in the first quarter of 2007 as if they had been completed on February 28, 2006:

	Payment Due by Period as of February 28, 2006
(In thousands)	2007		2008		2009		2010		2011		Thereafter		Total
As reported:
Long-term debt and capital leases	$	174,792	$	671	$	134	$	118	$	118	$	299,475	$	475,308
Interest payments		25,578		19,148		18,447		18,349		18,331		318,738		418,591
	$	200,370	$	19,819	$	18,581	$	18,467	$	18,449	$	618,213	$	893,899
As adjusted:
Long-term debt and capital leases	$	159,122	$	671	$	134	$	118	$	118	$	223,135	$	383,298
Interest payments		28,338		17,460		17,135		17,133		17,115		101,751		198,932
	$	187,460	$	18,131	$	17,269	$	17,251	$	17,233	$	324,886	$	582,230

Critical Accounting Policies

Please refer to the discussion of our Critical Accounting Policies as disclosed in our Annual Report on Form 10-K for the year ended February 28, 2006.

Factors That May Affect Future Results

Certain statements in this report may constitute forward-looking statements within the meaning of the Federal securities laws. These statements can be identified by the fact that they do not relate strictly to historic or current facts. They use such words as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of future operating or financial performance. These forward-looking statements are based on currently available information, but are subject to a variety of uncertainties, unknown risks and other factors concerning our operations and business environment, which are difficult to predict and may be beyond our control. Important factors that could cause actual results to differ materially from those suggested by these forward-looking statements, and that could adversely affect our future financial performance, include, but are not limited to, the following:

• our ability to successfully implement our strategy to invest in our core greeting card business;

• the timing and impact of investments in new retail or product strategies as well as new product introductions and achieving the desired benefits from those investments;

• the ability to execute share repurchase programs or the ability to achieve the desired accretive effect from such repurchases;

• retail bankruptcies, consolidations and acquisitions, including the possibility of resulting adverse changes to retail contract terms;

• a weak retail environment;

30

• consumer acceptance of products as priced and marketed;

• the impact of technology on core product sales;

• competitive terms of sale offered to customers;

• successful implementation of supply chain improvements and achievement of projected cost savings from those improvements;

• increases in the cost of material, energy, freight and other production costs;

• our ability to comply with our debt covenants;

• fluctuations in the value of currencies in major areas where we operate, including the U.S. Dollar, Euro, U.K. Pound Sterling, and Canadian Dollar;

• escalation in the cost of providing employee health care;

• successful integration of acquisitions; and

• the outcome of any legal claims known or unknown.

Risks pertaining specifically to AG Interactive include the viability of online advertising, subscriptions as revenue generators and the public’s acceptance of online greetings and other social expression products and the ability of the mobile division to compete effectively in the wireless content aggregation market.

The risks and uncertainties identified above are not the only risks we face. Additional risks and uncertainties not presently known to us or that we believe to be immaterial also may adversely affect us. Should any known or unknown risks or uncertainties develop into actual events, or underlying assumptions prove inaccurate, these developments could have material adverse effects on our business, financial condition and results of operations. For further information concerning the risks we face and issues that could materially affect our financial performance related to forward-looking statements, refer to our periodic filings with the Securities and Exchange Commission, including the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended February 28, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the quarter ended May 26, 2006, we entered into an interest rate derivative designed to offset the interest rate risk related to the forecasted issuance of $200 million of senior indebtedness. The interest rate derivative agreement expired during the quarter ended May 26, 2006. We did not designate this agreement as a hedging instrument pursuant to the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Accordingly, the change in the fair value of this agreement was recognized currently and included in “Interest expense” in the Condensed Consolidated Statement of Income. We have no derivative financial instruments outstanding as of May 26, 2006.

Also, during the quarter ended May 26, 2006, we significantly modified our debt structure. See “Liquidity and Capital Resources” above for more information.

For further information, refer to our Annual Report on Form 10-K for the year ended February 28, 2006. Except as described above, there were no material changes in market risk, specifically interest rate and foreign currency exposure, for us from February 28, 2006, the end of our preceding fiscal year, to May 26, 2006, the end of our most recent fiscal quarter.

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Item 4. Controls and Procedures

American Greetings maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

American Greetings carries out a variety of on-going procedures, under the supervision and with the participation of the Corporation’s management, including its Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of American Greetings concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this report.

There has been no change in the Corporation’s internal control over financial reporting during the Corporation’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in certain legal proceedings arising in the ordinary course of business. We, however, do not believe that any of the litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations.

Item 1A. Risk Factors.

There have been no material changes in the risk factors that were discussed in our Annual Report on Form 10-K for the year ended February 28, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) In March 2006, American Greetings issued 143 Class A common shares upon conversion of $2,000 in principal amount of its 7.00% Convertible Subordinated Notes due July 15, 2006 (the “Notes”). In April 2006, American Greetings issued 143 Class A common shares upon conversion of $2,000 in principal amount of the Notes. In May 2006, American Greetings issued an additional 286 Class A common shares upon conversion of $4,000 in principal amount of the Notes. The conversions were effected and the shares were issued in accordance with the terms of the Indentures governing the Notes. The Class A common shares were issued in reliance upon the exemption from registration provided in Section 3(a)(9) of the Securities Act of 1933, as amended. No commission or other remuneration was paid or given directly or indirectly for soliciting these transactions.

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(b) Not applicable

(c) The following table provides information with respect to our purchases of our common shares during the three months ended May 26, 2006.

Period	Total Number of Shares Repurchased	Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans		Maximum Number of Shares (or Approximate Dollar Value) that May Yet Be Purchased Under the Plans
March 2006	Class A – 2,500,000 Class B –         2,942(1)	$ $	21.13 20.77	(2)	2,500,000 —	(3)	$104,393,390
April 2006	Class A –    300,000 Class B –            —	$	21.74 —	(2)	300,000 —	(3)	$  97,870,020
May 2006	Class A –            — Class B –         1,448(1)	$	—   22.55		—   —		$  97,870,020
Total	Class A – 2,800,000 Class B –         4,390(1)				2,800,000 —	(3)

(1) There is no public market for our Class B common shares. Pursuant to our Amended Articles of Incorporation, all of the Class B common shares were repurchased by American Greetings for cash pursuant to its right of first refusal.

(2) Excludes commissions paid, if any, related to the share repurchase transactions.

(3) On February 1, 2006, American Greetings announced that its Board of Directors authorized a program to repurchase up to $200 million of its Class A common shares. There is no set expiration date for this repurchase program and these repurchases are made through a 10b5-1 program in open market or privately negotiated transactions which are intended to be in compliance with the SEC’s Rule 10b-18, subject to market conditions, applicable legal requirements and other factors.

Item 6. Exhibits

Exhibits required by Item 601 of Regulation S-K

Exhibit Number	Description
(10)	Key Management Annual Incentive Plan (Fiscal Year 2007 Description)
(31) a	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(31) b	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(32)	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

33

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AMERICAN GREETINGS CORPORATION
By:	/s/ Joseph B. Cipollone
	Joseph B. Cipollone
	Vice President, Corporate Controller, and Chief Accounting Officer *

July 5, 2006

* (Signing on behalf of Registrant as a duly authorized officer of the Registrant and signing as the chief accounting officer of the Registrant.)

34

EX-10

Exhibit 10

TABLE OF CONTENTS
Eligibility	1
How the Plan Works	2
Your Individual Target Incentive	2
Weighting the Measures	3
Measuring Performance	4
Performance Multipliers	4
Performance Measures	5
Corporate Performance	5
Business Unit Performance	6
Individual Performance	7
Summary - Total Award Calculation	8
Appendix	9
Business Unit Plan Components	9
Administrative Details	10
Definition of Common Terms	11

AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
	1

AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN   This brochure provides an overview of the Key Management Annual Incentive Plan — a valuable component of your total compensation package. It contains details about how the Plan rewards for Corporate, Business Unit and Individual performance results. In addition, your Incentive Compensation Statement — provided separately — includes information specific to your participation in the plan: your assigned business unit and sub-business unit if any, your target incentive percentage and detailed examples of the incentive calculation under different performance scenarios. Together, these documents provide the information you need to understand the Plan so you can maximize your annual incentive award.   n ELIGIBILITY   You are eligible to participate in the Key Management Annual Incentive Plan if you are a Key Manager or Officer in one of the following primary business units and you do not participate in another Company-sponsored annual incentive plan:

PRIMARY BUSINESS UNIT	PARTICIPANTS
Corporate Consolidated	Chief Executive Officer, President and
	Chief Operating Officer and their direct reports
Total Social Expressions Group (SEG)	Associates who are part of:
	AGI Schutz
	Business Intelligence
	Canada
	Carlton Mexico
	Carlton Retail
	Corporate Staff (Delta, Finance, HR, ISD, Legal)
	Creative
	DesignWare
	Everyday & Seasonal Cards
	Field Sales
	FSO
	Fundraising
	Gift Packaging
	Global Sourcing
	Guildhouse
	Inbound Licensing
	Learning Horizons
	Plants
	Specialties
	All other NAGCD units
AG Intellectual Properties Group	AGIP Corporate Staff (Finance, HR)
AG Interactive	AG Interactive associates
AG Properties	AG Properties associates
UK Greetings	UK Greetings associates
John Sands Group	John Sands Group associates
Key Managers include individuals in Key Manager 1 and Key Manager 2 job levels. Officers include Corporate-level Executive Directors, Vice Presidents, Senior Vice Presidents, President & Chief Operating Officer, Chief Executive Officer, Chairman of the Board and any other job level(s) that may be designated.

	AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
2

n HOW THE PLAN WORKS The Key Management Annual Incentive Plan rewards participants for their contributions to American Greetings success over a 12-month fiscal year. The Plan rewards for successful results in three key performance areas: n Corporate Performance. At the beginning of each fiscal year, the American Greetings Board of Directors approves the corporate earnings per share (EPS) goal for the year. Actual corporate results are compared to this goal at the end of the fiscal year. n Business Unit Performance. Every year, each business unit develops an earnings goal — which is approved by the Board of Directors — based on its strategic direction, business opportunities and growth projections. Business unit performance is based on actual fiscal year earnings results for your assigned business unit compared to goal.		The total award — which is paid in cash — can range from 0% to 200% of your individual target incentive. This provides significant incentive earnings opportunity when performance in one or more of these performance areas exceeds expectations. Let’s take a look at the components of the Plan and how they work. YOUR INDIVIDUAL TARGET INCENTIVE At the beginning of each fiscal year, an individual target incentive is established for you based on your job level. This target incentive is typically communicated as a percentage of your base earnings but may also be expressed as a dollar amount, determined by multiplying your base earnings by your target incentive percentage as follows:
n Individual Performance. Your manager will determine your individual performance compared to your objectives for the year. Your actual fiscal year-end performance rating determines the percentage of the target individual incentive amount you earn. At the end of each fiscal year, incentive amounts are determined based on performance in these three areas and are added together to determine your total Key Management Annual Incentive Plan award.			YOUR BASE EARNINGS
			X
			YOUR TARGET INCENTIVE PERCENTAGE
			=
			YOUR TARGET INCENTIVE
	CORPORATE PERFORMANCE	The target incentive represents what you would earn if each performance measure in this incentive plan (Corporate, Business Unit and Individual) were achieved at 100% of goal (i.e., all components achieve their target performance).
	+
	BUSINESS UNIT PERFORMANCE
	+	EXAMPLE
	INDIVIDUAL PERFORMANCE	For example, assume Joe is a Key Manager 1 with base earnings of $60,000. His target incentive under the Plan is 10%, or $6,000 ($60,000 x 10% = $6,000).
	=	We’ll refer to Joe throughout this brochure as we describe how the Plan works.
	YOUR INCENTIVE AWARD

AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
	3

WEIGHTING THE MEASURES

Performance measures are weighted by job level to reflect the degree to which positions within a job level can affect performance in each of the three performance measurement areas. Accordingly, associates at higher job levels — who have more impact on the achievement of corporate objectives — have more weight assigned to the corporate performance measure. Lower job levels, in contrast, have more weight assigned to the individual performance measure.

The following chart shows the specific weightings for each job level for fiscal year 2007.

	FISCAL YEAR 2007 WEIGHTINGS
JOB LEVEL	Corporate	Business Unit	Individual
Chairman of the Board, CEO, President and COO, Senior Vice Presidents	30%	50%	20%
Vice Presidents, Executive Directors, Key Managers 2, Key Managers 1	20%	50%	30%

EXAMPLE

Joe, a Key Manager 1 with base earnings of $60,000 and a 10% incentive target, would have the following set of performance measure weightings and target incentive awards:

	Corporate	Business Unit	Individual	Total
Key Manager 1 Weightings	20%	50%	30%	100%
Joe’s Target Incentive (Percent of Base Earnings)	2% (10% x 20%)	5% (10% x 50%)	3% (10% x 30%)	10%
Joe’s Target Incentive ($)	$1,200 ($60,000 x 2%)	$3,000 ($60,000 x 5%)	$1,800 ($60,000 x 3%)	$6,000

	AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
4

MEASURING PERFORMANCE At the beginning of each fiscal year, the American Greetings Board of Directors approves the corporate earnings per share (EPS) goal for the coming year. This goal provides the context within which each business unit then sets its earnings goal. Corporate and business unit actual earnings performance is determined at the end of the fiscal year and expressed as a percentage of the earnings goal. In contrast, individual results are evaluated by your manager at fiscal year-end and communicated as an individual performance rating. If the corporation’s or your business unit’s results exceed or fall below the earnings goal, Plan payouts are adjusted.	PERFORMANCE MULTIPLIERS The performance multiplier is used to calculate the corporate and business unit incentive awards when performance is above or below goal, provided the performance thresholds have been achieved. Corporate and business unit performance incrementally increase your incentive award for performance above goal. They also incrementally decrease your incentive award for performance below goal. For example, a multiplier of 4 means that for every 1% increase or decrease in the percentage of goal achieved, there is a corresponding 4% increase or decrease in the percentage of target incentive earned.
PERFORMANCE THRESHOLD The corporate and business unit performance threshold is 90% of the fiscal year earnings goal.	The formula below illustrates the role of the performance multiplier in determining the adjustment that is made to your incentive target based on actual performance achieved.
n  Below Target Performance. If actual earnings results do not meet a minimum level of performance — the performance threshold — no incentive award is earned for that performance measure. Earnings results that fall between threshold and goal result in a reduced incentive award.	Example of a performance adjustment when the percent of goal achieved is 105% and the performance multiplier is 4
	100%	+  (    4	x    5%    )	=  120%
	Target Performance	Performance Multiplier	Results Above Goal	Performance Adjustment
n  Target Performance. When actual results meet the earnings goal, you receive 100% of the target incentive award for that performance measure. n  Above Target Performance. When actual results exceed the earnings goal, you can receive up to 200% of the targeted incentive award for that performance measure. As described above, there is a precise relationship between actual earnings results and the corresponding incentive award. As performance rises or falls, so does your incentive award. But how much your award changes as performance varies is determined by something called a performance multiplier, which is discussed in the following section.	Important Note: Business unit performance multipliers vary by business unit. The multiplier assigned to your business unit is provided in your fiscal year 2007 Incentive Plan Statement. A list of all business unit multipliers is provided in the Appendix.

AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
	5

n PERFORMANCE MEASURES
CORPORATE PERFORMANCE Corporate performance is based on fiscal year-end corporate earnings per share compared to goal. Minimum performance of 90% of goal must be attained before any incentive is earned. From that point forward, incentive awards are determined using a performance multiplier of 4 as illustrated in the example below.	CORPORATE PERFORMANCE
	+
	BUSINESS UNIT PERFORMANCE
	+
	INDIVIDUAL PERFORMANCE

EXAMPLE

Joe is a KM1 with $60,000 in base earnings. Let’s assume corporate EPS performance is 105% of goal. Joe’s corporate incentive award is calculated in three steps:

1.      Determine the corporate performance adjustment factor

2.      Apply the corporate performance adjustment to Joe’s target incentive percentage for the corporate component

3.      Multiply the result by Joe’s base earnings

100%	+	(          4	x	5%	)  =	120%
Target Performance		Corporate Performance Multiplier		Results Above Goal		Performance Adjustment

CORPORATE INCENTIVE
Joe’s Target Incentive		2%
Performance Adjustment	x	120%
Joe’s Base Earnings	x	$60,000
Joe’s Incentive Earned	=	$1,440

	AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
6

BUSINESS UNIT PERFORMANCE Business unit performance is based on fiscal year-end earnings results compared to goal. All associates are assigned to a primary business unit. However, some will also be assigned to a sub-business unit based on business conditions and American Greetings strategic priorities. Business unit and sub-business unit performance measures will vary, but your primary business unit measure will be one of the following:	year-end earnings compared to goal. Minimum performance of 90% of goal must be attained before any incentive is earned. A listing of each business unit’s and sub-business unit’s assigned earnings measure(s) and performance multipliers are provided in the Appendix. An example of the calculation of this incentive follows.
n  Business Unit Pro Forma Earnings Before Interest and Taxes (Business Unit Pro Forma EBIT), or n Net Operating Profit After Taxes (NOPAT).		CORPORATE PERFORMANCE
		+
Pro forma earnings are charged/credited for any variation from plan in Net Capital Employed at the weighted average cost of capital. Performance is based on fiscal		BUSINESS UNIT PERFORMANCE
		+
		INDIVIDUAL PERFORMANCE

EXAMPLE

Joe is a KM1 with $60,000 in base earnings. Let’s assume his Business Unit has a performance multiplier of 4 and that its performance at year-end is 96% of goal. Joe’s business unit incentive award is calculated in three steps:

1.      Determine the business unit performance adjustment factor

2.      Apply the business unit performance adjustment to Joe’s target incentive percentage for the business unit component

3.      Multiply the result by Joe’s base earnings

100%	+	(          4	x	-4%	)  =	84%
Target Performance		Business Unit Performance Multiplier		Results Below Goal		Business Unit Performance Adjustment

BUSINESS UNIT INCENTIVE
Joe’s Target Incentive		5%
Performance Adjustment	x	84%
Joe’s Base Earnings	x	$60,000
Joe’s Incentive Earned	=	$2,520

AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
	7

INDIVIDUAL PERFORMANCE At the end of the fiscal year, managers assess each participant’s performance compared to other participants within the business unit. Managers determine the degree to which the participants achieve the goals and job expectations defined at the beginning of the year.		n  Participants who receive an “Improvement Expected/Performance Below Peer Level” rating will not receive an individual performance incentive and will only receive 50% of any incentive otherwise earned.
		If corporate earnings performance is below threshold, only those associates with a performance rating of “Exceeds Expectations” may receive awards for the individual performance measure.
Managers rank participants based on their relative performance and determine the actual performance rating based on these rankings and the targeted percentage of participants for each rating.
n  Participants who receive an “Exceeds Expectations” performance rating receive the target incentive for the individual performance measure multiplied by 150%. In certain circumstances, this target can be increased to 200%1.		n  Participants who receive an “Exceeds Expectations” performance rating will receive 50% of the target incentive payable for the individual performance component.
n  Participants who receive a “Meets Expectations” rating will receive 100% of their target individual incentive.		n  Participants who receive a “Meets Expectations” or “Improvement Expected/Below Peer Level” performance rating will not receive any portion of the individual performance incentive.
		EXAMPLE
	CORPORATE PERFORMANCE	For example, assume Joe receives a performance rating of “Exceeds Expectations.” His individual incentive award is calculated as follows:
	+
	BUSINESS UNIT PERFORMANCE
	+	INDIVIDUAL INCENTIVE
	INDIVIDUAL PERFORMANCE	Joe’s Target Incentive Payout Percentage	x	3% 150%
		Joe’s Base Earnings	x	$60,000
		Joe’s Incentive Earned	=	$  2,700

The following schedule shows how individual amounts will be adjusted based on individual performance.

Performance Rating	Target Percentage of Participants	Will Receive	Percentage of Incentive
Exceeds Expectations 1	30%		150%
Meets Expectations	60%		100%
Improvement Expected/ Performance Below Peer Level	10%		0%

¹ Managers can, at their discretion, increase the Individual Payout Percentage to 200% for associates rated as “Exceeds Expectations” who demonstrate an extraordinary level of performance. Accomplishments must be the result of extraordinary effort and initiative that go well beyond the contributions of other associates rated as “Exceeds Expectations.” The number of persons eligible to receive an Individual Payout Percentage of 200% may not exceed one-third of the total number of associates rated as “Exceeds Expectations.”

	AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
8

n SUMMARY—TOTAL AWARD CALCULATION

At the end of American Greetings fiscal year, corporate, business unit and individual results are evaluated and your total incentive award is calculated.

EXAMPLE

The following example shows how Joe’s actual incentive award is calculated based on the assumptions that were used throughout this brochure:

JOE’S ASSUMPTIONS		PERFORMANCE ASSUMPTIONS
Base Earnings:	$ 60,000	Corporate:	105% of Goal
Individual Target Percentage:	10%	Business Unit:	96% of Goal
Individual Target Incentive:	$ 6,000	Individual:	Exceeds Expectations

INCENTIVE CALCULATION			INCENTIVE %		BASE EARNINGS		INCENTIVE $
	CORPORATE PERFORMANCE
Target Corporate Incentive (20% weight)			2%
[100% + (4 x 5% above goal)]		x	120%
Actual Corporate Incentive			2.4%	x	$60,000	=	$1,440
	+
	BUSINESS UNIT PERFORMANCE
Target Business Unit Incentive (50% weight)			5%
[100% + (4 x -4% below goal)]		x	84%
Actual Business Unit Incentive			4.2%	x	$60,000	=	$2,520
	+
	INDIVIDUAL PERFORMANCE
Target Individual Incentive (30% weight)			3%
Individual Payout Percentage (“Exceeds”)		x	150%
Actual Individual Incentive			4.5%	x	$60,000	=	$2,700
	=
	TOTAL INCENTIVE AWARD		11.1%	x	$60,000	=	$6,660

AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
	9

n APPENDIX

The following section provides additional details about the plan, including details about the business units, their performance measures and performance multipliers.

Please note that some plan participants will have their business unit incentive determined based on performance in two areas. Details about the weightings and performance multipliers for these measures are shown below and on your personalized Incentive Compensation Statement, as appropriate.

BUSINESS UNIT/ PARTICIPANTS	PERFORMANCE MEASURE		WEIGHT		PERFORMANCE MULTIPLIER
	Primary Unit	Sub Unit	Primary Unit	Sub Unit	Primary Unit	Sub Unit
Corporate Consolidated	Corporate NOPAT		100%		4
CEO, COO and their direct reports
Business Intelligence, Canada, Carlton Mexico, Corporate Staff (Delta, Finance, HR, ISD, Legal), Creative, Field Sales, FSO, Fundraising, Gift Packaging, Global Sourcing, Learning Horizons, Plants, Specialties	Total SEG(1)		100%		4
Everyday & Seasonal Cards	Total SEG(1)	Total Cards EBIT	25%	75%	4	4
Inbound Licensing	Total SEG(1)	AG Interactive pro forma EBIT	75%	25%	4	2
DesignWare, Guildhouse	Total SEG(1)	DesignWare + Guildhouse EBIT	25%	75%	4	2
Carlton Retail	Total SEG(1)	Carlton Retail pro forma EBIT	25%	75%	4	2
AGI Schutz	Total SEG(1)	AGI Schutz pro forma EBIT	25%	75%	4	2
AG Intellectual Properties Group – Corporate Staff (Finance, HR)	AG Interactive pro forma EBIT + AG Properties pro forma EBIT		100%		2
AG Interactive	AG Interactive pro forma EBIT		100%		2
AG Properties	AG Properties pro forma EBIT		100%		2
UK Greetings	UK Greetings pro forma EBIT		100%		4
John Sands Group	John Sands Group pro forma EBIT		100%		2

⁽¹⁾ Total SEG = NAGCD pro forma EBIT (includes Carlton Mexico pro forma EBIT, Retail Eliminations and Corporate Expense) + Carlton Retail pro forma EBIT + AGI Schutz pro forma EBIT

	AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
10

ADMINISTRATIVE DETAILS   If your employment status changes, your Plan participation and any payouts may be affected as described below.   n  New Hires. If you are hired during the Plan year — defined as the American Greetings fiscal year ending February 28, 2007 — and are eligible to participate in the Key Management Annual Incentive Plan, you will receive a prorated incentive payout based on the period of time you participated in the Plan and your base earnings during that time.   n  Promotions and Transfers. If you are promoted or you move from one business unit to another during the Plan year, your individual target incentive, base earnings, business unit goal and corresponding performance multiplier may change. If any of these do change, your incentive will be calculated based on the targets, base earnings, plan provisions and actual performance for each business unit you participated in on a prorated basis and rounded to the nearest full month.   n  Termination. If you voluntarily or involuntarily leave American Greetings before the completion of the Plan year, you will forfeit your Key Management Annual Incentive Plan award for that fiscal year.   n  Retirement, Leave of Absence, Disability, Death. If your employment ends during the Plan year because you elect to retire after age 60, or if you take a leave of absence, suffer a permanent disability or die, your incentive payout will be prorated to the nearest full month based on the actual period you participated in the Plan during the year.   An associate will be deemed to suffer a permanent disability only in the following circumstances: (A) where an associate is absent from employment with American Greetings due to his or her inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment, which either can be expected to result in death, or can be expected to last for a continuous period of not less than 12 months; or (B) where an associate is scheduled to receive income replacement benefits for a period of not less than 3 months under an accident and health plan covering American Greetings associate on account of a medically determinable physical or mental impairment that can be expected to result in death or last for a continuous period of not less than 12 months.   n  Incentive Payout. Incentive payouts earned in fiscal year 2007 will be paid to participants within two and one-half months following the end of fiscal 2007, typically within 60 days after the end of the fiscal year. Incentive payouts are subject to normal tax withholding at a standardized rate and will be deposited to a bank account of your choice.   It is the intent that incentive payouts fall under the short-term deferral rules of Section 409A of the Internal Revenue Code to exempt the payment of such Key Management Annual Incentive Plan benefits from the requirements of Section 409A.   n  Calculating Payouts. For computation purposes, financial goals and actual performance results are rounded to the nearest $1,000. The percent of the financial goal achieved and the percent of target bonus earned is rounded to the nearest one-tenth of one percent. The actual incentive payout is rounded to the nearest dollar.   n  Questions. If you have questions about the Key Management Annual Incentive Plan and how it works, please contact your manager. Your manager will work with you to ensure you understand the Plan so you can maximize your annual incentive.

AMERICAN GREETINGS KEY MANAGEMENT ANNUAL INCENTIVE PLAN
	11

DEFINITION OF COMMON TERMS   The following provides summary definitions of some common terms used throughout this brochure.   n  Base Earnings. Your base earnings are defined as your base salary earned during the fiscal year. Base earnings exclude health and welfare benefits, bonus, commission, and incentive payments, overtime and other indirect compensation. Base earnings for Plan participants outside of the U.S. may be defined differently and may vary by country.   n  Business Unit EBIT. A business unit’s earnings before interest and taxes.   n  Business Unit Pro Forma EBIT. A business unit’s earnings before interest and taxes, charged/credited for any variation from plan in Net Capital Employed at the weighted average cost of capital.   n  Corporate Earnings Per Share (EPS). Corporate earnings per share is measured at the end of the fiscal year and is calculated as corporate net income divided by the planned total number of shares outstanding as calculated on a fully diluted basis. n  Corporate Net Operating Profit After Tax (NOPAT). Consolidated corporate net operating profit after tax, charged/credited for any variation from plan in Net Capital Employed at the weighted average cost of capital.   n  Fiscal Year. March 1 through February 28 or 29 of the following calendar year.   n  Net Capital Employed (NCE). Assets (minus cash and LIFO reserve) minus liabilities (not including long-term debt, inter-company payables and taxes).

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Nothing in this brochure should be construed to create or imply any contract of employment between an associate and American Greetings and its subsidiaries. Except as specifically provided in the Plan and subject to American Greetings right to amend or terminate the Plan generally or as it relates to any one participant, no associate, former associate or any beneficiary shall have any right to payments under the American Greetings Key Management Annual Incentive Plan.

American Greetings reserves the right to terminate or make changes to the Plan at any time without prior notice to any of the Plan’s participants. The Board of Directors (or committee thereof), Chief Executive Officer and Chairman are the only people who have the authority to alter or amend this Plan as it relates to any one participant. Any such alteration or amendment must be done in writing. No participant should rely on an alteration, amendment or modification to this Plan unless it is made in writing and is signed by the CEO or Chairman.

For the purposes of illustrating how the Plan works, hypothetical associates, target incentives, performance outcomes and incentive payments have been used in this brochure. The actual incentive, if any, will be based on the actual performance of American Greetings, its business units and your individual performance.

Your personalized Incentive Compensation Statement included with this brochure is considered to be confidential and proprietary and is for the sole use of current American Greetings associates.

EX-31.(A)

Exhibit (31) a

Certification of Chief Executive Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Zev Weiss, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Greetings Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of American Greetings Corporation as of, and for, the periods presented in this report;

4. American Greetings Corporation’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for American Greetings Corporation and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to American Greetings Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of American Greetings Corporation’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in American Greetings Corporation’s internal control over financial reporting that occurred during American Greetings Corporation’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, American Greetings Corporation’s internal control over financial reporting; and

5. American Greetings Corporation’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to American Greetings Corporation’s auditors and the audit committee of American Greetings Corporation’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect American Greetings Corporation’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in American Greetings Corporation’s internal control over financial reporting.

July 5, 2006	/s/ Zev Weiss
	Zev Weiss
	Chief Executive Officer
	(principal executive officer)

EX-31.(B)

Exhibit (31) b

Certification of Chief Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Michael J. Merriman, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Greetings Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of American Greetings Corporation as of, and for, the periods presented in this report;

4. American Greetings Corporation’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for American Greetings Corporation and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to American Greetings Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of American Greetings Corporation’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in American Greetings Corporation’s internal control over financial reporting that occurred during American Greetings Corporation’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, American Greetings Corporation’s internal control over financial reporting; and

5. American Greetings Corporation’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to American Greetings Corporation’s auditors and the audit committee of American Greetings Corporation’s board of directors:

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect American Greetings Corporation’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in American Greetings Corporation’s internal control over financial reporting.

July 5, 2006	/s/ Michael J. Merriman, Jr.
	Michael J. Merriman, Jr.
	Senior Vice President and
	Chief Financial Officer (principal financial officer)

EX-32

Exhibit (32)

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with this quarterly report of American Greetings Corporation on Form 10-Q as filed with the Securities and Exchange Commission on the date therein specified (the “Report”), each of the undersigned certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of American Greetings Corporation.

July 5, 2006

/s/ Zev Weiss

Zev Weiss

Chief Executive Officer (principal executive officer)

/s/ Michael J. Merriman, Jr.

Michael J. Merriman, Jr.

Senior Vice President and

Chief Financial Officer (principal financial officer)