UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended November 23, 2007

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

For the transition period from                        to                     

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 þ       No o

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 þ    Accelerated filer o    Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o       No þ

As of December 27, 2007, the number of shares outstanding of each of the issuer’s classes of common stock was:

Class A Common            48,743,833
Class B Common              3,442,145

 

 

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			15
Item 3. Quantitative and Qualitative Disclosures About Market Risk			27
Item 4. Controls and Procedures			27
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			27
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 6. Exhibits			28
SIGNATURES			29
EXHIBITS
EX-10.1
EX-31(A)
EX-31(B)
EX-32

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								Nine Months Ended
		November 23,				November 24,				November 23,				November 24,
		2007				2006				2007				2006
Net sales		$	474,995			$	510,102			$	1,258,829			$	1,271,755
Other revenue			10,751				11,052				24,309				26,537
Total revenue			485,746				521,154				1,283,138				1,298,292
Material, labor and other production costs			223,329				245,187				547,509				593,232
Selling, distribution and marketing expenses			159,420				157,364				444,695				451,419
Administrative and general expenses			60,481				65,287				178,291				183,516
Other operating income — net			(127	)			(20,541	)			(807	)			(20,963	)
Operating income			42,643				73,857				113,450				91,088
Interest expense			4,835				6,951				14,431				27,024
Interest income			(2,115	)			(1,258	)			(5,834	)			(6,716	)
Other non-operating (income) expense — net			(4,582	)			91				(7,478	)			(2,811	)
Income from continuing operations before income tax expense			44,505				68,073				112,331				73,591
Income tax expense			15,017				21,058				43,495				22,583
Income from continuing operations			29,488				47,015				68,836				51,008
(Loss) income from discontinued operations, net of tax			(472	)			2,692				(1,395	)			3,593
Net income		$	29,016			$	49,707			$	67,441			$	54,601
Earnings per share — basic:
Income from continuing operations		$	0.54			$	0.79			$	1.25			$	0.87
(Loss) income from discontinued operations			(0.01	)			0.05				(0.03	)			0.06
Net income		$	0.53			$	0.84			$	1.22			$	0.93
Earnings per share — assuming dilution:
Income from continuing operations		$	0.53			$	0.79			$	1.24			$	0.82
(Loss) income from discontinued operations			(0.01	)			0.04				(0.03	)			0.06
Net income		$	0.52			$	0.83			$	1.21			$	0.88
Average number of shares outstanding			55,022,689				59,502,276				55,350,736				58,590,857
Average number of shares outstanding — assuming dilution			55,466,351				59,902,127				55,726,990				64,361,644
Dividends declared per share		$	0.10			$	0.08			$	0.30			$	0.24

See notes to condensed consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
(Thousands of dollars)

		(Unaudited)				(Note 1)				(Unaudited)
		November 23,				February 28,				November 24,
		2007				2007				2006
ASSETS
Current assets
Cash and cash equivalents		$	71,117			$	144,713			$	86,216
Trade accounts receivable, net			205,702				103,992				239,207
Inventories			239,209				182,618				244,181
Deferred and refundable income taxes			76,568				135,379				160,983
Assets of businesses held for sale			2,216				5,199				13,310
Prepaid expenses and other			213,529				227,380				295,866
Total current assets			808,341				799,281				1,039,763
Goodwill			267,308				224,105				219,093
Other assets			389,324				416,887				459,269
Deferred and refundable income taxes			111,959				52,869				—
Property, plant and equipment — at cost			975,721				944,534				968,755
Less accumulated depreciation			684,170				659,462				668,524
Property, plant and equipment — net			291,551				285,072				300,231
		$	1,868,483			$	1,778,214			$	2,018,356
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Debt due within one year		$	46,490			$	—			$	142,000
Accounts payable			131,099				118,204				126,956
Accrued liabilities			89,751				80,389				91,108
Accrued compensation and benefits			58,969				61,192				58,720
Income taxes			31,255				26,385				17,412
Liabilities of businesses held for sale			1,383				1,932				1,629
Other current liabilities			96,896				84,898				91,162
Total current liabilities			455,843				373,000				528,987
Long-term debt			200,975				223,915				223,985
Other liabilities			149,869				162,410				101,003
Deferred income taxes and noncurrent income taxes payable			31,877				6,315				25,306
Shareholders’ equity
Common shares — Class A			49,929				50,839				53,775
Common shares — Class B			3,442				4,283				4,224
Capital in excess of par value			443,326				414,859				417,444
Treasury stock			(780,044	)			(710,414	)			(643,540	)
Accumulated other comprehensive income (loss)			22,982				(1,013	)			36,067
Retained earnings			1,290,284				1,254,020				1,271,105
Total shareholders’ equity			1,029,919				1,012,574				1,139,075
		$	1,868,483			$	1,778,214			$	2,018,356

See notes to condensed consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Thousands of dollars)

		(Unaudited)
		Nine Months Ended
		November 23, 2007				November 24, 2006
OPERATING ACTIVITIES:
Net income		$	67,441			$	54,601
Loss (income) from discontinued operations			1,395				(3,593	)
Income from continuing operations			68,836				51,008
Adjustments to reconcile to net cash provided (used) by operating activities:
Net (gain) loss on disposal of fixed assets			(481	)			754
Loss on extinguishment of debt			—				5,055
Depreciation and amortization			36,002				37,229
Deferred income taxes			(7,994	)			5,827
Other non-cash charges			5,719				9,180
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Increase in trade accounts receivable			(99,268	)			(92,821	)
Increase in inventories			(49,911	)			(27,202	)
Decrease (increase) in other current assets			18,090				(96,250	)
Decrease in deferred costs — net			29,338				110,076
Increase (decrease) in accounts payable and other liabilities			38,295				(5,894	)
Other — net			4,718				(6,265	)
Cash Provided (Used) by Operating Activities			43,344				(9,303	)
INVESTING ACTIVITIES:
Proceeds from sale of short-term investments			692,985				1,026,280
Purchases of short-term investments			(692,985	)			(817,540	)
Property, plant and equipment additions			(37,394	)			(29,600	)
Cash payments for business acquisitions, net of cash acquired			(51,256	)			(11,154	)
Cash receipts related to discontinued operations			4,283				12,559
Proceeds from sale of fixed assets			2,656				695
Cash (Used) Provided by Investing Activities			(81,711	)			181,240
FINANCING ACTIVITIES:
Increase in long-term debt			—				200,000
Reduction of long-term debt			—				(440,588	)
Increase in short-term debt			23,800				142,000
Sale of stock under benefit plans			26,198				5,630
Purchase of treasury shares			(74,572	)			(186,331	)
Dividends to shareholders			(16,657	)			(13,909	)
Debt issuance costs			—				(8,344	)
Cash Used by Financing Activities			(41,231	)			(301,542	)
DISCONTINUED OPERATIONS:
Cash used by operating activities from discontinued operations			(839	)			(2,377	)
Cash provided by investing activities from discontinued operations			—				1,656
Cash Used by Discontinued Operations			(839	)			(721	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			6,841				2,929
DECREASE IN CASH AND CASH EQUIVALENTS			(73,596	)			(127,397	)
Cash and Cash Equivalents at Beginning of Year			144,713				213,613
Cash and Cash Equivalents at End of Period		$	71,117			$	86,216

See notes to condensed consolidated financial statements (unaudited).

AMERICAN GREETINGS CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three and Nine Months Ended November 23, 2007 and November 24, 2006

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, 2007 refers to the year ended February 28, 2007.

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, 2007, from which the Condensed Consolidated Statement of Financial Position at February 28, 2007, presented herein, has been derived. Certain amounts in the prior year financial statements have been reclassified to reflect certain business units as discontinued operations and adjusted to reflect the Corporation’s adoption of Staff Accounting Bulletin No. 108 (“SAB 108”). The opening balance of retained earnings in 2007 was adjusted $5.2 million ($3.3 million after-tax) to record the correction of the overstatement of the allowance for rebates (correspondingly, an understatement of net income of prior periods) pursuant to the special transition provision detailed in SAB 108.

Certain amounts in the prior year financial statements have also been reclassified to conform to the 2008 presentation. Previously included in “Other income — net,” royalty revenue is now reported as “Other revenue” and interest income is now included as a separate line item on the Condensed Consolidated Statement of Income. The remaining items previously included in “Other income — net” have been segregated between operating and non-operating.

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.

Note 3 — Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109.” FIN 48 clarifies the accounting for uncertain tax positions recognized in a company’s financial statements in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes,” including what criteria must be met prior to recognition of the financial statement benefit of a position taken or expected to be taken in a tax return. FIN 48 requires a company to include additional qualitative and quantitative disclosures within its financial statements. The disclosures include potential tax benefits from positions taken for tax return purposes that have not been recognized for financial reporting purposes and a tabular presentation of significant changes during each annual period. The disclosures also include a discussion of the nature of uncertainties, factors that could cause a change and an estimated range of reasonably possible changes in tax uncertainties. FIN 48 requires a company to recognize a financial statement benefit for a position taken for tax return purposes when it is more likely than not that the position will be sustained. The cumulative effect of adopting FIN 48 is recorded as an adjustment to the opening balance of retained earnings in the period of adoption. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Corporation adopted FIN 48 on March 1, 2007. See Note 12.

In September 2006, the FASB issued SFAS No. 157 (“SFAS 157”), “Fair Value Measurements,” which provides a definition of fair value, establishes a framework for measuring fair value and requires expanded disclosures about

fair value measurements. In November 2007, the FASB agreed to defer the effective date of SFAS 157 for non-financial assets and liabilities until fiscal years and interim periods beginning after November 15, 2008. SFAS 157 is still effective for the Corporation in fiscal 2009 for financial assets and liabilities. The provisions of SFAS 157 will be applied prospectively. The Corporation is currently evaluating the impact that SFAS 157 will have on its consolidated financial statements upon adoption.

Note 4 — Other Income and Expense

		Three Months Ended								Nine Months Ended
		November 23,				November 24,				November 23,				November 24,
(In thousands)		2007				2006				2007				2006
Gain on contract terminations		$	—			$	(20,004	)		$	—			$	(20,004	)
Other			(127	)			(537	)			(807	)			(959	)
Other operating income — net		$	(127	)		$	(20,541	)		$	(807	)		$	(20,963	)
Foreign exchange gain		$	(4,054	)		$	(610	)		$	(6,323	)		$	(2,348	)
Rental income			(274	)			(261	)			(949	)			(1,044	)
Other			(254	)			962				(206	)			581
Other non-operating (income) expense — net		$	(4,582	)		$	91			$	(7,478	)		$	(2,811	)

“Other” includes, among other things, gains and losses on asset disposals and equity income. The $20.0 million gain on contract terminations was a result of retailer consolidations, wherein, multiple long-term supply agreements were terminated and a new agreement was negotiated with a new legal entity with substantially different terms and sales commitments.

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								Nine Months Ended
		November 23,				November 24,				November 23,				November 24,
		2007				2006				2007				2006
Numerator (in thousands):
Income from continuing operations		$	29,488			$	47,015			$	68,836			$	51,008
Add-back — interest on convertible subordinated notes, net of tax			—				—				—				1,958
Income from continuing operations — assuming dilution		$	29,488			$	47,015			$	68,836			$	52,966
Denominator (in thousands):
Weighted average shares outstanding			55,023				59,502				55,351				58,591
Effect of dilutive securities:
Convertible debt			—				—				—				5,353
Stock options and other			443				400				376				418
Weighted average shares outstanding — assuming dilution			55,466				59,902				55,727				64,362
Income from continuing operations per share		$	0.54			$	0.79			$	1.25			$	0.87
Income from continuing operations per share — assuming dilution		$	0.53			$	0.79			$	1.24			$	0.82

Approximately 1.3 million and 1.7 million stock options outstanding in the three and nine month periods ended November 23, 2007, respectively, were excluded from the computation of earnings per share-assuming dilution because the options’ exercise prices were greater than the average market price of the common shares during the respective periods (2.5 million and 4.4 million stock options outstanding in the three and nine month periods ended November 24, 2006, respectively). The convertible debt was retired during the second quarter of 2007.

Note 6 — Comprehensive Income

The Corporation’s total comprehensive income is as follows:

		Three Months Ended								Nine Months Ended
		November 23,				November 24,				November 23,				November 24,
(In thousands)		2007				2006				2007				2006
Net income		$	29,016			$	49,707			$	67,441			$	54,601
Other comprehensive income (loss):
Foreign currency translation adjustment and other			11,614				6,018				23,318				25,896
Unrealized gain (loss) on securities			—				323				(1	)			348
Pension and other postretirement benefit plans			678				—				678				—
Total comprehensive income		$	41,308			$	56,048			$	91,436			$	80,845

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)		November 23, 2007				February 28, 2007				November 24, 2006
Allowance for seasonal sales returns		$	70,014			$	57,584			$	67,365
Allowance for doubtful accounts			5,402				6,350				8,392
Allowance for cooperative advertising and marketing funds			35,939				24,048				27,677
Allowance for rebates			49,915				40,053				57,669
		$	161,270			$	128,035			$	161,103

Note 8 — Inventories

(In thousands)		November 23, 2007				February 28, 2007				November 24, 2006
Raw materials		$	16,211			$	17,590			$	22,334
Work in process			12,646				11,315				10,871
Finished products			265,013				207,676				264,940
			293,870				236,581				298,145
Less LIFO reserve			81,945				79,145				81,658
			211,925				157,436				216,487
Display materials and factory supplies			27,284				25,182				27,694
		$	239,209			$	182,618			$	244,181

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

Deferred costs and future payment commitments are included in the following financial statement captions:

(In thousands)		November 23, 2007				February 28, 2007				November 24, 2006
Prepaid expenses and other		$	135,017			$	131,972			$	142,329
Other assets			313,928				355,115				371,745
Deferred cost assets			448,945				487,087				514,074
Other current liabilities			(57,607	)			(47,692	)			(58,746	)
Other liabilities			(28,652	)			(49,648	)			(47,272	)
Deferred cost liabilities			(86,259	)			(97,340	)			(106,018	)
Net deferred costs		$	362,686			$	389,747			$	408,056

Note 10 — Debt

Debt due within one year is as follows:

(In thousands)		November 23, 2007				February 28, 2007				November 24, 2006
Revolving credit facility		$	12,800			$	—			$	60,000
Accounts receivable securitization facility			11,000				—				82,000
6.10% senior notes, due 2028			22,690				—				—
		$	46,490			$	—			$	142,000

At November 23, 2007, the balances outstanding on the revolving credit facility and accounts receivable securitization facility bear interest at a rate of approximately 5.7% and 5.4%, respectively. In addition to the balances outstanding under the aforementioned agreements, the Corporation has, in the aggregate, $25.7 million outstanding under letters of credit, which reduces the total credit availability thereunder. The balance of the 6.10% senior notes was reclassified to current during the second quarter of 2008 as these 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.

Long-term debt and their related calendar year due dates are as follows:

(In thousands)		November 23, 2007				February 28, 2007				November 24, 2006
6.10% senior notes, due 2028		$	—			$	22,690			$	22,633
7.375% senior notes, due 2016			200,000				200,000				200,000
Other			975				1,225				1,352
		$	200,975			$	223,915			$	223,985

At November 23, 2007, the Corporation was in compliance with the financial covenants under its borrowing agreements.

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
		Three Months Ended								Nine Months Ended
		November 23,				November 24,				November 23,				November 24,
(In thousands)		2007				2006				2007				2006
Service cost		$	251			$	207			$	740			$	621
Interest cost			2,249				2,192				6,769				6,713
Expected return on plan assets			(2,143	)			(2,182	)			(6,479	)			(6,503	)
Settlement			—				—				1,067				—
Amortization of prior service cost			67				67				200				200
Amortization of actuarial loss			411				258				1,227				1,609
		$	835			$	542			$	3,524			$	2,640

		Postretirement Benefit
		Three Months Ended								Nine Months Ended
		November 23,				November 24,				November 23,				November 24,
(In thousands)		2007				2006				2007				2006
Service cost		$	1,050			$	999			$	3,150			$	2,997
Interest cost			2,150				1,925				6,450				5,775
Expected return on plan assets			(1,250	)			(1,275	)			(3,750	)			(3,825	)
Amortization of prior service credit			(1,850	)			(1,849	)			(5,550	)			(5,547	)
Amortization of actuarial loss			1,650				1,700				4,950				5,100
		$	1,750			$	1,500			$	5,250			$	4,500

During the nine months ended November 23, 2007, the Corporation settled a portion of its obligation under one of the defined benefit pension plans at its Canadian subsidiary. For the affected participants, the plan was converted to a defined contribution plan. As a result, a settlement expense of $1.1 million was recorded in the second quarter.

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 nine months ended November 23, 2007 was $5.1 million, compared to $3.6 million in the prior year period. The profit-sharing plan expense for the nine 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 expenses recognized for the three and nine month periods ended November 23, 2007 were $1.0 million and $3.2 million ($0.8 million and $3.0 million for the three and nine month periods ended November 24, 2006), respectively.

At November 23, 2007, February 28, 2007 and November 24, 2006, the liability for postretirement benefits other than pensions was $72.7 million, $66.7 million and $15.6 million, respectively, and is included in “Other liabilities” on the Condensed Consolidated Statement of Financial Position. The change since November 24, 2006 is due to the adoption of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R),” effective February 28, 2007.

Note 12 — Income Taxes

Effective March 1, 2007, the Corporation adopted FIN 48, including the provisions of FASB Staff Position No. FIN-48-1, “Definition of Settlement in FASB Interpretation No. 48.” In connection with the adoption of FIN 48, the Corporation recorded a decrease to retained earnings of $14.0 million to recognize an increase in its liability (or decrease to its refundable) for unrecognized tax benefits, interest and penalties under the recognition and measurement criteria of FIN 48. As of March 1, 2007, the Corporation had $33.5 million of total gross

unrecognized tax benefits, the recognition of which would have a favorable effect of $29.3 million on the effective tax rate. It is reasonably possible that the Corporation’s unrecognized tax positions as of March 1, 2007 could decrease approximately $2 million during 2008. The anticipated decrease is primarily due to settlements and resulting cash payments related to open years after 1999, which are currently under examination.

The Corporation recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of March 1, 2007, the Corporation had $8.8 million of gross accrued interest and penalties related to uncertain tax positions. The Corporation is subject to examination by the U.S. Internal Revenue Service (“IRS”) and various U.S. state and local jurisdictions for tax years 1999 to the present. The Corporation is also subject to tax examination in various foreign tax jurisdictions, including Canada, the United Kingdom, Australia, France, Italy, Mexico and New Zealand for tax years 2003 to the present.

During the first quarter of 2008, the Corporation’s net unrecognized tax benefits decreased $1.1 million as the Corporation reached an agreement with the IRS on a significant tax issue that was not anticipated at the beginning of the year. During the second quarter of 2008, the Corporation’s net unrecognized tax benefits increased $2.4 million primarily related to a prior year outstanding tax issue in one of the international jurisdictions in which the Corporation operates. During the third quarter of 2008, the Corporation’s net unrecognized tax benefits increased $1.9 million primarily related to interest accruing on the unrecognized tax benefits.

As of November 23, 2007, the Corporation had $38.9 million of total gross unrecognized tax benefits, the recognition of which would have a favorable effect of $32.5 million on the effective tax rate. Included in the total gross unrecognized tax benefits is $13.5 million of gross accrued interest and penalties related to uncertain tax positions.

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.

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 November 23, 2007, the Corporation owned and operated 429 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 acquisition of the online digital photography business discussed below is also included in the AG Interactive segment.

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

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

		Three Months Ended								Nine Months Ended
		November 23,				November 24,				November 23,				November 24,
(In thousands)		2007				2006				2007				2006
Total Revenue:
North American Social Expression Products		$	339,543			$	371,726			$	892,518			$	908,909
Intersegment items			(19,423	)			(14,953	)			(41,532	)			(47,811	)
Exchange rate adjustment			2,972				218				4,318				325
Net			323,092				356,991				855,304				861,423
International Social Expression Products			80,604				82,526				199,648				209,019
Exchange rate adjustment			8,606				794				17,958				(1,527	)
Net			89,210				83,320				217,606				207,492
Retail Operations			39,550				42,252				115,856				125,206
Exchange rate adjustment			2,467				178				3,540				299
Net			42,017				42,430				119,396				125,505
AG Interactive			18,912				21,663				55,964				62,151
Exchange rate adjustment			(2	)			31				(1	)			76
Net			18,910				21,694				55,963				62,227
Non-reportable segments			12,486				16,679				34,754				41,510
Unallocated			31				40				115				135
		$	485,746			$	521,154			$	1,283,138			$	1,298,292
Segment Earnings (Loss):
North American Social Expression Products		$	64,549			$	98,533			$	192,288			$	182,111
Intersegment items			(14,481	)			(10,296	)			(31,203	)			(34,125	)
Exchange rate adjustment			1,557				80				2,360				129
Net			51,625				88,317				163,445				148,115
International Social Expression Products			10,037				6,092				11,470				7,148
Exchange rate adjustment			1,117				(30	)			1,464				34
Net			11,154				6,062				12,934				7,182
Retail Operations			(5,833	)			(5,056	)			(15,098	)			(21,428	)
Exchange rate adjustment			86				4				83				1
Net			(5,747	)			(5,052	)			(15,015	)			(21,427	)
AG Interactive			2,194				2,249				8,667				5,498
Exchange rate adjustment			15				(18	)			(2	)			(17	)
Net			2,209				2,231				8,665				5,481
Non-reportable segments			636				3,668				3,598				8,308
Unallocated			(15,312	)			(27,157	)			(61,161	)			(73,919	)
Exchange rate adjustment			(60	)			4				(135	)			(149	)
Net			(15,372	)			(27,153	)			(61,296	)			(74,068	)
		$	44,505			$	68,073			$	112,331			$	73,591

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.

The balance of the severance accrual was $6.9 million, $8.4 million and $5.7 million at November 23, 2007, February 28, 2007 and November 24, 2006, respectively, and is included in “Accrued liabilities” on the Condensed Consolidated Statement of Financial Position.

Deferred Revenue

Deferred revenue, included in “Other current liabilities” on the Condensed Consolidated Statement of Financial Position, totaled $32.5 million, $35.5 million and $27.0 million at November 23, 2007, February 28, 2007 and November 24, 2006, respectively. The amounts relate primarily to the Corporation’s AG Interactive segment and the licensing activities included in non-reportable segments.

Acquisition

During the third quarter of 2008, the AG Interactive segment acquired Webshots, an online digital photography business, for approximately $45 million. Cash paid was $45.2 million and is reflected in investing activities in the Condensed Consolidated Statement of Cash Flows. Although the allocation of the purchase price has not yet been finalized, preliminary estimates of $12 million and $37 million were recorded for intangible assets and goodwill, respectively. The financial results of this acquisition are included in the Corporation’s consolidated results from the date of acquisition. The pro forma results of operations have not been presented because the effect of this acquisition was not deemed material.

Note 14 — Discontinued Operations

Discontinued operations include the Corporation’s educational products business, its entertainment development and production joint venture, its South African business unit and its nonprescription reading glasses business. Learning Horizons, the Hatchery, Magnivision and the South African business units each meet the definition of a “component of an entity” and have been accounted for as discontinued operations under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, the Corporation’s consolidated financial statements and related notes have been presented to reflect all four as discontinued operations for all periods presented. Learning Horizons, the Hatchery and Magnivision were previously included within the Corporation’s “non-reportable segments” and the South African business unit was included within the former “Social Expression Products” segment.

Discontinued operations for the nine months ended November 23, 2007 includes the operations of the Hatchery and the operations of Learning Horizons through the closing date of the sale of that business. The nine months ended November 24, 2006 included the operations of the Hatchery and Learning Horizons and the operations of the Corporation’s South African business unit through the closing date of the sale of that unit. The “(Loss) gain on sale” in the current year relates to the sale of Learning Horizons while the prior year amount related to the sales of the South African business unit and Magnivision. The following summarizes the results of discontinued operations:

		Three Months Ended								Nine Months Ended
		November 23,				November 24,				November 23,				November 24,
		2007				2006				2007				2006
Total revenue		$	20			$	2,122			$	379			$	11,275
Pre-tax loss from operations		$	(368	)		$	(388	)		$	(1,122	)		$	(2,371	)
(Loss) gain on sale			(161	)			5,100				34				5,784
			(529	)			4,712				(1,088	)			3,413
Income tax (benefit) expense			(57	)			2,020				307				(180	)
(Loss) income from discontinued operations, net of tax		$	(472	)		$	2,692			$	(1,395	)		$	3,593

In February 2007, the Corporation entered into an agreement to sell its educational products subsidiary, Learning Horizons. The sale reflects the Corporation’s strategy to focus its resources on business units closely related to its core social expression business. The sale closed in March 2007 and the Corporation received cash proceeds of $2.2 million, which is included in “Cash receipts related to discontinued operations” on the Condensed Consolidated Statement of Cash Flows.

Also, in February 2007, the Corporation committed to a plan to exit its investment in the Hatchery, which seeks growth from opportunities that are inconsistent with the Corporation’s objectives and that would require significant capital commitments. The Corporation is taking this action as it has decided to focus its efforts on opportunities in children’s animation.

In February 2006, the Corporation committed to a plan to sell its South African business unit as it had been determined that the business unit was no longer a strategic fit for the Corporation. The sale closed in the second quarter of 2007.

The sale of Magnivision closed in the third quarter of 2005. In the third quarter of 2007, the Corporation recorded an additional pre-tax gain of $5.1 million based on final closing balance sheet adjustments. During the three and nine months ended November 23, 2007, proceeds of $1.0 million and $2.1 million, respectively, related to the sale of Magnivision were received and are included in “Cash receipts related to discontinued operations” on the Condensed Consolidated Statement of Cash Flows. These proceeds are associated with the gain recorded during the third quarter of 2007.

“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)		November 23, 2007				February 28, 2007				November 24, 2006
Assets of businesses held for sale:
Current assets		$	13			$	2,933			$	8,035
Other assets			2,135				2,185				5,085
Fixed assets			68				81				190
		$	2,216			$	5,199			$	13,310
Liabilities of businesses held for sale:
Current liabilities		$	158			$	610			$	292
Noncurrent liabilities			1,225				1,322				1,337
		$	1,383			$	1,932			$	1,629

Note 15 — Subsequent Events

On November 28, 2007, the Corporation announced that it entered into a definitive agreement to acquire PhotoWorks for approximately $26.5 million. PhotoWorks is a leading online photo sharing and personal publishing company that allows consumers to use their digital images to create quality photo-personalized products like greeting cards, calendars, online photo albums and photo books. In accordance with the terms of the agreement, on December 13, 2007, the Corporation commenced a cash tender offer to acquire all outstanding common stock of PhotoWorks at a price of 59.5 cents per share. The acquisition is expected to close in late January 2008.

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 description 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 consolidated total revenues and earnings during the third quarter of 2008, compared to the prior year quarter, due to lower sales in all reporting segments but primarily in our North American Social Expression Products segment which experienced a decrease in sales of seasonal gift packaging products and party goods. Also significantly impacting the year-over-year comparison of this segment was the impact of the candle products divestiture and the gain on contract terminations in the prior year quarter.

We spent less on the implementation of our strategy to invest in our core greeting card business (“investment in cards strategy”) and scan-based trading (“SBT”) implementations during the third quarter compared to the prior year period. The investment in cards strategy is focused on improving the design, production, display and promotion of our cards, creating relevant and on-trend products, brought to market quickly and merchandised in a manner that enhances the shopping experience. The most significant costs associated with this strategy are incentive allowances for new fixtures and removal of product at retail (to improve productivity), as credits issued to customers exceed new product shipments. Due to the nature of these costs, generally sales incentives and credits for removed product, they are reported as reductions to net sales. In addition, there are costs to implement the strategy, including installation services, information system improvements, point of purchase materials, scrap and order filling costs, which are reported within the appropriate expense lines of the Condensed Consolidated Statement of Income.

During the third quarter of 2008, actions related to our investment in cards strategy decreased total revenue by approximately $2 million and SBT implementations reduced total revenue approximately $4 million. In the prior year quarter, actions related to our investment in cards strategy decreased total revenue by approximately $10 million while SBT implementations had minimal impact on total revenue. Other related costs to implement the strategy were approximately $2 million in the current quarter, compared to approximately $3 million in the prior year period, none of which were individually significant. In total, actions related to the investment in cards strategy and SBT implementations reduced consolidated pre-tax income by approximately $8 million, compared with approximately $12 million in the prior year period.

For the nine months ended November 23, 2007, total revenue was reduced by approximately $10 million for actions related to our investment in cards strategy and approximately $5 million for SBT implementations, compared to approximately $23 million and $14 million, respectively, in the prior year. Other related costs to implement the strategy were approximately $4 million in the current nine month period, compared to approximately $7 million in the prior year period, none of which were individually significant. In total, actions related to the investment in cards strategy and SBT implementations reduced consolidated pre-tax income by approximately $19 million, compared with approximately $44 million in the prior year period.

For fiscal 2008, we expect the expenditures for the investment in cards strategy and SBT implementations to be in the range of $46 million to $51 million, compared to actual expenditures of approximately $66 million in fiscal 2007. Although we expect a significant amount of SBT implementations to occur in the fourth fiscal quarter, depending on timing, some of the income statement impact associated with the SBT implementations may occur in the first quarter of next year rather than this year’s fourth quarter.

Our recent trend of gross margin percentage improvement continued in the quarter, up one percentage point over the prior year quarter due to a change in the mix of products sold to a richer mix (as defined by higher gross margins) of

card versus non-card products and the impact of continued cost savings programs, particularly in the areas of manufacturing and supply chain.

On October 25, 2007, we announced the acquisition of the assets of Webshots, an online photo and video sharing site. This acquisition, made through our AG Interactive unit, provides us the opportunity to expand our current product offerings of online social expressions into the adjacent area of online photo sharing. In addition, subsequent to November 23, 2007, we announced that we entered into a definitive agreement to acquire PhotoWorks, an online personal publishing company and photography site.

During the prior year third quarter, we recorded a gain of $20.0 million as a result of retailer consolidations, wherein, multiple long-term supply agreements were terminated and a new agreement was negotiated with a new legal entity with substantially different terms and sales commitments.

Net income was $29.0 million, or $0.52 per share, in the quarter compared to $49.7 million, or $0.83 per share, in the prior year third quarter (all per-share amounts assume dilution).

Our results for the three months ended November 23, 2007 and November 24, 2006 are summarized below:

						% Total								% Total
(Dollars in thousands)		2007				Revenue				2006				Revenue
Net sales		$	474,995				97.8	%		$	510,102				97.9	%
Other revenue			10,751				2.2	%			11,052				2.1	%
Total revenue			485,746				100.0	%			521,154				100.0	%
Material, labor and other production costs			223,329				46.0	%			245,187				47.0	%
Selling, distribution and marketing expenses			159,420				32.8	%			157,364				30.2	%
Administrative and general expenses			60,481				12.5	%			65,287				12.5	%
Other operating income – net			(127	)			(0.1	%)			(20,541	)			(3.9	%)
Operating income			42,643				8.8	%			73,857				14.2	%
Interest expense			4,835				1.0	%			6,951				1.3	%
Interest income			(2,115	)			(0.4	%)			(1,258	)			(0.2	%)
Other non-operating (income) expense – net			(4,582	)			(1.0	%)			91				0.0	%
Income from continuing operations before income tax expense			44,505				9.2	%			68,073				13.1	%
Income tax expense			15,017				3.1	%			21,058				4.1	%
Income from continuing operations			29,488				6.1	%			47,015				9.0	%
(Loss) income from discontinued operations, net of tax			(472	)			(0.1	%)			2,692				0.5	%
Net income		$	29,016				6.0	%		$	49,707				9.5	%

For the three months ended November 23, 2007, consolidated net sales were $475.0 million, down from $510.1 million in the prior year third quarter. This 6.9%, or approximately $35 million, decrease was primarily the result of lower net sales in our North American Social Expression Products segment of approximately $37 million and lower net sales of approximately $2 to $3 million in each of our International Social Expression Products, Retail Operations and AG Interactive segments and our fixtures business. These decreases were partially offset by a favorable foreign exchange impact of approximately $13 million.

Net sales of our North American Social Expression Products segment decreased approximately $37 million. Our candle product lines, which were sold in January 2007, contributed approximately $14 million to net sales in the

prior year quarter. Approximately $4 million of the decrease resulted from more SBT implementations in the current quarter compared to the prior year third quarter. The majority of the remaining decrease was the result of lower sales of our gift packaging products and party goods due to continued softness in demand for gift wrap as well as our attempt to improve the overall annual return within these product lines by not pursuing traditionally low margin business that we did pursue in prior years. Both seasonal and everyday cards were also down slightly compared to the prior year period. These decreases were partially offset by our reduced spending on our investment in cards strategy. In the current quarter, we spent approximately $2 million on our investment in cards strategy, compared to approximately $10 million in the prior year quarter.

The reduction in our International Social Expression Products segment’s net sales was due primarily to the challenging retail environment in the United Kingdom (“U.K.”), which continues to demand reduced inventory levels for most of our product lines. Our Retail Operations segment was down approximately $3 million, or 6%, as favorable same-store sales of approximately 5% were more than offset by the decrease in store doors of approximately 13%.

Wholesale Unit and Pricing Analysis for Greeting Cards

Unit and pricing comparatives (on a sales less returns basis) for the three months ended November 23, 2007 and November 24, 2006 are summarized below:

		Increase (Decrease) From the Prior Year
		Everyday Cards								Seasonal Cards								Total Greeting Cards
		2007				2006				2007				2006				2007				2006
Unit volume			1.7	%			(4.2	%)			4.2	%			(23.4	%)			2.3	%			(9.7	%)
Selling prices			(2.5	%)			2.1	%			(3.3	%)			15.0	%			(2.7	%)			5.3	%
Overall increase / (decrease)			(0.9	%)			(2.2	%)			0.8	%			(11.9	%)			(0.4	%)			(5.0	%)

During the third quarter, combined everyday and seasonal greeting card sales less returns were virtually flat, down 0.4%, compared to the prior year quarter, with a slight increase in seasonal greeting cards and a slight decrease in everyday greeting cards.

Everyday card sales less returns for the third quarter were down slightly, 0.9%, compared to the prior year quarter primarily due to lower performance from our International Social Expression Products segment. Overall, unit volume was up 1.7% and selling prices were down 2.5%. The higher unit volume was driven by the North American Social Expression Products segment, which also drove the lower selling prices with a higher mix of value line cards compared to the prior year period.

Seasonal card unit volume increased 4.2%, primarily in the fall and Christmas programs. Lower selling prices of 3.3% were related to these same programs, with a higher mix of value priced cards compared to the prior year period.

Expense Overview

Material, labor and other production costs (“MLOPC”) for the three months ended November 23, 2007 were $223.3 million, a decrease from $245.2 million for the comparable period in the prior year. As a percentage of total revenue, these costs were 46.0% in the current period compared to 47.0% for the three months ended November 24, 2006. The decrease of $21.9 million is the result of favorable volume variances of approximately $17 million due to the lower sales volume and favorable product mix of approximately $12 million partially offset by increased spending of approximately $2 million and foreign exchange impacts of approximately $5 million. The favorable product mix is due to a change to a richer mix (as defined by higher gross margins) of card versus non-card products, partially due to the sale of our candle product lines in January 2007. The increased spending was primarily attributable to higher scrap costs.

Selling, distribution and marketing costs for the three months ended November 23, 2007 were $159.4 million, increasing from $157.4 million for the comparable period in the prior year. The increase of $2.0 million is due to unfavorable foreign exchange impacts of approximately $5 million partially offset by spending decreases of approximately $3 million. The reductions in spending are attributable to decreases in retail store expenses of approximately $2 million (due to fewer stores), savings from supply chain cost reduction programs of approximately $2 million and reduced marketing-related expenses at AG Interactive (primarily attributable to the reduced offerings for the mobile product group) of approximately $2 million. These amounts were partially offset by higher advertising and research expenses of approximately $2 million primarily attributable to our focus on our core greeting card business and approximately $1 million of distribution expenses associated with our animated children’s television programs.

Administrative and general expenses were $60.5 million for the three months ended November 23, 2007, a decrease from $65.3 million for the three months ended November 24, 2006. The decrease of $4.8 million is primarily related to favorable spending variances of approximately $6 million partially offset by unfavorable foreign exchange impacts of approximately $1 million. The decreased spending is attributable to lower profit-sharing expense of approximately $2 million as well as reductions in information technology-related expenses, stock-based compensation expense, severance charges, consulting expenses and payroll and benefits related expenses.

Other operating income – net was $0.1 million for the quarter ended November 23, 2007, a decrease from $20.5 million for the comparable period in the prior year. The decrease of $20.4 million is attributable to the gain of $20.0 million recorded in the prior year third quarter related to terminations of long-term supply agreements associated with retailer consolidations. Other non-operating (income) expense – net was income of $4.6 million in the current year third quarter compared to expense of $0.1 million for the three months ended November 24, 2006. The $4.7 million improvement is due primarily to increased foreign exchange gains in the current period and a swing from a loss on disposal of fixed assets in the prior year period to a gain in the current period.

Interest expense for the three months ended November 23, 2007 was $4.8 million, down from $7.0 million for the prior year quarter. The decrease of $2.2 million is attributable to savings of $1.5 million due to the reduced debt balances for the revolving credit facility and the accounts receivable securitization facility. Commitment fees paid on the available balance of our credit facility decreased $0.4 million, primarily as a result of the reduction in the size of the term loan facility.

The effective tax rate on income from continuing operations was 33.7% and 30.9% for the three months ended November 23, 2007 and November 24, 2006, respectively. The lower effective tax rate in the prior quarter relates to several discrete events during that period, including interest expense on estimated tax payments, return to provision adjustments and the effect of amended tax returns on deferred tax assets.

Results of Operations

Nine months ended November 23, 2007 and November 24, 2006

Net income was $67.4 million, or $1.21 per share, for the nine months compared to $54.6 million, or $0.88 per share, in the prior year period.

Our results for the nine months ended November 23, 2007 and November 24, 2006 are summarized below:

						% Total								% Total
(Dollars in thousands)		2007				Revenue				2006				Revenue
Net sales		$	1,258,829				98.1	%		$	1,271,755				98.0	%
Other revenue			24,309				1.9	%			26,537				2.0	%
Total revenue			1,283,138				100.0	%			1,298,292				100.0	%
Material, labor and other production costs			547,509				42.7	%			593,232				45.7	%
Selling, distribution and marketing expenses			444,695				34.7	%			451,419				34.8	%
Administrative and general expenses			178,291				13.9	%			183,516				14.1	%
Other operating income – net			(807	)			(0.1	%)			(20,963	)			(1.6	%)
Operating income			113,450				8.8	%			91,088				7.0	%
Interest expense			14,431				1.1	%			27,024				2.0	%
Interest income			(5,834	)			(0.5	%)			(6,716	)			(0.5	%)
Other non-operating income – net			(7,478	)			(0.6	%)			(2,811	)			(0.2	%)
Income from continuing operations before income tax expense			112,331				8.8	%			73,591				5.7	%
Income tax expense			43,495				3.4	%			22,583				1.8	%
Income from continuing operations			68,836				5.4	%			51,008				3.9	%
(Loss) income from discontinued operations, net of tax			(1,395	)			(0.1	%)			3,593				0.3	%
Net income		$	67,441				5.3	%		$	54,601				4.2	%